Business context and reporting period
This is CHF Solutions, Inc.’s Form 10-Q for the quarter ended March 31, 2019; the filing identifies the registrant as CHF Solutions, Inc. The company commercializes the Aquadex FlexFlow system, used for ultrafiltration treatment of patients with fluid overload who have not responded to diuretics. Its prior C-Pulse program had been halted. Financial amounts below are in U.S. dollars.
Key financial results
- Revenue: $1.215 million, up 17.2% from $1.037 million in Q1 2018.
- Gross profit and margin: Gross profit was $603,000, compared with $136,000; gross margin improved to approximately 49.6% from 13.1%, reflecting the transition to internally manufactured inventory.
- Expenses and earnings: SG&A was $4.018 million, essentially flat year over year. R&D rose 173.5% to $1.310 million. Operating and net losses were $4.725 million and $4.727 million, respectively, versus $4.354 million net loss in Q1 2018. The reported basic and diluted loss per share was $11.47; a $4.508 million deemed dividend to preferred shareholders increased the loss attributable to common shareholders.
- Cash flow: Operating cash use was $4.907 million, versus $5.036 million in Q1 2018. Investing cash use was $41,000. Financing provided $10.959 million, primarily from the March offering.
- Liquidity and debt: Cash was $11.489 million at quarter-end, up from $5.480 million at year-end. Current assets were $14.251 million and current liabilities $2.432 million. No borrowings were outstanding under the Silicon Valley Bank facility; its revolving line, subject to conditions and covenants, runs through March 31, 2020. Total liabilities were $2.835 million, including operating lease liabilities.
Material changes versus the prior comparable period
- Sales increased, while cost of goods sold declined to $612,000 from $901,000 as the company began selling internally manufactured inventory following completion of the manufacturing transition in 2018.
- R&D spending increased substantially for Aquadex console software and catheter improvements; SG&A remained approximately level.
- The March 2019 public offering generated $12.4 million gross and approximately $11.0 million net proceeds. It included common stock, Series G convertible preferred stock and warrants for approximately 4.7 million common shares. The offering also triggered a reduction in the Series F preferred conversion price to $5.25 and the $4.508 million deemed dividend.
- A 1-for-14 reverse stock split took effect in January 2019; share and per-share figures in the filing are retroactively adjusted.
- Adoption of the lease accounting standard added approximately $0.6 million in right-of-use assets and lease liabilities; prior comparative periods were not restated.
Outlook, risks and unusual items
- Management expects near-term losses and says additional funding may be needed. The filing states that recurring losses, operating cash outflows and an accumulated deficit of $204.1 million raise substantial doubt about the company’s ability to continue as a going concern over the next twelve months. Management believes cash and potential warrant exercises can support operations, but gives no assurance of funding or future profitability.
- Management expects gross margins to improve as volumes and manufacturing efficiencies increase; it expects selling expenses to rise with commercial expansion and R&D spending to increase slightly.
- The Aquadex CE Mark for the European Union had expired. Management expected renewal in the latter half of 2019 and said existing inventory was sufficient, with no material revenue impact expected from timing.
- The company depends on broader adoption of Aquadex, successful hospital staff training, effective manufacturing and distribution, and access to capital. Failure to achieve these could impair growth or ongoing operations.
- Series G warrants include a short-term Series 2 tranche whose expiration is tied in part to FDA clearance or approval of a pediatric-label modification. Baxter contingent terms include a potential payment tied to qualifying asset dispositions and a repurchase option if the stock ceases to trade on Nasdaq.
- The filing reports no material legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether cash, future warrant exercises or new financing can cover the operating cash burn and address the disclosed going-concern doubt.
- Whether revenue growth and the improved gross margin persist as Aquadex sales volumes expand.
- The status and commercial implications of EU CE Mark renewal and any FDA decision on the pediatric-label modification.
- The potential dilution from outstanding preferred stock and warrants, including terms and exercise or conversion activity after quarter-end.
- The company’s actual liquidity and performance after March 31, 2019; this interim filing provides no quantified profitability or cash-flow guidance.