Business context and reporting period
This is CHF Solutions, Inc.’s Form 10-K for the fiscal year ended December 31, 2018—not a standalone fourth-quarter report. The filing identifies the company as CHF Solutions; it does not establish that the filer was Nuwellis during this reporting period. The business commercializes the Aquadex FlexFlow ultrafiltration system for patients with fluid overload who have failed diuretic therapy. The company had shifted its focus from C-Pulse to Aquadex after acquiring the business in 2016.
Key financial metrics
Amounts are in millions of dollars except percentages and per-share data.
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $5.00 | $3.55 |
| Cost of goods sold | $3.67 | $2.76 |
| Gross profit / gross margin | $1.33 / 26.6% | $0.79 / 22.2% |
| Operating expenses, excluding cost of goods sold | $18.36 | $15.60 |
| Operating loss | $(17.04) | $(14.81) |
| Net loss | $(17.03) | $(13.38) |
| Operating cash flow | $(14.56) | $(11.92) |
| Cash and cash equivalents at year-end | $5.48 | $15.60 |
| Total current assets / current liabilities | $8.13 / $2.84 | $17.86 / $2.09 |
| Total assets / stockholders’ equity | $8.78 / $5.94 | $18.46 / $16.24 |
Revenue was principally from disposable blood filters and catheters used with Aquadex consoles. The company reported no borrowings under its Silicon Valley Bank facility at year-end; its $4 million term-loan availability had expired unused, while the revolving facility offered up to $1 million, subject to borrowing conditions, through March 31, 2020. The filing reports no separate Q4-only financial results.
Material changes versus the prior year
- Sales increased 40.7%, attributed to expansion of the commercial organization and customer outreach.
- Gross margin improved to 26.6% from 22.2%; management attributed expected further improvement in 2019 to internally manufactured products, higher volumes and scale efficiencies.
- Operating loss widened despite higher sales. SG&A rose 50.6% to $15.31 million, primarily from commercial expansion and higher stock-based compensation; R&D rose 106.1% to $3.05 million for system and catheter improvements.
- 2017 included $3.95 million of goodwill and intangible impairment charges; none were recorded in 2018. The 2017 results also included a $1.48 million gain from warrant remeasurement that did not recur in 2018.
- Cash fell by $10.12 million during 2018 as operating and investing outflows exceeded financing proceeds. The July 2018 stock offering generated $4.65 million net proceeds.
Outlook, risks and unusual items
- Going concern: The auditor and management state that recurring losses, operating cash outflows and the need for additional working capital raise substantial doubt about the company’s ability to continue as a going concern for at least twelve months from the report date. Management says additional capital will be needed; an S-1 to raise capital was filed in December 2018 and amended in January 2019.
- Management outlook: For 2019, management expected gross margins to improve, commercial investment to increase modestly as prior-year investments level off, G&A to remain near 2018 levels, and R&D spending to rise modestly. These are expectations, not quantified guidance.
- Commercial and reimbursement risks: Aquadex is the company’s sole near-term commercial product, customer orders may fluctuate, and the ten largest customers contributed 54.1% of 2018 revenue; the largest contributed 10.1%. Medicare had not issued a favorable national coverage determination for the therapy, and outpatient use was not reimbursed by Medicare and private payers as described in the filing.
- Regulatory and international risks: The Aquadex CE Mark had expired, preventing import of new units into the EU; renewal was expected in the latter half of 2019. Pediatric promotion required FDA clearance, which the company planned to pursue. Delays or additional testing could impede expansion.
- Financing and dilution: The July 2018 offering triggered a reduction in the Series F preferred conversion price to $29.68 and repricing/extension of certain warrants. Significant warrants and preferred-stock conversion rights remained outstanding. The January 2019 1-for-14 reverse split followed earlier reverse splits and was intended in part to address Nasdaq bid-price requirements.
- Other contingencies: Baxter could require repurchase of its shares at fair market value if the common stock ceased trading on Nasdaq. No material pending legal proceedings were reported. The company reported no material capital expenditure commitments.
Important facts for investors to verify
- Confirm the issuer’s identity and reporting period: the supplied 10-K is for CHF Solutions, Inc. and fiscal 2018, not standalone Q4 results.
- Review subsequent financing, cash runway and any developments affecting the going-concern uncertainty.
- Track Aquadex sales growth, gross-margin progress and operating cash use against management’s 2019 expectations.
- Check CE Mark renewal, FDA decisions on pediatric labeling, and reimbursement developments, especially for outpatient treatment.
- Assess potential dilution from outstanding warrants, Series F preferred stock, equity plans and future capital raises.