Good morning, and welcome to the CHF Solutions’ Earnings Conference Call for the Fourth Quarter Ended December 31, 2020. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Claudia Drayton, the company’s Chief Financial Officer. Please go ahead, madam.

Thank you, Detemra. Thank you for joining today’s conference call to discuss CHF Solutions’ corporate developments and financial results for the fourth quarter ended December 31, 2020. With us today are Nestor Jaramillo, the company’s CEO; John Erb, Chairman of the Board; myself, Claudia Drayton, the company’s CFO. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended December 31, 2020. 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 discussions 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 current expectations. 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’ Chairman of the Board.

Thank you, Claudia. I am pleased to have this opportunity this morning to introduce CHF Solutions’ new Chief Executive Officer, Mr. Nestor Jaramillo. Jr. Nestor joined CHF Solutions just under two years ago as our Chief Commercial Officer and quickly, strategically guided the company into a couple of exciting new markets and restructured our high caliber commercial team. Last year, Nestor moved up to become President and Chief Operating Officer and not only led our growth during the challenging pandemic crisis also oversaw the development of important product enhancements and new technologies that we will expect to bring to the market soon. It gives me great pleasure to now let you hear from our new CEO.

Thank you, John and good morning, everyone. Welcome to the fourth quarter 2020 earnings call and corporate update. 2020 was a challenging year for the global healthcare system due to the ebb and flow of the COVID-19 pandemic. Although the world has dramatically changed, our business model has not, and we remain optimistic about the durability of our business and the value we can bring to our customers, investors, and the patients we serve. We anticipate that when healthcare returns to some level of the new normal, we will see accelerating sales growth by continuing to position ourselves as the primary provider of ultrafiltration therapy for cardiologists, nephrologists, hospitals, intensivists, cardiac surgeons, and pediatricians, who treat patients suffering from fluid overload. The company achieved very solid performance in the fourth quarter of 2020 with 49.5% revenue growth over prior year. For the fifth straight quarter, we were able to generate sequential revenue growth. specifically, revenue in the fourth quarter increased 7.4% sequentially compared to the third quarter of 2020. We believe this trend is an indicator of the underlying momentum within our pediatric and critical care business segments. During the fourth quarter, critical care delivered a strong resource driven by increased utilization and unit placements of our Aquadex system in the ICU setting. As mentioned in previous earnings calls, we experienced a strong unit placement in ICU centers in response to the COVID-19 pandemic, the tailwinds from this – from treating COVID-19 patients early in the year, establish a unique synergetic effect leading to increased Aquadex utilization to treat non-COVID-19 critically-ill patients in the ICU. Due to the effectiveness of the Aquadex system, treating COVID-19 patients early in the pandemic, we believe an increased number of hospitals will want our device in their ICU to treat non-COVID-19 critically-ill patients. With…

Thanks, Nestor. Good morning, everyone. turning to our financial results, revenue for the fourth quarter was $2 million, up 49.5% from Q4 of last year and 7.4%, up sequentially from Q3 of 2020. revenue performance for the quarter was driven by increased utilization among our established critical care and pediatric accounts and the addition of five new pediatric accounts. for the year 2020, revenue totaled $7.4 million, a 35% increase over 2019. regarding our cost of sales and operating expenses, I will briefly comment about major drivers. first, regarding our cost of sales, our gross margins were 56.1% for the quarter, an increase from Q3 2020 margins of 46.1% and from Q4 2019 margins of 50.8%. overall, our margins for the quarter were favorably impacted by increased volumes of consumables and improved manufacturing efficiencies. for the year 2020, our gross margins were 54.5%, up from 2019 margins of 51.7%. Next, regarding our SG&A expenses. Q4 2020 expenses were $4.4 million, an increase of 5% over Q4 of 2019. The increased results from having fully staffed territories partially offset by reduced travel expenses. Our R&D expenses were $1 million in Q4 2020, a 10% increase compared to Q4 of last year. The increase in R&D expenses over the prior year was primarily driven by clinical expenditures related to our pediatric registry. During the quarter, we recognized a gain of $1.2 million related to the dissolution of an inactive subsidiary in Australia. The gain relates to cumulative foreign exchange adjustments that were previously recorded on our balance sheets as unrealized gains. The net loss for the quarter was $3.1 million or a $1.13 per share compared to a net loss in the fourth quarter of 2019 of $4.4 million or $33.46 per share. for the 2020 year, the loss was $15.8 million…

Thank you. [Operator Instructions] Your first response is from Jeffrey Cohen of Ladenburg Thalmann. please go ahead.

Hello, Claudia, Nestor and John how are you?

Hi, Jeff.

So, a few questions from me. Thank you for providing the percent of revenue for 2020 as a whole from critical care, pediatric and heart failure. Could you give us a better sense of how Q4 was and what kinds of trends we could expect into 2021?

Yes. The Q4 was a strong year – as strong quarter, excuse me, as Claudia and I mentioned before. The trend for 2021 continues to be very similar to what we have seen in the last two quarters. Very strong. We have a strong pipeline. The utilization that we’ve seen on the Aquadex in the ICU, not only treating COVID-19 patients, but the synergetic effect in treating non-COVID-19 plus our maturity in our sales organization will lead us to believe that we’re going to have a good and strong 2021.

Got it. And you’ve got the pediatric centers up to 25 open now. I’m assuming the representative market for the predominantly large portion of that sector would be in the order of 50 or 60. Could you give us a sense of what things might look like for 2021, as far as future openings as you’re kind of five and a quarter we should think about?

Yes. it’s hard to say Jeff, because we still have the effects of the lack of access to the hospitals. But the underlying momentum that we’ve seen on our pediatric business will lead us to believe that yes, that we could probably have another 10 to 20 new centers in 2021.

Got it. Okay. And then can you give us a sense of units per center or any type of interim look into the registry data and when we may see some of that data through the midpoint or post the midpoint?

Yes. The utilization per center depends on the volume of how large your hospital is, but we see anywhere from three to six consults per center. And the utilization is much larger than the adult, as you – as we have discussed in the past. And we expected registry, the center participating in the registry to have the same type of volumes that we have seen. And we expect to see regular updates on the registry analysis throughout the year throughout the length of the study of the registry.

Yes. Okay, got it. And can you talk a little bit about hospital access? What have you seen in the past three or four months through Q4 and early this year, as far as access into hospitals and any trends are worth reading into?

Yes. Jeff, that’s a major concern to us. we’re still seeing a limited access in the hospitals and we hope that one of the vaccinations started to cover more of the country that we will see more access to hospitals, but we still have very limited access.

Okay. And then lastly, from me, could you talk about any activity outside the U.S. in there, you got recognized again, $1.2 million from your foreign subsidiary in Australia, but could you talk about any traction or penetration or placements outside of the U.S.?

Jeff, we’re seeing the same thing that we see here in the United States outside of the U.S. we limited hospital access. elective procedures are not being scheduled and as you know, the changes that have happened in the patient’s behavior, in volumes, hospitals has really had a negative impact in our sales outside of the United States.

Got it. Okay. And you talked about some R&D activities related to patents and IP. Could you give us a general sense of as modeling purposes, we’re thinking about mid-to-high single-digit increases on your R&D expenditure for 2021 and beyond? any commentary there?

Well, as Claudia mentioned, the increase that we expect in 2021 on our R&D. We’re really focusing on how that we enhance our current products in terms of diagnostics to guide therapy in our catheter line to improve and to make it easier the access to the venous system, and to provide more flexible applications and more predictability in terms of outcomes. So, we do expect to see those increases in R&D.

Okay, perfect. Got it. That does it for me. Thanks for taking the questions.

All right. Thank you, Jeff.

Thank you. Your next response is from Anthony Vendetti of Maxim. Please go ahead.

Thank you. Congratulations, Nestor, on the CEO appointment.

Thank you, Anthony.

How are you doing? Good. And Claudia and John, how are you doing? I just wanted to focus a little bit more on the pediatric opportunity. So, five new hospitals open, I know that’s been a focus. just as a follow-up, I know it’s hard to gauge. On a quarterly basis, how many you could open up there, but as you look at the overall opportunity in pediatrics, what – how would you categorize that overall market opportunity for CHFS?

I would characterize it as being a very strong opportunity for us. We’ve seen a very good momentum in terms of opening new accounts, our commitment to educate key opinion leaders in the medical – in the pediatric community, continues to be very strong and our sales organization is getting well-trained and very proficient on selling the values of the Aquadex in the pediatric segment.

Okay. And then you said the timeframe for the CPT code. Did you say third quarter of this year, 3Q 2021?

That is correct. Yes.

Okay. And it’s not just to clarify in the pediatrics, it’s not just pediatric specific hospitals, but it could be pediatric units within any hospital, correct?

That is correct. But those hospitals are, would utilize our product to help babies that are born with disease or absence of kidneys are more specialized hospitals. We’ve seen the use of the Aquadex in other pediatric patients, much older patients that come in, in the ICU with some sort of a bacterial sepsis. And those also could be done in – in the majority of the pediatric hospitals or adult hospitals that treat older pediatric patients.

Okay. That makes sense. And then just on the critical care side – critical care and pediatrics, both the focus, critical care, it appears to have maybe, benefited from COVID-19 in terms of the opportunity for CHFS to utilize the Aquadex system for COVID-19 patients, if – as COVID-19 hopefully, continues to recede, do you think the opportunity and critical care still grows even if COVID-19 recedes or do you think that that could be – that could slow down, just curious how you think of the critical care opportunity post-COVID-19?

Yes. No. Anthony, we’re very excited about and optimistic about the critical care opportunity. Not only for treating – continued treating COVID-19 patients, but more important for the synergetic effect that treating COVID-19 patients has had in the ICUs to treat non-COVID-19 – non-COVID-19 critically-ill patients. So, we have seen that these hospitals are learning a great deal of how to treat COVID-19 critically-ill patients to non-COVID-19 patients in the ICU. In addition to that, there is a pent-up demand right now for elective procedures that we believe that is going to also help increase and accelerate the sales of the Aquadex in the critical care segment.

Okay. Makes sense. So, the ability to treat COVID-19 has – you believe, it sounds like it increased the exposure for the Aquadex system to show that it can be used for all types of critical care patients. Is that a good way to summarize it?

That is a very good way to summarize it, Anthony.

Okay. And then are there any other studies that there are currently underway that you can point to that continue to validate the use of the Aquadex system? Is there anything else currently in progress?

Yes. We know of two abstracts that were submitted for the upcoming meeting at ACC. So, you will hear from us more on that on this study. Very promising data, I cannot disclose at this moment, but in the near future, you’ll see, how we’re going to disclose the data that is coming out of this clinical studies, very promising, very promising.

And when do you expect those to be released approximately?

I believe that they are going to be released in the date of the ACC is May of this year.

Okay. Okay. Excellent. And Claudia, I don’t have any questions for you, because you’ve given us a very good guidance. So thank you, I’ll hop back in the queue.

Great.

Thank you. Your next response is from Brooks O’Neil of Lake Street Capital. Please go ahead. Brooks O’Neil: Good morning. Congratulations, Nestor. Good morning, John and Claudia.

Good morning.

Good morning. Brooks O’Neil: Yes. I just wanted to follow up on Anthony’s excellent questions. I’m curious if there’s any way for you guys to help us think about the ultimate market potential in your three basic areas right now; critical care, pediatric and heart failure. And I’m not asking for what it’s going to be in 2021 or what it could be in 2022, but as you think about those markets, what – how do you cite them in terms of the opportunity you see out there?

Good question, Brooks. When we take a look at the three segments and the addressable market, these are the patients that can benefit from our products. We estimate that the three together to be about $2 billion in market cite. Brooks O’Neil: And is there any way – I’m not trying to be too picky here, but is there any way you could break that out between the three, just so I could have a sort of general sense for, are they each $700 million or is one bigger than the other in your opinion?

Yes. A critical care and heart failures are very similar somewhere between $800 million and a $1 billion each – $800 million and a $1 billion each of those two. The pediatric is much smaller. We think that is somewhere around $150 million. So that’s why we believe that it’s about a $2 billion total addressable market. Brooks O’Neil: That’s extremely helpful. Now again, following up on the Anthony, I was trying to assess if you guys think that the long-term impact of COVID is that likely to turn out to be a positive driver of your business in your opinion, or is it, I mean, recognize there’s still the headwinds that are out there right now, but I’m thinking longer-term, how do you view it? Is it – has it been – will it ultimately, prove to be a positive driver of the business or will it be something when we still got to get past and move on from?

No. absolutely, Brooks, we believe that the COVID-19 has helped us a great deal. We’ve been able to prove, and our customers have been able to prove that the use of the Aquadex in critically-ill COVID-19 patients has worked extremely well. So therefore, those patients that come into the ICU critically-ill non-COVID-19 can be treated equally effective with the Aquadex and hospitals are seeing that. So, we do expect that many hospitals would want to have our Aquadex system in their ICUs to treat non-COVID-19 critically-ill patients. Yes. We believe that has been a very positive impact, and that’s what I refer in my notes, I referred that as the synergetic effect of treating COVID-19 patients in non-COVID-19. Brooks O’Neil: Yes. That’s great. And then I know you went through a lot of things about the research that’s underway and whatnot, but I was hoping you might highlight the one or two things you’re particularly looking forward to for 2021 in terms of milestones or advancement that you think will really be significant for the company this year.

Okay. In addition to seeing the business, the underlying increase in the use of the Aquadex, there are a couple of particular events that we’re really looking forward to it. One is the registry – the pediatric registry, that’s going to be a significant event for us to promote the awareness of the utilization of the Aquadex and pediatric, but also, some of our key opinion leaders are producing a lot of good data that is getting to be published in the journals presented in trade shows. So, we’re very excited about how we’re building not only a momentum in sales, but also in momentum and the clinical evidence of the efficacy of the Aquadex in treating patients suffering from fluid overload. Brooks O’Neil: Okay. That’s great. That’s very helpful. Thank you very much. I’m looking forward to this year for you guys, very much.

Brooks, I’m sorry, let me add one more thing that, I can’t believe I forgot. And that was the reimbursement. We – yes, the reimbursement the Category 3 CPT code is going very well, every indication that we have received from the CPT editorial panel and some of our consultants continue to be very positive. Brooks O’Neil: Great. Fantastic. Thanks a lot.

All right, Brooks. Thank you.

Thank you. There are no further questions in the queue at this time.

Okay. I want to thank you for joining our fourth quarter 2020 conference call and I wish you all a good day. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day and you may all disconnect.