Nuwellis, Inc. quarterly report, Q3 FY2013

Business context and reporting period

This is Sunshine Heart, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The filing describes an early-stage medical-device company developing the C-Pulse Heart Assist System for moderate-to-severe heart failure. The device was not approved for commercial sale; U.S. sales were limited to eligible clinical-trial sites. The filing identifies the registrant as Sunshine Heart, Inc., not Nuwellis, Inc.

Financial performance and condition

Amounts below are in U.S. dollars; financial-statement figures are in thousands except per-share data.

Gross margin is not presented, and is not readily determinable from the filing: costs of clinical-trial products were expensed in research and development. Q3 SG&A was $2.486 million and R&D was $3.747 million. The nine-month figures were $6.612 million and $9.323 million, respectively.

For the nine months, operating cash use was $11.755 million, investing cash use was $82,000, and financing provided $57.591 million, primarily from stock sales. Cash rose to $59.807 million at September 30, 2013, from $14.224 million at year-end 2012. Total liabilities were $2.952 million, all current; the balance sheet reports no debt. Working capital was approximately $57.425 million. Accumulated deficit was $93.908 million.

Changes versus comparable periods

• Sales of $59,000 came from one C-Pulse device sold to a clinical-trial site; there were no sales in the comparable 2012 periods.
• Q3 operating expenses increased 89% year over year; SG&A rose 66% and R&D rose 108%. Management attributed the increases to added infrastructure, personnel, professional fees, and clinical-trial support. For the first nine months, SG&A increased 32% and R&D increased 62%.
• Nine-month net loss increased to $14.654 million from $9.999 million, while loss per share improved to $1.29 from $1.49, reflecting a higher weighted-average share count.
• Equity financing generated $57.6 million in net proceeds in the first nine months of 2013, compared with $20.6 million in 2012. April and September public offerings generated net proceeds of $14.036 million and $42.674 million, respectively.
• R&D tax-credit benefits were $1.213 million for the 2013 nine-month period, including a $1.077 million Australian refund and a $136,000 Minnesota refund. The Minnesota credit no longer applied to tax years after 2012.

Outlook, risks, and notable items

Management expected revenue to remain minimal until North American pivotal-trial enrollment increased and reimbursement was established in selected European markets. The company began enrolling patients in its U.S. pivotal trial in Q3 2013; enrollment in its European post-market trial began in Q2 2013. Management expected SG&A and R&D to remain above prior-year levels as it supported growth and trials. It stated that cash and anticipated clinical-trial receipts, together with remaining potential proceeds under its Aspire Capital agreement, were expected to fund operations for at least 12 months based on its current plan.

The company reported continuing operating losses and operating cash outflows and said it would need to raise additional capital as milestones required. Its ability to continue as a going concern depends on obtaining financing and developing and commercializing its product; there is no assurance it can do so. Further equity financing could dilute shareholders, and debt financing could add senior claims and restrictive covenants. Key uncertainties include regulatory approval, clinical outcomes, commercialization, reimbursement, market acceptance, and availability of funding. No material capital-expenditure commitments or off-balance-sheet arrangements were reported.

A three-year stockholder rights plan adopted in June 2013 may cause substantial dilution for an unapproved holder or group reaching 15% ownership or taking specified actions. The company also had an Aspire Capital facility permitting up to $25 million of purchases over two years, subject to contractual terms and share limits. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Confirm the issuer and any relationship to Nuwellis: this filing names Sunshine Heart, Inc.; do not assume the company identity from the request metadata.
• Verify current clinical-trial status, enrollment, regulatory pathway, and the timing and likelihood of U.S. or European commercialization and reimbursement.
• Assess cash burn and runway against the company’s stated at-least-12-month estimate, including the assumptions behind future trial revenue and Aspire Capital proceeds.
• Review the dilution implications of the 2013 public offerings, outstanding options and warrants, the Aspire agreement, and the stockholder rights plan.
• Check subsequent filings for updated tax-credit eligibility, financing needs, trial costs, and any changes to the going-concern risk.