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…

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…

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.