Business context and reporting period
Filing identity: The supplied 10-Q names Sunshine Heart, Inc. as the registrant; the filing does not identify the issuer as Nuwellis. It covers the quarter ended March 31, 2017, with financial comparisons to the quarter ended March 31, 2016. Amounts below are in U.S. dollars unless stated otherwise.
Sunshine Heart was an early-stage medical-device company transitioning to commercialization of the Aquadex FlexFlow ultrafiltration system, acquired from Baxter in August 2016. It had discontinued enrollment in C-Pulse clinical studies and halted neuromodulation evaluations to focus resources on Aquadex.
Financial results and condition
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $901,000 | No sales reported |
| Cost of goods sold / gross profit | $514,000 / $387,000 | No commercial product costs reported |
| Operating expenses | $2.695 million SG&A and R&D | $4.555 million total |
| Operating loss | $2.308 million | $4.555 million |
| Net loss | $940,000 | $4.786 million |
| Basic and diluted loss per share | $1.75 | $7.82 |
| Cash used in operations | $1.614 million | $5.696 million |
| Cash and cash equivalents, March 31 | $1.661 million | $1.323 million at Dec. 31, 2016 |
The reported $1.429 million gain from remeasurement of warrant liabilities materially reduced the quarterly net loss; the company also recorded $67,000 of warrant valuation expense. Q1 2017 loss allocable to common shareholders included a $1.8 million deemed preferred-stock dividend, so reported loss per share reflects more than the $940,000 net loss.
At March 31, 2017, current assets were $2.985 million and current liabilities were $3.798 million. Total liabilities were $3.970 million; there was no debt outstanding. The company reported an accumulated deficit of $169.9 million. No property or equipment purchases were made in Q1 2017. Financing activities provided $1.952 million, primarily from warrant exercises and preferred-stock proceeds.
Material changes and outlook
- Sales began following the 2016 Aquadex acquisition; Q1 revenue came mainly from disposable filters and catheters. Management cited more than 500 installed consoles in the U.S. and expected Aquadex revenue to grow through increased disposable use. No quantitative sales guidance was provided.
- SG&A increased 76.9% to $2.387 million as the company shifted toward commercialization. Management expected selling expense to rise as the sales organization expanded, while general and administrative expense was expected to decline. R&D fell 90.4% to $308,000 after clinical programs were halted; modest future Aquadex R&D investment was expected.
- On April 24, 2017, after quarter-end, the company completed an offering for $9.2 million gross and approximately $8.1 million net proceeds. It issued 2.8 million common shares, preferred stock convertible into 6.4 million common shares, and warrants for 9.2 million shares. By May 10, holders had converted 2,965 preferred shares into 2.965 million common shares.
- Management disclosed substantial operating losses and cash outflows, expected near-term losses, and uncertainty about obtaining future capital. It stated that failure to raise funding could threaten the company’s ability to continue as a going concern. The April offering added liquidity after quarter-end.
- The $1.0 million revolving credit facility had no outstanding borrowings; management said the company did not then meet the financial covenants required for advances. The $4.0 million term-loan availability had expired unused.
- Under the Baxter supply agreement, the company could be required to purchase remaining Aquadex inventory at termination, estimated not to exceed $2.5 million. Other contingent terms include paying Baxter 40% of proceeds above $4.0 million if the acquired assets are disposed of within three years, and a potential Baxter repurchase right if the shares cease to trade on Nasdaq.
- The company reported that it regained Nasdaq minimum-bid-price compliance in February and stockholders’ equity compliance in May 2017. Management said the listing matter was closed. It reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity and corporate-name relationship: this filing is for Sunshine Heart, Inc., despite the request metadata naming Nuwellis.
- Assess Aquadex sales growth, gross profitability, hospital adoption, and the company’s ability to build sales and distribution operations.
- Review post-quarter financing, conversions, warrants, and resulting dilution; the filing reports 8,885,378 common shares outstanding as of May 10, 2017.
- Evaluate liquidity and ongoing financing needs, including the revolving-credit covenant restrictions and the going-concern disclosure.
- Track Baxter supply arrangements, the potential inventory purchase obligation, and contingent consideration terms.
- Interpret reported net loss and loss per share in light of the warrant fair-value gain and $1.8 million deemed preferred dividend.