CHF Solutions, Inc. (now Nuwellis, Inc.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is under the company’s then-current name, CHF Solutions, Inc. Amounts below are in U.S. dollars; financial statement figures are generally in thousands unless noted.
Business context and strategy
The company was an early-stage medical-device business commercializing the Aquadex FlexFlow System for ultrafiltration therapy. It acquired the Aquadex business from Baxter in August 2016 and shifted resources toward commercialization, halting clinical evaluations of its prior neuromodulation program. The company changed its name from Sunshine Heart, Inc. to CHF Solutions, Inc. in May 2017.
Financial performance
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Net sales | $864 | $1,765 |
| Cost of goods sold | $616 | $1,130 |
| Gross profit / margin | $248 / 28.7% | $635 / 36.0% |
| Selling, general and administrative | $2,420 | $4,807 |
| Research and development | $327 | $635 |
| Operating loss | $(2,499) | $(4,807) |
| Net loss | $(2,458) | $(3,398) |
| Basic and diluted loss per share | $(0.47) | $(1.39) |
Q2 2016 sales were zero; the company had no commercial sales before the Aquadex acquisition. Net loss was lower than the prior-year periods, when Q2 and first-half losses were $4.188 million and $8.974 million, respectively. Lower R&D spending after stopping prior programs and, for the first half, a $1.466 million warrant-liability fair-value gain contributed to the improvement. Q2 2017 included a $37,000 warrant-liability gain. The reported loss per share reflects preferred-stock deemed dividends, including $1.0 million associated with the Series E offering in 2017.
Cash, liquidity and debt
- Cash and cash equivalents were $5.558 million at June 30, 2017, compared with $1.323 million at December 31, 2016. Current assets were $7.169 million and current liabilities were $2.164 million.
- Operating cash use was $5.698 million for the first half; investing cash use was $20,000. Financing provided $9.954 million, principally from the April public offering, warrant exercises and preferred-stock proceeds.
- The company reported no borrowings outstanding. Its prior term loan had been repaid in August 2016. A $1.0 million revolving line remained undrawn, but the company said it did not meet the financial covenants required to access advances.
- Management said additional funding would be needed in the fourth quarter of 2017 or first quarter of 2018. The filing warns that financing may not be available on acceptable terms, or at all, and raises substantial uncertainty around continued operations if future fundraising fails.
Material changes, outlook and risks
- Commercialization and margins: Management expected Aquadex revenue to grow as use of disposable products increased within the installed base. Selling expenses were expected to rise as the sales organization expanded; R&D spending was expected to increase modestly. Management expected gross-margin improvement in 2018 as volume and scale efficiencies improved.
- Manufacturing transition: The company notified Baxter that it intended to end Baxter manufacturing by June 30, 2017, with in-house production expected to begin in Q4 2017. It expected to continue purchasing materials and finished goods from Baxter into Q1 2018, including a $2.4 million inventory purchase commitment through February 2018. The company identified transition-related startup costs in 2017 cost of sales.
- Equity financing and dilution: The April offering generated $9.2 million gross and approximately $8.0 million net, issuing 2.8 million common shares, preferred stock convertible into 6.4 million shares, and warrants for 9.2 million shares. The preferred stock had been converted by June 30. The filing also reports 10.1 million common-stock warrants outstanding at June 30 and 12,515,718 common shares outstanding on August 7.
- Nasdaq: The company regained stockholders’ equity compliance in May but received a new minimum-bid-price deficiency notice on June 1. It had until November 28, 2017 to regain compliance by maintaining a $1.00 closing bid price for at least 10 consecutive business days.
- Other risks and contingencies: The company had an accumulated deficit of $172.4 million and expected continued losses. A 2017 ownership change may limit use of tax-loss carryforwards; a formal Section 382 analysis was not complete. Baxter was entitled to contingent consideration if acquired assets were disposed of above a threshold, and had a repurchase option for its shares under specified delisting circumstances. No material legal proceedings were reported.
- Management concluded disclosure controls were effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether Aquadex sales and disposable-product utilization grew enough to support the company’s revenue and profitability objectives.
- Actual manufacturing-transition costs, production timing, product availability, and the effect on gross margins and the Baxter inventory commitment.
- Cash burn and fundraising needs relative to the stated Q4 2017/Q1 2018 funding timeline, including access to the restricted revolving facility.
- Nasdaq bid-price compliance status and the potential effects of outstanding warrants and other equity-linked securities on dilution.
- Whether the Section 382 review materially limits tax-loss carryforwards and whether the company can sustain operations without additional capital.