Good morning and welcome to the CHF Solutions Earnings Conference Call for the Third Quarter ending September 30, 2019. [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 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 one hour after the call's end.

I would now like to turn the conference over to Scott Gordon, President of Core IR, the Company Investor Relations firm. Please go ahead, sir..

Thank you, operator and thank you all for joining today's conference call to discuss CHF Solutions corporate developments and financial results for the third quarter ended September 30, 2019.

With us today are John Erb, the Company's CEO and Chairman of the Board; Claudia Drayton the Company's CFO; and Nestor Jaramillo, the Company's Chief Commercial Officer. At 8:00 AM Eastern time today, CHF Solutions released financial results for the quarter ended September 30, 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 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.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?.

Thank you, Scott, and good morning everyone. Welcome to the third quarter 2019 earnings call and corporate update. Our vision is to become the global market leader in fluid management with solutions that change the lives of patients suffering from fluid overload.

CHF Solutions is now expanding its therapy into critical care therapies, including cardiovascular surgery and liver disease, continuing to be at the forefront of fluid management in heart failure and expects to soon be commercializing our products in pediatrics.

Throughout this call, I will point out, how we are transitioning from a primary focus on the chronic needs in heart failure to the acute needs and critical care and soon to the life saving therapy in pediatric care.

During the call, I will highlight the progress we have made during Q3 and executing on our vision and provide an update on the following topics. Number one our pediatric strategy; number two, our critical care strategy, number three, clinical studies update; and fourth our revenue.

Regarding our pediatric strategy, as I previously reported, we had a very successful pre-submission meeting with the FDA in mid-May to discuss modifications of our label to specifically include pediatric patients. The FDA was very supportive, collaborative and agreed with the 510(k) application strategy we presented.

During the pre-submission meeting, the FDA recommended we complete several additional bench tests to confirm safety for the pediatric population which delayed our anticipated submission by a few months. The FDA did not require any clinical evaluations before submission of the 510(k).

We completed the 510(k) application during Q3 and submitted it to the FDA at the end of September 2019. We anticipate a 90-day review by the FDA and look forward to receiving market clearance for pediatrics in early Q1 2020. The Aquadex FlexFlow system is not yet cleared by the FDA for use in pediatric patients.

And although we are not currently marketing to physicians treating pediatric patients, we continue to receive unsolicited inquiries from pediatric hospitals.

In fact six of the country's leading children's hospitals use Aquadex to treat pediatric patients because of its capabilities for adjusting flow rates and the low volume of extracorporeal blood required by small sized patients. The Aquadex system is the only available device with these capabilities in the United States.

These children's hospitals are treating pediatric patients for many conditions that can result with fluid overload, including acute kidney injury, renal support, cardiac diseases, electrolyte abnormalities and multiple organ failure or organ transplants.

During Q3, a very impactful multi-center retrospective clinical study was published in the Clinical Journal of the American Society of Nephrology, citing very positive results for treating pediatric patients with the Aquadex FlexFlow system.

This was an independent physician initiated study intended to evaluate the use of hemofiltration and ultrafiltration therapy with the Company's Aquadex FlexFlow system in pediatric patients.

The study titled, Kidney Support in Children using an Ultrafiltration Device, included 117 patients in three weight categories, less than 10 kilograms -- 10 to 20 kilograms and above 20 kilograms suffering from fluid overload, acute kidney injury or end stage kidney disease.

All patients across the three weight categories were treated with the Aquadex FlexFlow system. The primary outcome was survival to the end of therapy.

In patients weighing 20 kilograms, a total of 32 patients, 97% survive to the end of therapy, and patients weighing between 10 and 20 kilograms, a total of 13 patients, 100% survived to the end of therapy. And patients weighing under 10 kilograms, a total of 72 patients, 60% survive to the end of therapy.

There is a high mortality rate in all three of these patient segments, but according to one of the paper's authors 97% of the children under 10 kilograms that do not receive the Aquadex therapy, die because there is no other alternative treatment.

This is the transition into life saving therapy I mentioned earlier, which we offer with the Aquadex FlexFlow system. And we are the only company that can offer it. On September 25, Stuart Goldstein, MD, from Children's sorry -- Cincinnati Children's Hospital Medical Center, Dr. David Askenazi from Children's of Alabama and Dr.

Shina Menon from Seattle Children's Hospital participated in a conference call and webcast to provide an overview of the clinical uses and results of the multi-center retrospective study. This study involve pediatric patients who need a kidney support and utilize the Company's Aquadex FlexFlow.

Jeff Cohen, Managing Director, Equity Research, Healthcare & Medical Technologies at Ladenburg Thalmann & Company moderated the discussion. Dr. David Askenazi, Professor of Pediatrics at the University of Alabama, Birmingham.

Children's of Alabama reported that this is the first multicenter clinical study to report experience in pediatrics, and which an ultrafiltration device was used to provide kidney support therapy in younger patients.

For many of the types of patients in this study, available therapies require very high relative extracorporeal blood volumes, which can be challenging with the use of our aquapheresis device with a small blood volume and low-flow rates, the investigators were able to initiate therapy with excellent hemodynamic stability.

On the critical care front, our cardiovascular surgery growth opportunity is significant, because using the Aquadex FlexFlow system is a simple form of ultrafiltration, that can be prescribed by any medical specialty for the treatment of volume overload in patients post-surgery, including the cardiovascular surgeon anesthesiologist, pulmonologist, intensivist, pediatrician and physician's assistant.

We are continuing our marketing and sales focus to the acute needs in cardiac surgery where physicians need a simple and predictable method to rapidly remove the additional four to six liters of fluid put on the surgical patient to compensate for the blood flowing through the heart-lung machine.

It is vital to remove this excess fluid immediately post surgery before the patient can be extubated from the ventilator. Taken out of the cardiac ICU and properly managed after leaving the hospital. Fluid overload is the third-highest reason for a cardiac surgical patient to be re-admitted to the hospital, in the first 30 days post discharge.

And the number one reason a cardiac surgical patient is re-admitted to the hospital after 30 days from discharge.

The use of our therapy can be prescribed by any of the physicians involved in the care of the patient without calling in the nephrologist which may be categorized as an adverse event and thus avoiding a potential hit in surgery quality scores and potential costly penalties.

Among the key reasons cited for aquapheresis therapy where the ease of use for both doctors and other hospital staff, rapid pace removal from the ventilator decreased need for blood transfusions, efficient utilization of hospital resources and the ability to personalize treatment based on the individual patient's need.

This is the transition to acute needs in critical care, I mentioned earlier, where we offer the Aquadex FlexFlow system. On the clinical studies front, there are several studies underway and we expect results to be published in the next three to 12 months on the Aquadex FlexFlow system.

First, we are working with Mount Sinai Hospital in New York City to support their retrospective study, that will assess the use of Aquadex in patients who underwent cardiac surgery and the associated clinical outcomes.

A total of 700 patients will be evaluated, 200 patients that received Aquadex therapy and 500 patients that did not in match control cases. Second, our customers are beginning to evaluate the use of Aquadex in another area of critical care, liver.

Mount Sinai is also conducting a physician-initiated clinical evaluation of using the Aquadex FlexFlow system in advanced liver disease including liver transplant.

Third, we recently announced that Abington Hospital, which is part of the Jefferson Health System in Philadelphia has received approval for a physician initiated retrospective study with 344 heart failure patients treated with Aquadex, with the aim to define amounts of fluid removed, renal function outcomes and the impact on readmission rates post aquapheresis.

Finally, we remain focused on identifying and researching multiple diagnostic technologies that more clearly informed treatment providers on appropriate Aquadex patient selection, went to initiate therapy, how to manage throughout the therapy and when to discontinue ultrafiltration.

A study co-sponsored by CHF Solutions and Daxor Corporation received IRB approval and will be initiated this month to start enrolling patients.

This study is aimed to characterize the synergies between the Aquadex FlexFlow hermetic feature in conjunction with Daxor's BVA-100 Blood Volume Analyzer to assist and inform clinicians on fluid volume status and how to manage therapy to achieve positive clinical results.

We believe that this collaboration with Daxor is another important building block of our strategy to evaluate diagnostic tools, which may refine and maximize fluid management therapy. Third quarter revenue was $1.3 million, an 8% decline in year-over-revenue versus Q3 2018.

We believe that our revenue decline is due to the short-term impact of the change in our account managers sales strategy, we recently communicated. We are refocusing our sales team to address the faster growing segment of our business in critical care and to prepare for our expected launch in pediatrics.

This change in strategy has necessitated our change in the criteria and experience required for account managers. We believe that the primary reason for the Q3 shortfall in revenue was due to open sales territories, as we revamped the team.

We have retained the services of a top executive search firm to help build out our sales organization and the sales competencies we need in executing our new strategies.

During the quarter we opened several new hospital systems, including Memorial Hermann, which has 13 hospitals in the Houston, Texas area; Baylor Scott and White, which has 28 hospitals in the Dallas, Texas area, the Methodist Hospital in Memphis, Tennessee; and Texas Health Resources Hospital system with 26 hospitals in Northern Texas.

In addition, several new pediatric hospital accounts began use of the therapy including Children's Hospital of Pennsylvania and DuPont Children's Hospital in Wilmington, Delaware.

Looking forward to Q4, we have a robust pipeline of hospital systems initiating the Aquadex therapy, including University Hospitals with 18 hospitals in Ohio, WellStar Health System with 11 hospitals in Georgia, Baptist Memorial Care Corporation with 14 hospitals in Tennessee, and the New York Presbyterian Hospital System with 13 hospitals in New York, plus five new pediatric centers.

I will now turn the call over to Claudia who can walk you through our Q3 2019 results and financial details. Following that, I will provide some closing comments and we'll open the call to questions..

Thank you, John. Good morning everyone. Turning to the P&L, revenue for the third quarter was $1.3 million as compared to $1.4 million for the third quarter of 2018, a decline of 8%, mainly the result of the sales realignment we announced earlier this quarter. Regarding our operating cost and expenses, I will briefly comment about major drivers.

First regarding our cost of goods sold, in the third quarter of 2019, we continue to see improvements in our gross margins resulting from the transition to in-house manufactured inventory. Our margins were about 50% -- 57% for the quarter, 24 percentage points above last year's Q3 margins and 7 percentage points above Q2 2019 margins.

Second, regarding our selling and administrative expenses, current quarter expenses increased by 10.6% from last year. The increase results from additional clinical specialists we hired to assist in opening and training new accounts and to train new users in existing accounts. Next, R&D expenses increased by 12.9% versus last year.

The increase was driven by investments in product development to support our 510(k) submission for pediatric clearance and for updates to our console and catheter to provide better customer experience and improve adoptions.

The net loss for the quarter was $4.5 million or $1.70 per share compared to a net loss in the third quarter of 2018, $4.2 million or $8.50 per share.

Regarding our liquidity position we used $3.8 million of cash in the quarter to finance our operations, an increase of our $0.5 million versus last year, mainly the result of the investments in our sales organization in an R&D, which I previously discussed. We ended the quarter with approximately $3.6 million in cash and cash equivalents and no debt.

Subsequent to quarter end, we announced two financing transactions for net proceeds of approximately $1.7 million. Pro forma cash balances as of September 30, reflecting these transactions is about $5.3 million.

In terms of modeling the remainder of 2019, we expect that the impact of the sales reorganization will be largely behind us in Q4, and that we will resume double-digit growth versus prior quarter -- the prior year.

We expect that as we continue to upgrade and refocus our sales force, and as we continue to introduce our therapy into new hospitals and hospital systems, we will continue to drive market acceptance and marketing revenue growth. Regarding our gross margins, we expect that they will continue to improve as our volumes and efficiencies increase.

Regarding our operating expenses in Q4, we expect to see our investment in sales and marketing to remain consistent as we replace rather than add personnel -- for R&D expenditures to decrease. I will now turn the call back over to John..

Thank you, Claudia. We are transitioning from our primary focus on the chronic needs in heart failure, to the acute needs in cardiac surgery, and soon to the acute needs in cardiac surgery and soon to the life saving therapy in pediatric care.

We anticipate further accelerated sales growth by continuing to position ourselves in the market as the primary provider of ultrafiltration therapy for cardiologists, hospitalists, intensivists, cardiac surgeons and pediatricians.

We are spearheading the growing awareness of the current challenges faced with using IV diuretic therapy only, and thereby introducing the clinical value of [indiscernible] treatment as an opportunity to improve clinical outcomes, reduce re-hospitalization days reduce a major expense to the healthcare system and saving lives in pediatrics.

CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management. We are dedicated to bringing proven solutions to improve the quality of life for these patients and to the clinicians who have the passion to treat them. Operator, please open the call for any questions..

[Operator Instructions] Your first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann..

So, a few issues in wanted to drive into. So, firstly, could you talk about this study amounts [indiscernible] as far as therapy compared to non-therapy for 200 and 500 patients.

Did they start that study? And can you tell me, some of the parameters in that study and could you also speculate if you will, as far as types of surgeries, with these valves bypasses, etc.

And are they going to be using Aquadex prior to surgery and measure that or post surgery or both?.

So, Jeff, I can't give you a lot of details, this is a physician initiated retrospective study, so these are basically in cardiac surgery there looking back of 700 patients, 200 of which they've used Aquadex on, because it's basically a Mount Sinai owned study.

I don't have a lot of those details as it's pulled together and as a complete it, will get details. Our Senior Director of clinical studies is working closely with Dr. Lala [ph], at Mount Sinai to pull this information together, but it's a retrospective study..

Got it.

I'll retrospective and will that be published or shown to the public at some point? Or we'll be able to see that presumably?.

Yes. Again it's under the control of Mount Sinai, and as they told us, that's the plan is to have it published. We're not sure when or where it's when they get it completed..

Got it, okay. Secondly, can you talk a little more about the pediatric work that we've done some work on this. And as far as what we think are the amount and size in patient population of the appropriate centers in the U.S.

Could you just expand upon that a little bit with us as far as the higher level pediatric market in the U.S., do you think that sort of the order -- call it 45 to 60 centers. And how do you determine the scale of the churn -- how you've thinking about it, prior to the label expansion? Thanks..

Yes, there again we've been very conservative at this point, because we really have not been able to market to the children's hospitals. Once we get market clearance and we can go to the children's hospitals and talk about the therapy, talk about the opportunity, we will have a much better handle on it.

The market opportunity ourselves, we have been -- I think very conservative in looking at what is our addressable market. And we think that addressable market is a bit over $100 million potential revenue. So again, but that's I think conservative.

It's early and we really need to get the clearance before we can really dig in and have conversations with the pediatricians and for the children's hospitals directly..

Okay, got it.

And then lastly for me, if you could talk about, the change in sales strategies as far as where you're talking about revamping the team, and how that may correlate toward the SG&A line for the near future? And as you transition what does that mean as far as it's sounding like less for heart failure, more for cardiac critical care in pediatrics.

And how does it look as far as the siloes in the spend and how does it look as far as what percent of the sales focus is switching or has switched? Would you say that has half completed or two-thirds completed and how that correlates to [indiscernible] and spend going forward? That's it from me. Thank you very much..

Yes, good question. This is Nestor Jaramillo.

As we prepare for introducing the pediatric strategy and the pediatric therapy as well as the cardiac surgery, which is one of our fastest growing therapies, we needed to transition the competencies of the sales reps from focusing on heart failure or having the experience in heart failure and cardiology more towards cardiac surgery and critical care.

So we are probably about half there, we had to transition some reps all the ones left that voluntarily given their competencies. We're not in line with these strategy, so we're in the process of replacing those territories. We also, as John mentioned, we have retained the services of a high and recruiter to help us with this task.

In terms of the finance impact, we believe that they are going to be neutral to what we projected early in the year. Most of the territories have already been budgeted for. So we don't think that that's going to have a significant impact on our finances..

Perfect. Okay, that does it for me. Thanks for taking the questions..

Your next question comes from the line of Kyle Abuser with Dougherty & Company..

Hi thanks, good morning John, Claudia and Nestor.

If we just look at the quarter, what was the percentage of sales attributed to cardiovascular surgery in pediatrics? Are you able to kind of tease that out?.

Yes Kyle, the percentage of the revenue that we had in cardiac surgery in Q3 was about 40%..

And for the first two quarters of the year was it about the same?.

No, it was a little less than that -- was around 30%, 33%..

Okay.

And so to date have all the reps kind of divided their time equally across all the call points within critical care and heart failure? And so going forward, it's going to be just focusing initially cardiovascular surgery, and then once you get the clearance in pediatrics there as well?.

That is correct. The strategy is to penetrate new accounts using the cardiovascular strategy. Then moving into heart failure, so we're not forgetting about heart failure, is the biggest market. However, it's easier for a sales rep to penetrate in account through cardiac surgery.

And then, like you said, after we get the approval for the pediatric indication we will focus heavily on that -- on that end..

Got it, okay. Yes, that makes sense. And so, it sounds like the headcount will stay the same.

You're not adding, it's more just replacing territories and then, what is the current headcount or number of territories?.

We have right now 13 territories and we have eight sales reps..

Okay. So 13 --.

So still looking to get five more reps to cover all the territories ahead of pediatric launch, correct?.

Correct..

Okay.

And we've seen some really nice sequential gross margin expansion from bringing that in-house, Claudia as we look at the income statement, particularly within R&D, might we expect some leverage in this bucket, now that we've got a pediatric 510(k) application submitted and the product enhancements that you talked are behind us?.

Yes. Yes, we do expect that R&D spend to decrease as we go forward, largely for those reasons because we were investing pretty heavily ahead of the pediatric submission. But that's behind us now. We will continue to invest, but in much more moderately..

Got it. Okay. Okay, that's helpful. I appreciate. That's it for me. Thanks guys..

Thank you..

[Operator Instructions] And we have no questions at this time..

Very good. Thank you. Well, I want to thank everybody for joining our third quarter 2019 conference call, and I wish you all a very good day. Bye..

I just want to thank you for joining our second quarter 2019 conference call. And I wish you all a good day. You may all disconnect your lines..