Good morning, and welcome to the CHF Solutions Earnings Conference Call for the first quarter ended March 31, 2019. [Operator Instructions]. Participants of this call are advised that audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes.

A replay of the call will be available approximately 1 hour after the end of the call. I would now like to turn the conference call over to John Marco, Managing Director of CORE IR, the company Investor Relations firm. Please go ahead, sir..

Thank you, operator, and thank you for joining today's conference call to discuss CHF Solutions corporate developments and financial results for the first quarter ended March 31, 2019. With us today are John Erb, the company's CEO and Chairman of the Board; and Claudia Drayton, the company's CFO. At 8:00 a.m.

Eastern Time today, CHF Solutions released financial results for the quarter ended March 31, 2019. If you have not received CHF Solutions' earnings release, please visit the Investors page at www.chf-solutions.com. During the course of this conference call, the company will be making forward-looking statements.

Except for historical information mentioned, during the conference call, statements made by the management of CHF Solutions are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties that are based on management's beliefs, assumptions, expectations and information currently available to management.

Those risks include, but are not limited to, risks associated with the possibility that the company may be unable to grow revenue in future quarters, that the company may be unable to execute in its commercialization strategy, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations, that the company may not be able to commercialize its products successfully, and the other risk factors described under the caption Risk Factors and elsewhere in the company's filings with the Securities and Exchange Commission.

By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements, whether as a result of new information, new developments or otherwise.

You should review the cautionary statements and discussion of risk factors included in the company's press release issued today, the company's latest 10-K, subsequent reports as well as its other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements Related to Forward-Looking Statements.

For an 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 discussions of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the company's website at www.chf-solutions.com.

With that said, I would now like to turn the call over to John Erb, CHF Solutions' Chief Executive Officer and Chairman of the Board.

John?.

one, investing in our direct U.S.

sales and clinical teams; two, expanding our market target areas with new clinical applications for fluid management; three, growing our international distribution footprint; four, developing and/or investing in diagnostic technologies to help our customers manage fluid removal; and most importantly, number five, increasing revenue growth.

I will now turn the call over to Claudia, who can walk you through our Q1 2019 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 fourth quarter was $1.2 million, a growth of 17% over Q1 of 2018. Regarding our operating costs and expenses, I will briefly comment about major drivers. First, regarding our cost of goods sold.

In the first quarter of 2019, we transitioned to selling inventory manufacture in-house -- to selling inventory manufactured in-house, driving the improvement in our gross margins from 13% a year ago to 50% for this quarter.

As a reminder, up until Q4 2018, we were selling inventory purchased from Baxter at a mark up of 60% over their manufacturing cost. Second, regarding our selling and general expenses. Current quarter expense have remain consistent to the prior year.

As we previously announced, we are seeking to leverage the investments in our commercial organization that we made in 2018, while we continue to drive revenue growth.

As John mentioned previously, we will be making additional investments in the commercial organization to aid in the successful execution of planned launches and to further drive therapy adoption within an existing account.

Finally, the increase in our R&D expenses are driven by investments we're making in product development to improve the functionality of our council and catheter and to improve customer experience and drive adoption in the marketplace. The net loss for the quarter was $4.7 million compared to a net loss in the first quarter of 2018 of $4.4 million.

Regarding our liquidity position, we used $4.9 million of cash in the quarter to finance operations, slightly less than the first quarter of 2018. We expect that cash utilization will decrease in Q2, Q3 and Q4 consistent with last year. During the quarter, we completed an underwritten public offering for net proceeds of $11 million.

We ended the quarter with approximately $11.5 million in cash and cash equivalents and no debt. In terms of modeling 2019, we expect revenue to continue to grow double digits versus the prior year and continue the trajectory we have been on for the last 8 quarters.

We expect that as our sales force gains experience in the territories as we push into the cardiovascular surgery space, and as we make additional investments in the commercial organization, we will continue to drive market acceptance and revenue growth.

Regarding our gross margins, we expect that they will be continue to improve as our internal production volumes and efficiencies increase. Regarding our operating expenses for 2019, we expect to make additional investments in the sales organization and to see lower spend in R&D efforts. I will now turn the call back over to John..

Thank you, Claudia. Before opening the call for questions, let me reiterate that we remain optimistic about our future.

Looking ahead, we continue to fine-tune growth strategies to optimize significant opportunities to improve clinical outcomes and health care cost reduction by giving health care providers a viable and clinically proven alternative to diuretics.

We look forward to continuing to partner with the medical community in the treatment of fluid overloaded patients and believe these initiatives create a significant market growth opportunity.

We continue to develop and refine our focus to demonstrate a strong business model by driving revenue, which is the key metric our employees, shareholders and potential investors will use to measure our performance. CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management.

We are dedicated to bring proven solutions that improve the quality of life for these patients and the clinicians who have the passion to treat them. Operator, please open the call to questions..

[Operator Instructions]. And our first question is coming from the line of Jeffrey Cohen with Ladenburg..

So, I guess, I want to know a little more about current and planned commercial force and the clinical force you talked about, 13 to 15 and 5 to what?.

5 to 15 clinical specialists..

So 30 commercial?.

Correct..

Okay and then....

Plus sales management..

Okay.

What's total FTEs now?.

I'm sorry.

Say that again?.

Total full-time equivalents now?.

Sorry, total FTEs is about 52 people..

Okay.

So ending the year 65-ish?.

Yes. That's about it..

Correct..

Good work at it..

Got it.

And then can you talk a little bit about -- so currently, the commercial team, what percent if they're focused kind of stays on heart failure percent and CV? And what's it like today? And what it might look like end of year? And then fast-forward -- end of the year or mid next year, what does it look like for heart failure, CV and pediatrics as far as....

Yes. Sure. As comparative, if you went back to Q4 2018, I would say we were probably 75% to 80% focused on heart failure and maybe 20%, 25% focused on CV surgery. At this point in time, we're shifting the attention to CV surgery because of its much more rapid uptake or implementation and adoption.

And today we're probably 50-50 between CV surgery and heart failure.

If you look at the end of the year, after we received our pediatric 510(k) market clearance, I would say, we're probably going to be 20% focused on pediatrics, maybe 25% focused on pediatrics, probably 30% focused on CV surgery, and 40%-or-so, I don't if that all added up, but I am just shooting from up here, focused on heart failure.

Heart failure is still by far our largest market. It's just a bit slower uptake than both the cardiovascular and the pediatric markets..

Okay. I would completely agree with you as far as the slower uptake. Okay.

And then spend for the year would be about -- where can you give me a guesstimate?.

We expect spend for the year to be consistent with last year..

And our next question is coming from the line of Kyle Bauser with Dougherty & Company..

So nice step up in gross margins in the quarter. I know you moved manufacturing in-house.

Just curious, I didn't catch it, do you still have inventory on hand that's not -- that hasn't been manufactured in-house? Or are you going forward just selling in-house manufactured inventory?.

Yes. We defeated the Baxter inventory, and we're now just selling in-house manufactured product..

Okay.

And 12, 24 months, what's sort of a benchmark or how high do you think gross margins can go from here?.

We....

Well, I think. Go ahead..

Yes. Certainly, we expect this is our first quarter of transitioning to internally manufactured inventory that as volumes continue to go up, it will go up into the mid-60, maybe 60% to 65% by the end of the year, that's our expectation and even north on that as we get additional volume. As you know, volume is key in driving costs down..

Okay. Great. I know you mentioned you have a presubmission meeting next week with the FDA regarding the pediatric indication.

Can you kind of walk through the subsequent steps you have with the FDA until 510(k) clearance? And also can you just speak a little bit more broadly about the opportunity here and how it relates to the existing heart failure and cardiovascular surgery markets in which you already operate?.

Sure. After the presubmission meeting, we'll get input -- well, during the presubmission meeting, we'll get input from the FDA and what they would look for in the actual 510(k) submission.

We will incorporate or -- we've already spent -- probably 90% of the 510(k) has completed already, but we need to get this initial input from FDA on their requirements. Once we receive that, within 30 days, we would submit our 510(k). The FDA has basically 90 days to review.

If there was round -- 1 round of questions, then it might go out to 120 days, when we would expect to receive 510(k) market clearance that would allow us to market and sell into the pediatric market.

The pediatric market has grown considerably for us organically by the pediatric physicians actually finding the value using the Aquadex because there's such a small amount of blood that's required to go through the machine for filtering as compared to a renal replacement machine or a dialysis machine that requires anywhere from 4 to 7x more blood.

Should the young child or baby doesn't have as much blood as an adult, so that really the significant difference that we offer is very amount -- a small amount of blood that's outside the baby's body. And again, if you look back at Q4, I don't remember the statistics for Q1. But Q4, 25% of our revenue came from children's hospitals.

So when we have the opportunity in the fourth quarter or the beginning of 2020 after received 510(k) market clearance, where we really can get out to these children's hospitals and be able to demonstrate the value of the Aquadex System to them, I expect good growth in the pediatric area.

Right now we're selling to, I think, 8 children's hospitals in U.S. There's probably 200 that are key hospitals that are treating pediatrics. So we look forward to the big opportunity in pediatrics..

At this time, I am showing no further questions. I would like to turn the call back over to CEO, Mr. John Erb, for closing remarks..

Thank you, Operator. I'd just close and want to thank you for joining our first quarter 2019 conference call, and wish you all a really good day. Thank you..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Good day..