John Erb - Chairman of the Board, CEO Claudia Drayton - CFO

Good day, ladies and gentlemen, and welcome to the Sunshine Heart Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. 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 risk includes, but are not limited to, risks associated with the possibility that the Company may be 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 the discussion of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the Company’s Web site at www.sunshineheart.com. In addition, a replay of this call is provided through a link on the Investor Relations section of the Company’s Web site. 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. Good morning and welcome to Sunshine Heart's fourth quarter 2016 conference call. With me today is Claudia Drayton, Sunshine Heart's Chief Financial Officer. Following our prepared remarks, we'll be happy to answer any questions. Before I comment on our fourth quarter' performance, I would like to provide some perspective on the full year of 2016. As part, as most of you know, it was a year of many changes at Sunshine Heart. I became CEO in March. In August, we announced our intention to shift our therapeutic strategy from a counter pulsation approach to a neurostem approach. This decision was based on solid empirical data and pointed us in an exciting direction that also formed supporting basis for our capital raising efforts. However, we were both surprised and disappointed by the challenges that we faced in trying to raise sufficient capital till we get the neurostem program off the ground. We still believe that our neurostem approach for treating heart failure patients has significant upside potential, and the resource required to fund this project remain beyond our current capacity. However, please know that we continue to consider alternative opportunities to fund the development of this technology. In that regard, we are looking for strategically creative ways to unlock the value of this therapy, possibly through a partnership or a joint venture. We continue to have meaningful discussions with potential strategic partners. There's nothing imminent at that point, but we will update you when we identify a viable path forward for this project. In August, we announced what turned out to be our most important strategic change in 2016, the acquisition of Aquadex from Baxter International. As we communicated at that time, it is a strategic acquisition that allows us to maintain a working partnership with heart failure…

Thanks, John. Good morning everyone. Turning to the P&L. This is the first full quarter we generated revenue from our newly acquired Aquadex business. Revenue for the quarter was $746,000 and it resulted mainly from the sale of new consoles and disposable blood sets. Revenue was below our expectations, however, driven mainly by a couple of factors. First, we took over customer order taking and fulfillment from Baxter in November of 2016. While we were fully prepared for this event, there were nonetheless some communication issues with Baxter that impacted the transition. Second, we underestimated the effort needed to reengage accounts that had not been attended to for a long time, or the belief that Aquadex was no longer available and had switched technologies. We're happy to report that while reactivating accounts took longer than planned, we expect to see Q1 more in line with our expectations. Cost of sales was at the brightest state for inventory, and their manufacturing and services agreements we signed 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 start-up manufacturing and product costs related to the manufacturing transition from Baxter. In terms of other operating expenses for the fourth quarter, they totaled $3.3 million, a decrease of about $3 million from the same period last year. The decrease in expenditures reflects lower clinical spending, resulting from the announcement earlier in 2016 that we were no longer enrolling patients in our clinical studies; from the consolidation and streamlining of all activities in areas of the Company and from reduced stock compensation expense. In terms of non-operating expenses, during the quarter, we recognized an unrealized gain of approximately $170,000 related to the change in fair value…

Thank you, Claudia. Before opening the phone line up for questions, let me iterate that I remain optimistic about our future. We know we have a lot of work ahead of us, but I believe we are moving in the right strategic direction. The entire management team is rising to the challenges in front of us and we are focused on delivering results. We will continue to provide you milestones to track our progress over the coming quarters. Operator, are there any questions?

Very good. If there are no questions, I would like to thank you for joining our fourth 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 the program, and you may all disconnect. Everyone, have a great day.