Business context and reporting period
This is CHF Solutions, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018. The filing identifies the registrant as CHF Solutions, not Nuwellis; CHF Solutions later became known as Nuwellis. The company focused on commercializing the Aquadex FlexFlow system for ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy. It had halted clinical evaluation of its former C-Pulse technology.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $1.037 million | $0.901 million; up 15.1% |
| Cost of goods sold | $0.901 million | $0.514 million |
| Gross profit / margin | $0.136 million / approximately 13.1% | $0.387 million / approximately 42.9% |
| Operating expenses | $4.490 million | $2.695 million |
| Operating loss | $4.354 million | $2.308 million |
| Net loss | $4.354 million | $0.940 million; prior-period result included $1.429 million warrant fair-value gain |
| Loss per share | $1.08 | $35.05; weighted-average shares were 4.031 million versus 79,000 |
| Cash used in operating activities | $5.036 million | $1.614 million |
| Cash and cash equivalents | $10.504 million at March 31 | $15.595 million at December 31, 2017 |
| Total current assets / current liabilities | $13.817 million / $1.899 million | At March 31, 2018 |
| Debt | No borrowings outstanding | $1.0 million revolving facility available, subject to conditions |
Inventory rose to $2.525 million from $1.588 million, mainly reflecting increases in raw materials and work in process. Total liabilities were $2.025 million and stockholders’ equity was $12.386 million at quarter-end. The company reported no income tax expense. Approximate gross margins above are calculated from reported sales and cost of goods sold.
Material changes versus the prior comparable period
- Sales increased $136,000, which management attributed to execution of its commercialization strategy and expansion of its sales, clinical specialist and marketing teams.
- Cost of goods sold increased 75.3%, substantially faster than sales; gross margin fell to approximately 13.1% from 42.9%. The company attributed costs partly to manufacturing transition and startup activity.
- Selling, general and administrative expense increased 68.0% to $4.011 million, and research and development expense increased 55.5% to $479,000. Stock-based compensation rose to $500,000 from $166,000.
- Net loss increased, while Q1 2017 had included a $1.429 million noncash gain from changes in warrant fair value and a $1.8 million deemed preferred-stock dividend affecting loss attributable to common shareholders.
- Cash declined $5.091 million during Q1 2018; there were no financing cash inflows during the quarter, compared with $1.952 million in Q1 2017.
Outlook, risks and contingencies
- Management expects near-term losses and says further funding will be needed to grow the Aquadex business. It warns that financing may not be available on favorable terms or at all, and that these factors raise substantial doubt about the company’s ability to continue as a going concern through the next 12 months.
- Management expects gross margins to improve later in 2018 as internally manufactured inventory is sold and production volumes and scale efficiencies increase. It also expects selling expenses to rise with distribution expansion, general and administrative expenses to remain consistent with Q1, and research and development spending to increase slightly. These are expectations, not assurances.
- Risks include adoption and market acceptance, hospital staff training, manufacturing and supply execution, reimbursement and regulatory changes, competitors, customer bulk-order timing, discounts and pricing pressure, and the ability to increase sales enough to cover fixed costs. Quarterly results may fluctuate materially.
- The $1.0 million Silicon Valley Bank revolving line had no outstanding balance; availability is subject to borrowing conditions and financial covenants. The company reported no material legal proceedings and no material capital expenditure commitments.
- Contingent consideration related to the Baxter acquisition had a reported fair value of $126,000. Baxter may also be entitled to 40% of proceeds above $4.0 million if specified Aquadex assets are disposed of within three years of acquisition, and has a repurchase option tied to the company’s Nasdaq listing status.
- ASC 606 was adopted January 1, 2018 using the modified retrospective approach, with no impact on previously recognized revenue amounts or timing. Extended service-plan revenue was less than 1% of Q1 sales; deferred revenue was $32,000 at March 31.
Important facts for investors to verify
- Confirm current liquidity, cash burn and financing plans in subsequent filings, given the going-concern warning and Q1 operating cash use.
- Track whether internal manufacturing improves gross margin as management expects, and whether inventory levels convert into sales without additional cost or write-downs.
- Assess sales growth, installed-console utilization, customer ordering patterns and the sustainability of revenue gains.
- Review potential dilution: at March 31, 2018, the filing listed 10.9 million potential common shares excluded from diluted loss per share as antidilutive, including approximately 8.5 million warrant shares and 389,804 shares underlying Series F preferred stock. The share count and conversion terms require review against later filings.
- Check subsequent disclosures on the contingent obligations to Baxter, regulatory and commercial developments, and any changes to the risk factors or controls.