2018 Q2 Form 10-Q Summary
Company and period: The filing identifies the registrant as CHF Solutions, Inc. (the company identified in the request as Nuwellis, Inc.). It covers the quarter and six months ended June 30, 2018. The company focused on commercializing the Aquadex FlexFlow system for ultrafiltration treatment of fluid-overloaded patients who have not responded to diuretic therapy.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1.099 | $0.864 | $2.136 | $1.765 |
| Gross profit / margin | $0.229 / 20.8% | $0.248 / 28.7% | $0.365 / 17.1% | $0.635 / 36.0% |
| Operating loss | $(4.179) | $(2.499) | $(8.533) | $(4.807) |
| Net loss | $(4.181) | $(2.458) | $(8.535) | $(3.398) |
| Basic and diluted loss per share | $(0.93) | $(9.38) | $(2.00) | $(27.77) |
- Q2 sales increased 27.2% year over year; six-month sales rose 21.0%. Management attributed growth to expanding the commercial organization, including sales representatives and clinical specialists. The company reported more than 500 installed Aquadex consoles in the United States.
- Costs rose faster than sales. Q2 cost of goods sold increased 41.2%, SG&A 55.6%, and R&D 96.6% year over year. For the six-month period, the respective increases were 56.7%, 61.8%, and 76.7%.
- Gross margin declined in both comparisons. The company cited manufacturing transition costs and anticipated improvement later in 2018 as internally manufactured inventory and production efficiencies increased.
- Cash and cash equivalents were $7.0 million at June 30, 2018, down from $15.6 million at year-end 2017. Six-month operating cash use was $8.478 million; investing cash use was $0.121 million; there were no financing cash flows during the period.
- Current assets were $10.167 million and current liabilities $2.003 million at quarter-end. Total liabilities were $2.129 million. No borrowings were outstanding on the $1.0 million revolving credit facility; the filing does not report other funded debt outstanding.
- Accumulated deficit was $190.9 million. The filing reports a $126,000 contingent-consideration liability related to the Aquadex acquisition.
Changes, outlook, and risks
- Operating and net losses widened year over year, and gross margin weakened, despite revenue growth. Prior-year results included a $1.466 million gain from changes in warrant fair value for the six-month period; there was no comparable gain in 2018.
- Management expected additional near-term losses while investing in sales and marketing, inventory, manufacturing, and public-company costs. It expected selling expenses to continue rising, general and administrative costs to remain broadly consistent with the current quarter, and R&D spending to increase slightly. It forecast gross-margin improvement later in 2018, not a specific revenue, earnings, or cash-flow target.
- The company stated that recurring losses and operating cash outflows raised substantial doubt about its ability to continue as a going concern through the next twelve months. It expected to need additional funding; future financing might not be available on favorable terms or at all. Profitability depended on broader adoption of Aquadex and effective sales, training, manufacturing, and distribution.
- On July 3, 2018, after quarter-end, the company raised $5.4 million gross and approximately $4.7 million net in a common-stock offering. It also repriced certain warrants to $2.12 per share and extended some expirations; repriced warrants covered 7,760,400 shares. The Series F preferred conversion price was reduced from $4.50 to $2.12 under its anti-dilution provisions. These terms create potential dilution.
- The company adopted ASC 606 on January 1, 2018; it reported no impact on the amount or timing of revenue previously recognized. It reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth and expected manufacturing efficiencies translate into sustained gross-margin improvement.
- Cash burn, available financing, and the company’s ability to address the disclosed substantial doubt about going concern.
- The dilution and potential cash proceeds associated with the repriced warrants, Series F preferred stock, and subsequent offering.
- Whether commercial adoption, installed-console utilization, and recurring sales of disposables support the company’s growth expectations.
- How much of the higher operating expenses reflects ongoing commercial investment versus nonrecurring or stock-based compensation; six-month stock-based compensation was $1.107 million.