Business context and reporting period
This is CHF Solutions, Inc.’s Form 10-Q for the quarter and nine months ended September 30, 2019; it is not filed under the name Nuwellis. CHF Solutions developed, manufactured, and commercialized the Aquadex FlexFlow system for ultrafiltration treatment of fluid-overload patients. The company had refocused on Aquadex after acquiring that business in 2016.
Financial results and position
Amounts below are in millions of dollars unless stated otherwise. Revenue is primarily sales of disposable filters and catheters used with Aquadex consoles.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1.252 | $1.363 | $4.144 | $3.499 |
| Gross profit (margin) | $0.712 (56.9%) | $0.448 (32.9%) | $2.157 (52.1%) | $0.813 (23.2%) |
| Operating loss | $(4.507) | $(4.250) | $(13.660) | $(12.783) |
| Net loss | $(4.509) | $(4.241) | $(13.666) | $(12.776) |
| Loss per share | $(1.70) | $(8.50) | $(9.49) | $(34.59) |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $(12.337) | $(11.843) |
At September 30, cash and cash equivalents were $3.634 million, down from $5.480 million at December 31, 2018. Current assets were $6.051 million and current liabilities $2.937 million. Total liabilities were $3.246 million, including $0.490 million of operating lease liabilities. The company had no borrowings under its Silicon Valley Bank facility; the $1 million revolving line was scheduled to expire March 31, 2020. Accumulated deficit was $213.1 million. Nine-month financing cash inflow of $10.959 million came from an equity offering; investing cash outflow was $0.464 million.
Material changes versus prior comparable periods
- Q3 sales declined 8.1% year over year, which management attributed to a salesforce reorganization to align the commercial strategy with cardiac surgery and prospective pediatric use. Nine-month sales rose 18.4%, attributed to expansion of the commercial footprint.
- Gross margin improved substantially in both comparisons as the company began selling internally manufactured inventory in Q1 2019, following completion of the manufacturing transfer from Baxter in 2018. Management expected further margin improvement as volume and manufacturing efficiency increased.
- Q3 SG&A increased 10.6% and R&D increased 12.9% year over year; nine-month SG&A rose 5.3% and R&D 76.5%. Spending reflected commercial expansion and pediatric-label, software, and catheter work.
- Common shares outstanding were 2.879 million at September 30, versus 0.513 million at December 31, 2018. The filing retroactively reflects a 1-for-14 reverse split effective January 2019. Nine-month loss per share includes a $4.5 million deemed dividend associated with the March 2019 preferred-stock offering.
Outlook, risks, contingencies, and unusual items
- Management expected FDA 510(k) clearance for pediatric use in patients weighing at least 20 kg in Q1 2020. It expected renewal of the Aquadex console CE Mark in Q4 2019; the circuit renewal had been received in Q2. Management said existing EU console inventory was sufficient and anticipated no material revenue effect from renewal timing.
- The company expected modest increases in selling expense, SG&A generally consistent with the current quarter, and a modest decrease in R&D in future quarters. No quantified revenue or earnings guidance was provided.
- The filing states that recurring losses, operating cash outflows, and the need for additional funding raise substantial doubt about the company’s ability to continue as a going concern through the next twelve months. Management expected near-term losses and said further funding might not be available on favorable terms, or at all.
- Subsequent to quarter-end, the company raised gross proceeds of about $0.660 million on October 25, 2019 and about $1.36 million on November 6, 2019 through equity offerings. Both offerings triggered reductions in the Series F preferred conversion price under its full-ratchet anti-dilution terms; the November financing also included warrants. These financings occurred after the September 30 balance-sheet date.
- Key risks include adoption and market acceptance of Aquadex, successful hospital training and commercialization, regulatory clearance and product availability, and access to additional capital. The filing reported no material legal proceedings and no material change to previously disclosed risk factors. The Baxter contingent asset-disposal payment obligation expired August 6, 2019; a separate Baxter repurchase right applies if the common stock ceases to trade on Nasdaq.
Important facts for investors to verify
- Confirm the issuer and reporting period: this filing is for CHF Solutions, Inc., not Nuwellis, Inc.
- Review subsequent financing terms, warrant dilution, Series F anti-dilution adjustments, and the company’s cash needs relative to operating cash burn.
- Check actual FDA timing and outcome for pediatric labeling and renewal status of the EU console CE Mark.
- Assess whether sales growth resumes after the salesforce reorganization and whether manufacturing-driven margin gains persist as volumes change.
- Reconcile the reported share count and per-share figures with the 1-for-14 reverse split and the substantial number of potentially dilutive warrants and other securities.