CHF Solutions, Inc. (ticker: CHFS) — Q1 2020 Form 10-Q
Entity note: The supplied filing is for CHF Solutions, Inc., not Nuwellis, Inc.; it identifies the issuer as CHF Solutions and does not mention Nuwellis. The reporting period is the three months ended March 31, 2020. Financial amounts below are in U.S. dollars; dollar figures are in millions unless noted.
Business context
CHF Solutions develops and commercializes the Aquadex FlexFlow and SmartFlow systems for aquapheresis, treating fluid overload unresponsive to medical management. Its SmartFlow system received FDA 510(k) clearance in February 2020 for use in adult and pediatric patients weighing at least 20 kg.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $1.630 | $1.215 |
| Gross profit / gross margin | $0.834 / 51.2% | $0.603 / 49.6% |
| Operating loss | $(4.567) | $(4.725) |
| Net loss | $(4.568) | $(4.727) |
| Loss per share, basic and diluted | $(0.37) | $(11.47) |
| Cash and cash equivalents | $5.669 at March 31 | $1.279 at December 31, 2019 |
| Stockholders’ equity | $7.704 at March 31 | $1.990 at December 31, 2019 |
| Total liabilities | $2.343 at March 31 | $3.612 at December 31, 2019 |
Net cash used in operating activities was $5.495 million, compared with $4.907 million in Q1 2019. Investing activities used $0.017 million; financing activities provided $9.905 million, mainly from equity offerings and warrant exercises. The company had no borrowings outstanding; its unused revolving credit facility expired March 31, 2020. Its current assets were $8.732 million against current liabilities of $2.131 million.
Changes versus the prior period
- Sales increased 34.2%, which management attributed to expanded commercial coverage and sales execution.
- Gross margin improved to 51.2% from 49.6%, reflecting higher volumes and manufacturing efficiencies.
- Selling, general and administrative expense increased 12.9% to $4.537 million, primarily from investment in sales, clinical, and marketing personnel.
- Research and development expense declined 34.0% to $0.864 million after pediatric-label and product-functionality work was completed in 2019.
- Common shares outstanding rose to 27.1 million from 4.7 million at year-end 2019, reflecting equity issuance and conversions of preferred stock. Preferred-stock deemed dividends were $1.588 million in Q1 2020 and $4.508 million in Q1 2019; the filing reports net loss per share after these deemed dividends.
Outlook, risks, and unusual items
- Going concern: Management said recurring operating losses and cash outflows raise substantial doubt about the company’s ability to continue as a going concern for the next 12 months. It expects near-term losses and says additional funding will be required; future financing may not be available on acceptable terms or at all.
- COVID-19: Hospital-access restrictions, remote work, possible customer-demand changes, supply-chain and production disruptions, and uncertainty in capital markets could materially affect operations and financial performance. The company increased production in March in anticipation of demand; the eventual impact was not reasonably estimable.
- Financing after quarter-end: The company completed offerings on April 1 and May 5, 2020, with gross proceeds of approximately $2.2 million and $1.7 million, respectively. It also reported approximately $1.0 million from warrant exercises in April and May. These events occurred after March 31 and are not included in quarter-end cash.
- PPP: The company received $1.66 million under the Paycheck Protection Program in April and announced it returned the funds on May 12 after subsequent eligibility guidance.
- Nasdaq listing: The company had until August 28, 2020 to regain compliance with the $1.00 minimum bid-price requirement. It also disclosed potential risk if stockholders’ equity again fell below Nasdaq’s $2.5 million threshold; a reverse stock split was being considered.
- Management expected gross margins to improve with higher volume and scale, selling expense to increase modestly as recent hires were annualized, general and administrative expense to remain near the current-quarter level, and research and development expense to remain near the current-quarter level. No numerical revenue or earnings guidance was provided.
Important facts for investors to verify
- Confirm that this CHF Solutions filing is the intended issuer and period for the Nuwellis request.
- Assess cash runway and financing needs against the disclosed $5.495 million quarterly operating cash burn, including post-quarter financing and warrant proceeds.
- Review the extent of potential dilution from preferred-stock conversions and outstanding warrants; the filing lists 27.8 million warrants outstanding at March 31, 2020.
- Track Aquadex sales, gross-margin progress, customer concentration, and whether COVID-19 affected demand, hospital access, or supply.
- Monitor Nasdaq bid-price and stockholders’ equity compliance, as well as the company’s ability to continue as a going concern.