CHF Solutions, Inc. (CHFS) — Q2 2020 Form 10-Q
Entity note: The filing names the registrant as CHF Solutions, Inc.; it does not identify the company as Nuwellis. Reporting period ended June 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and reporting period
CHF Solutions develops, manufactures, and sells the Aquadex FlexFlow and SmartFlow systems for ultrafiltration therapy in patients with fluid overload. The SmartFlow system received FDA 510(k) clearance in February 2020 for pediatric patients weighing at least 20 kg. This report covers the three and six months ended June 30, 2020, compared with the same periods in 2019.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1.863 | $1.677 | $3.493 | $2.892 |
| Gross profit / margin | $1.199 / 64.4% | $0.842 / 50.2% | $2.033 / 58.2% | $1.445 / 50.0% |
| Operating loss | $(3.920) | $(4.428) | $(8.486) | $(9.153) |
| Net loss | $(3.922) | $(4.430) | $(8.490) | $(9.157) |
| Basic and diluted loss per share | $(0.10) | $(1.93) | $(0.37) | $(8.82) |
- Q2 sales increased 11.1%; first-half sales increased 20.8%. Management attributed growth to expansion of the commercial organization.
- Q2 cost of goods sold fell 20.5% despite higher sales; management cited higher volumes and manufacturing efficiencies. SG&A rose 6.6% in Q2 and 9.7% year to date; R&D declined 31.8% in Q2 and 32.9% year to date, following completion of product-functionality and pediatric-label work.
- Cash and cash equivalents were $7.821 at June 30, versus $1.279 at December 31, 2019. Current assets were $11.729 and current liabilities $3.335. Working capital was $8.394.
- First-half operating cash use was $8.760, investing cash use $0.069, and financing cash provided $15.376. Financing included $13.040 net proceeds from stock offerings and $2.340 from warrant exercises.
- Total liabilities were $3.541, largely operating lease liabilities; finance lease liabilities totaled $0.063. The filing reports no material conventional borrowings. A June equipment finance lease had a 7.5% implied rate and 39-month term.
- Stockholders’ equity was $9.602. Common shares outstanding rose to 43.2 million from 4.7 million at year-end 2019, reflecting offerings, warrant exercises, and preferred-stock conversions. The filing lists 22.9 million warrants and other potential shares; they were excluded from diluted loss per share as antidilutive.
Changes, outlook, and material risks
- COVID-19: Management estimated approximately 34% of Q2 revenue came from hospitals treating COVID-19 patients. Hospital access restrictions disrupted sales practices and, management said, negatively affected other sales. The future effects on demand, operations, supply, and capital-market access were uncertain and could be material.
- Going concern: The company reported a $226.0 million accumulated deficit, recurring losses and operating cash outflows, and stated that these conditions raise substantial doubt about its ability to continue as a going concern through the next 12 months. It expects near-term losses and says additional funding will be needed; future warrant exercises or capital raises are not assured.
- Management expectations, not formal guidance: The company expected annual gross margins to improve with higher volumes and scale; selling expenses to rise modestly as recent hires are annualized; and G&A and R&D spending to remain near current-quarter levels.
- Nasdaq listing: The company had until August 28, 2020 to regain the $1.00 minimum bid-price compliance. A proposed reverse split did not receive enough votes at the annual meeting; failure to regain compliance could lead to delisting, subject to possible extension or appeal.
- Equity terms and dilution: 2020 offerings and lower-priced sales triggered anti-dilution adjustments to Series F preferred-stock conversion terms and January offering warrant exercise prices. All Series H preferred shares had converted by June 30; 7.7 million related warrants had been exercised for $2.3 million.
- PPP: The company received $1.66 million under the Paycheck Protection Program in April and returned all funds in May after eligibility guidance was issued.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether post-quarter sales growth and gross-margin improvement persisted after the COVID-related demand contribution and hospital-access disruptions.
- Cash burn, available liquidity, and the timing and terms of any additional financing, including potential warrant exercises and resulting dilution.
- Nasdaq minimum-bid compliance status after the August 28, 2020 deadline and any extension, reverse-split action, or listing decision.
- Whether pediatric clearance and broader commercial expansion translate into sustained adoption and revenue sufficient to reduce continuing losses.
- The full terms and outstanding share impact of warrants and preferred-stock anti-dilution provisions.