Nuwellis, Inc. (then CHF Solutions, Inc.) — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company is a medical-device business commercializing the Aquadex FlexFlow System for ultrafiltration treatment of fluid-overloaded patients. Unless noted, amounts are in millions of dollars.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1.363 | $0.957 | $3.499 | $2.722 |
| Gross profit (margin) | $0.448 (32.9%) | $0.175 (18.3%) | $0.813 (23.2%) | $0.810 (29.8%) |
| Operating loss | $(4.250) | $(2.863) | $(12.783) | $(7.670) |
| Net loss | $(4.241) | $(2.847) | $(12.776) | $(6.245) |
| Basic and diluted loss per share | $(0.61) | $(4.55) | $(2.47) | $(25.36) |
- Q3 sales increased 42.4%; nine-month sales increased 28.5%. Management attributed growth to expansion of its commercial footprint.
- Q3 gross margin improved year over year, while nine-month gross margin declined. Nine-month cost of goods sold rose 40.5% against sales growth of 28.5%.
- Q3 SG&A was $3.713 million and R&D was $0.985 million; both increased year over year, reflecting commercial expansion, stock compensation, and product improvements.
- Cash used in operations was $11.843 million for the first nine months, versus $8.769 million in 2017. Investing cash use was $0.177 million; financing provided $4.649 million.
- Cash and cash equivalents were $8.222 million at September 30, down from $15.595 million at year-end 2017. Current assets were $11.197 million and current liabilities $2.012 million.
- No borrowings were outstanding on the $1.0 million revolving credit facility; total liabilities were $2.138 million. The filing does not report material funded debt outstanding.
Material changes, outlook, and risks
- In July 2018, the company raised $5.4 million gross, or about $4.6 million net, through a common-stock offering. The offering triggered a full-ratchet reduction in the Series F preferred conversion price from $4.50 to $2.12. Certain November 2017 warrants were also repriced to $2.12 and some expiration dates extended. These financing terms create potential dilution.
- The company completed the transfer of Aquadex manufacturing in August 2018. Management expects gross margins to improve as internally manufactured inventory is sold and production volumes and efficiencies increase; this is not quantified guidance.
- Management expanded its commercial focus in September to include post-cardiovascular-surgery patients. It expects continued investment in sales and marketing and some increase in R&D spending. The filing gives no numerical revenue or earnings guidance.
- The company reported a $195.1 million accumulated deficit, expects near-term losses, and stated that substantial doubt exists about its ability to continue as a going concern through the next 12 months. It expects to need additional funding; availability and terms are uncertain.
- The Aquadex CE Mark for EU imports had expired. Management expected renewal in the latter half of 2019 and believed existing EU inventory would limit near-term revenue impact, but a delay could constrain product availability.
- Contingencies include a $0.126 million fair-value liability related to acquisition consideration, plus a potential payment to Baxter if acquired assets are sold above $4.0 million within three years. Baxter also has a repurchase right relating to its shares if the company ceases to be Nasdaq-listed. No material legal proceedings were reported.
- The company adopted ASC 606 in January 2018 with no impact on prior-period revenue amounts or timing. It expected adoption of the lease accounting standard in 2019 to materially increase reported assets and liabilities.
Investor facts to verify
- Cash burn, available liquidity, and the timing and terms of any additional financing; assess the stated going-concern uncertainty.
- Whether sales growth can continue and whether manufacturing transition and scale deliver the anticipated margin improvement.
- Actual dilution from outstanding warrants, options, and Series F preferred stock, including the effects of repricing and anti-dilution provisions.
- Status of EU CE Mark renewal and adequacy of existing inventory if renewal is delayed.
- Execution and commercial traction in the post-cardiovascular-surgery market expansion.