Nuwellis, Inc. annual report, FY2019

Business context and reporting period

The supplied filing is CHF Solutions, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed March 5, 2020—not a standalone 2019 Q4 report. The request metadata names Nuwellis, Inc., but the filing identifies the registrant as CHF Solutions, Inc. The company develops and sells the Aquadex ultrafiltration system for patients with fluid overload; it had shifted its focus from its former C-Pulse product to Aquadex.

Financial performance and liquidity

Revenue increased 10.3%. Gross margin improved as the company sold internally manufactured inventory after completing its manufacturing transition from Baxter. R&D expense rose 53.0% to $4.672 million, primarily for pediatric-label work and product improvements; selling, general and administrative expense rose 6.4% to $16.285 million. Stockholders’ equity was $1.990 million, down from $5.936 million. Current assets were $4.036 million against current liabilities of $3.351 million. The company reported no borrowings under its Silicon Valley Bank facility; the available revolving line was capped at $1 million and scheduled to expire March 31, 2020.

Material changes and notable items

• Cash declined by $4.201 million during 2019 as operating and investing outflows exceeded financing proceeds. Net cash provided by financing was $12.665 million, principally from equity offerings.
• Gross margin increased substantially year over year, while the operating loss widened by about $1.070 million as operating expenses grew faster than sales.
• A $4.509 million deemed dividend related to the March 2019 Series G preferred-stock offering increased the loss allocable to common stockholders; reported basic and diluted loss per share was $9.30 versus $42.14 in 2018. The per-share comparison is affected by the substantially different weighted-average share counts and the deemed dividend.
• After year-end, the company raised approximately $8.6 million in net proceeds from a January 28, 2020 offering of common stock, Series H preferred stock and warrants. The offering also reduced the Series F preferred-stock conversion price to $0.55, creating potential dilution.
• The company received FDA 510(k) clearance in February 2020 to include pediatric patients weighing 20 kg or more. It also received CE Mark clearance for the SmartFlow console in January 2020.

Outlook, risks and contingencies

The auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern. Management expected ongoing losses and stated that additional funding would be needed, likely in the third quarter of 2020; absent further financing or warrant exercises, the company might be unable to continue operations. The January 2020 offering provided near-term capital but did not remove the disclosed need for additional funding.

Management expected modestly higher commercial investment and generally stable general and administrative expense in 2020, with R&D spending expected to decrease modestly. It anticipated further gross-margin improvement as production volumes and manufacturing efficiencies increased. These are expectations, not assured results.

• Revenue depends on a single product and adoption by hospitals; the ten largest customers generated 45.1% of 2019 revenue, and the largest accounted for 10.0%.
• Medicare had not issued a favorable national coverage determination for Aquadex ultrafiltration; outpatient use was not reimbursed by Medicare and private payors, and broader reimbursement remained uncertain.
• Nasdaq had notified the company that its share price was below the $1.00 minimum bid requirement. Year-end equity of $1.990 million was below Nasdaq’s $2.5 million threshold; the company believed the January offering restored equity compliance, but bid-price compliance and continued listing remained risks.
• The company cited possible supply-chain disruption from the coronavirus outbreak, including reliance on some China-based suppliers, as well as manufacturing, regulatory, product-liability, reimbursement and competitive risks.
• Outstanding warrants and convertible securities could materially dilute common shareholders. No material pending legal proceedings were reported.

Key facts for investors to verify

• Confirm the issuer and period: this is a CHF Solutions, Inc. 2019 annual filing, although the request metadata specifies Nuwellis, Inc. and 2019 Q4.
• Assess whether the January 2020 financing, subsequent cash burn, and available financing sources were sufficient to address the going-concern warning and stated need for additional capital.
• Track revenue growth, product utilization, customer concentration, and whether the improved gross margin persisted as in-house manufacturing scaled.
• Verify Nasdaq bid-price and stockholders’ equity compliance, and review the potential dilution from preferred stock, warrants and other convertible securities.
• Check progress on reimbursement, pediatric commercialization, clinical evidence, and any material supply-chain or regulatory developments.