Nuwellis, Inc. quarterly report, Q2 FY2015

Business context and reporting period

This is Sunshine Heart, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015; the filing does not identify the registrant as Nuwellis. Sunshine Heart was an early-stage medical-device company developing the C-Pulse Heart Assist System for heart failure. The product was not approved for commercial sale in the United States; the company was conducting U.S. and European clinical studies.

Financial results and liquidity

Amounts below are in millions of dollars unless stated otherwise.

Gross margin is not meaningful at this revenue level; costs for clinical-study devices are expensed as research and development. At June 30, cash and cash equivalents were $33.419, total current assets $34.186, and current liabilities $4.588 (working capital of approximately $29.598). Total debt was $8.0 gross, with $7.696 reported net of debt discount; $1.895 was classified as current and $5.801 as long-term. Cash increased $2.126 during the first half, supported by $7.055 net proceeds from common-stock sales and $8.0 of borrowings.

Material changes versus prior comparable periods

• Second-quarter SG&A increased 4.7% to $2.348; first-half SG&A decreased 1.5% to $4.534.
• Second-quarter R&D decreased 9.6% to $3.991, primarily due to a temporary pause in COUNTER HF enrollment. First-half R&D rose 4.5% to $8.856, reflecting clinical infrastructure, personnel, and fully implantable-system development, partly offset by the pause.
• Other expense was $0.151 for the quarter and $0.217 for the first half, mainly reflecting interest on new Silicon Valley Bank borrowings; the comparable 2014 periods reported other income.
• First-half net cash used in operations increased to $12.809 from $11.922. The company reported $59,000 revenue in each first-half period, from one device implantation in each period.
• Shares outstanding increased to 18.311 million at June 30 from 16.983 million at December 31, 2014, primarily reflecting at-the-market share sales.

Outlook, risks, and unusual items

• FDA-approved enrollment in the COUNTER HF pivotal trial resumed in May 2015 after a protocol-driven pause and FDA-requested minor changes. Management expected R&D spending to rise as enrollment resumed and fully implantable-system development continued.
• Management expected revenue to remain minimal until U.S. pivotal-study enrollment increased and reimbursement was established in selected European post-market markets. The C-Pulse system had CE Mark approval, but U.S. commercial approval had not been obtained; reimbursement for some study procedures was unavailable.
• The Silicon Valley Bank facility provides up to $10.0 million at 7% annual interest. The remaining $2.0 million was conditional on enrollment of the 100th COUNTER HF patient by September 30, 2015. The agreement requires an equity financing generating at least $20.0 million in unencumbered net proceeds by March 31, 2016. The filing also describes a 5% final payment on original principal and restrictive covenants.
• The company reported accumulated deficit of $140.0 million and expected continued losses. It said ongoing operations depend on raising capital and successfully developing and commercializing its product; failure to secure funding could threaten its ability to continue as a going concern. No assurance of future financing or profitability was given.
• Australian R&D tax-credit benefits declined to $0.127 for the first half from $0.265 in 2014; management expected future refunds, if any, to decrease as Australian R&D spending had been substantially reduced.
• The office lease was extended through March 31, 2019. Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls at June 30, 2015.

Important facts for investors to verify

• Whether COUNTER HF enrollment resumed on schedule and the 100-patient milestone was achieved, including any subsequent regulatory or clinical developments.
• Whether the required $20.0 million equity financing was completed by March 31, 2016, and the availability and terms of any additional capital.
• Cash burn, remaining cash runway, and debt service obligations, including the final payment and covenant compliance.
• Whether reimbursement access and clinical evidence support eventual commercialization in the United States and Europe.
• Clarify the registrant’s identity and corporate-name history: this filing is by Sunshine Heart, Inc.