Good morning. And welcome to the CHF Solutions' Earnings Conference Call for the First Quarter ended March 31, 2018. 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 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 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, Tiffany. 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, 2018. 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 8:00 AM Eastern Time today, CHF Solutions released financial results for the quarter ended March 31, 2018. 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 commercialization of its products; that the company may not be able to commercialize its products successfully; that the company may not be able to successfully integrate acquired businesses; that the company may not realize the anticipated synergies and benefits from acquired businesses and 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 the 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 and 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? Please stand by we are having technical issues.

Ladies and gentlemen, please standby, your conference call will begin momentarily. Once again thank you for your patience and please standby. Okay you are now connected.

Thank you. I apologize for that little [indiscernible]. But let me just say thank you Scott for the introduction and good morning to everyone. Welcome to our first quarter 2018 earnings call and corporate update. CHF Solutions' vision is to be the global market leader in fluid management solutions to improve patient's quality of life. We've provide healthcare professionals with a sophisticated, yet easy to use mechanical pump and filtration system to address fluid overload primarily associated with heart failure and related conditions when diuretics have failed. Our technology, the Aquadex FlexFlow system provides a competitive advantage in fluid management, offers an effective and clinically proven solution for decongestion and reduces hospital readmissions which provides our customers an economic solution to reduce the cost of care in this difficult to treat patient population. We are very pleased with having now achieved four consecutive quarters of double-digit year-over-year revenue growth, our revenue growth achieved in the first quarter of 2018 as a result of the dedicated execution of our strategy. In Q1 of 2018, we achieved a significant revenue growth of 25% increase over the fourth quarter of 2017 and a 15% increased over the first quarter of 2017. We believe, our revenue growth is a result of successful execution of our commercialization strategy, which includes adding marketing strength to the organization, adding appropriately scalable sales territories, adding dedicated clinical specialists to the field base team and continuing to focus on increasing the utilization of the Aquadex FlexFlow system in our largest hospitals. In the first quarter of this year, we started with 10 U.S. sales territories. Those territories were selected by identifying the largest heart failure admission statistics for hospitals in this specific territory. We statistically expanded -- I'm sorry, we strategically expanded our field clinical specialist team adding three…

Thanks, John. Good morning, everyone. Turning to the P&L. Revenue for the first quarter was $1.37 million, a growth of 15% over the first quarter of 2017 and 25% growth sequentially from Q4 2017. Our cost of goods sold reflected prices paid for the finished goods that we purchased from Baxter under the manufacturing and services agreement we signed at the time of acquisition, which include a mark-up of 60% over the cost that Baxter incurred to manufacture the products. Additionally, cost of sales includes start-up manufacturing costs associated with the transition of manufacturing to our facilities in Eden Prairie, Minnesota. As previously announced, in the fourth quarter of 2017, we completed the manufacturing transfer to in-house operations with the completion of our first production build. We expect that the margin benefits from bringing manufacturing in-house will begin to materialize later in 2018 as we consume the Baxter manufacturing units and our internal production volumes and efficiencies increase. In terms of other operating expenses, consisting of SG&A and R&D expenses, they totaled $4.5 million for the quarter versus $2.7 million in the first quarter of 2017. The increase is driven mainly by the investments that we have made in our sales and marketing organization over the last 12 months including additional sales territories, clinical support and sales and marketing leadership. In terms of non-operating expenses, in the first quarter of 2017, we recognized an unrealized gain of $1.4 million related to a change in fair value of our warrants. Those warrants were exercised as part of the warrant exchange that took place in the first quarter of 2017. We did not have non-operating income or expense items in the first quarter of 2018. The net loss for the quarter was $4.4 million, compared to a net loss in the first…

Thank you, Claudia. Before opening the call for questions, let me reiterate that we continue to be very optimistic about our future. Looking ahead, we continue to fine tune growth strategies to optimize significant opportunities to impact improve clinical outcomes and healthcare cost reduction by giving healthcare providers a viable and clinically proven alternative to diuretics. We continue to develop and refine our strategic 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. Our organizational enhancements of this past quarter stand us in good stead to continue progressing our strategy in 2018 including the continued expansion of our U.S. sales force, continued growth of our international commercialization as well as the R&D of new product enhancements for our Aquadex product franchise. Renowned author, Dan Millman, through his character Socrates wrote in the way of the peaceful warrior, the secret of change is to focus all your energy not on fighting the old but building the new. In that spirit, CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management. We’re dedicated to bring an improvement solution to improve the quality of life of these patients and clinicians who have the passion to treat them. Operator, please open the call to questions.

[Operator Instructions] And our first question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is now open.

So I just wanted to run through a number of questions. So firstly John, can you walk me through your -- you said you added three into 10 territories, can you just walk me through now the complete size of the commercialization force, number of people having the sales number of territories in total?

We have 10 sales territories and four clinical specialists supporting them. We also have two Directors of sales. So right now a total team of 16, plus Jim Breidenstein leading it.

Okay. So 17 for the moment. And how does that look as far as what would that look like toward the end of the year?

We have budget to add I think three more sales territories. We would like to get them put in place by midyear. And we will also be adding clinical specialists, and a potential International Accounts Director.

Okay. And how you are finding the existing staff, have you incurred any turnover or how does that look?

Well Jim has done a great job hiring really some talented folks that have strong experience and folks that have done really well in previous medical device sales situations. Jim, I should let you respond to that question, just a brief overview of the folks you brought in.

Yes. Sure, Jeffrey. I am happy to answer that. Folks that we've brought into the organization are senior medical device sales professionals. Many of them have started in the larger Fortune 500 type companies and transitioned through their careers and quite honestly have earned the right to launch medical device technologies like ours. So they also have a mixture of start-up experience to go along with the trainings that they've acquired throughout their careers. We have had Jeffrey a little bit of turnover as expected as you are launching new technologies and fine tuning the sales model and quite honestly the [fabricate] of people that you bring into the organization. I would deem it a very minor amount that it has allowed us to fine tune our hiring profiles as well as we get into the back half of '18 and so on and so forth.

Okay, super, and that's helpful. Claudia you mentioned you purchased $1.2 million of inventory to Baxter. So where did come out of and I see that your inventory is up now about $1 million from last year to around $2.5 million, is that right?

Yes. When we agreed on the final steps to bring manufacturing in-house from Baxter we agreed to buy the remaining inventory that was with Baxter and it's the raw materials as well as finished goods. So this was all planned as part of our transition.

Okay, got it. The $1.4 million gain on the change in fair value on the warrants of the income statement. You reflected a gain a year ago Q1 on the income statement, there is a reflection this quarter on the income statement?

Right. We -- those warrants were exercised, those were warrants that needed to be marked up to fair value. We no longer have warrants that require fair value adjustments, thankfully. Those were exchanged last year in Q1. So we no longer have derivative type warrants on our balance sheet.

Okay, got it. And then can we talk a little about the OpEx for the balance of the year, $4.5 million. Do you see firstly, R&D maintaining this kind of $0.5 million level on a quarterly basis? And then the SG&A, how might that look from the $4 million for the first quarter for the balance of the year, any insight would be helpful there?

Yes. We see a slight uptick on SG&A again because we will be adding additional sales people towards the last half of the year. And a slight uptick as well in R&D as we continue to make investments in our product improvement.

Okay, got it. The shares, 4.031 for the quarter, correct?

Yes.

Cash 10.504 for the quarter, correct?

Yes.

Debt zero? Long-term debt, zero?

Debt zero, yes. Yes.

Okay. And then I guess finally, John, could you talk a little bit about some of the conferences and some of the clinical data and some of your users have presented and some of the registration studies that are ongoing and how you see heart failure playing out at least for your solution in the short and near-term, please?

Sure. Heart failures continues to get a very bright spotlight because not only of the large patient population but because of the healthcare cost. You've heard me say in the past that in the U.S. in 2017, it was estimated about $30 billion were spent just on heart failure. And that's expected to double over the next 13 to 15 years. So there is just a lot of attention there. I think one of the main opportunities for us is the fact that the current standard of care has many clinical publications indicating that it is somewhat detrimental to the patient. It is not a therapy that helps them relieve that fluid overload but can actually exacerbate the problem. So we are really sitting a very good spot there to be able to help both clinically and economically. I think that Dr. Maria Rosa Costanzo, who is one of the key opinion leaders in heart failure, is probably the most published and outspoken person about the value of ultrafiltration to better care for these patients. She actually will be presenting a paper in Vienna at the European Society of Cardiology Heart Failure Meeting week after next believe it is. Where she is really pointing out the value of ultrafiltration and particularly as additional data has come out regarding the CARRESS trial, which showed the way that trial was designed, it showed a preference to diuretics over ultrafiltration. And there were a lot of inappropriate protocols included in that trial that have now been published by couple of different physicians really indicating that [c-emcreten] rising is not an issue. And that in fact bump in [c-emcreten] has nothing to do with the value of ultrafiltration to that patient after a relatively short period of time. So there is continuing data coming out. There is a small trial, I shouldn't say small, it's a large trial. Smaller than its getting off of the ground in Europe with a different product regarding ultrafiltration, that is getting a lot of good attention. Again, it's one thing to be the only player out there, it kind of helps build the market when somebody else comes along, and says they have a product can also help these patients. So we are the market leaders in fluid management, particularly in heart failure and excited to be in this position.

And our next question comes from Raymond Myers with Benchmark. Your line is now open.

Thank you, John. You've answered many of my questions. But I believe that there is some more economic support for Aquadex that we should anticipate shortly and I was hoping you might be able to preview some of that?

Yes. We commissioned a third-party consultant to do an economic -- basically hospital budget analysis to really look at ultrafiltration versus diuretics. And the results of that have been completed and actually have been submitted for publication at peer-reviewed Journal of Cardiac Failure. And a lot of the actual detailed data that is very positive for ultrafiltration has been [embargoed] until that publication actually is made public. We do have an abstract that's being presented I believe it's this week at ISPOR and that overview basically talks about the very large economic benefit that ultrafiltration has over diuretic. So I am eager and anxious to be able to publicly talk about the results of the analysis but we need to protect its publication at this point.

[Operator Instructions]. And we have one here from Jeffrey Cohen with Ladenburg and Thalmann. Your line is now open.

Just a quick follow-up. Could you talk a little John about current number of systems of use and current number of users and number of facilities?

Yes, I think Jim is a lot closer to that. I'd like for him to address that, if you would Jim?

Yes, sure happy to Jeff. Currently we have a 175 active customers with us which continues to grow quarter-over-quarter and I think you probably heard John and I say that we are certainly growing the business but we are growing it selectively with our small but growing force. So when we do offer the opportunity for institutions to utilize our technology, we want to make sure that we not only offer it but we service it appropriately and we spend enough time to training and education and support to increase the uptake and utilization of the technology. So we are growing the business. We are growing it at a controlled rate and we think that's the appropriate go-deep strategy if you will that will foster long-term results for us. And in terms of the systems deployed, when we acquired the business till to-date, we still think there's about 300 plus systems out there in terms of our capital console which again sells for $31,000 list price and of course that number continues to grow each and every quarter as well for us.

So you are seeing increased revenue as a result of uptake and utilization of existing users more probably I suppose to expansion of the footprint at this point?

I think there's avenues to grow the business on both fronts Jeff, obviously. But our strategy is to -- again with a small force and somewhat limited resources, is to go deep once you have an account that's up and running and to increase utilization is always the key which will yield long-term sticky adoption. And of course as begin to grow in scale and offer the technology, we feel that the clinicians will continue to get more and more comfortable in utilizing the technology in a boarder base of patients of course that sell diuretic therapy. In other words, Jeff, we feel that they will be inserting Aquapheresis earlier into their treatment protocol. And again just to kind of for an explanation point to you out is, getting an injective into hospital's heart failure treatment protocol and that isn't an easy thing, but when you are seen as part of that critical patient pathway, that's the goal line if you will to long-term adoption of the technology and that's why where we are focusing our efforts on.

Okay. Now I'm showing no more in queue.

Very good. Thank you, operator. Well, I want to thank you all for joining our first quarter 2018 conference call, and I wish you all a really, really good day. Thank you.