Business Context and Reporting Period
This is CHF Solutions, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017—not a filing under the name Nuwellis. CHF Solutions described itself as a medical-device company commercializing the Aquadex FlexFlow System for ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy. The company had shifted focus from its discontinued C-Pulse program to the Aquadex business acquired from Baxter in August 2016. Share and per-share amounts reflect the company’s reverse stock splits.
The interim financial statements received an independent accountant’s review, not an audit.
Key Financial Metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $0.957 | $0.543 | $2.722 | $0.543 |
| Gross profit (sales less cost of goods sold) | $0.175 | $0.356 | $0.810 | $0.356 |
| Gross margin | 18.3% | 65.6% | 29.8% | 65.6% |
| Operating loss | $(2.863) | $(4.062) | $(7.670) | $(12.599) |
| Net loss | $(2.847) | $(3.917) | $(6.245) | $(12.891) |
| Basic and diluted loss per share | $(4.55) | $(117.66) | $(25.36) | $(409.02) |
At September 30, 2017, cash and cash equivalents were $2.513 million, current assets $4.738 million, current liabilities $2.227 million, and working capital $2.511 million. Total assets were $9.340 million and total liabilities $2.359 million. No debt was outstanding; the company said it did not then meet the financial covenants required to draw on its revolving credit line.
For the nine months, operating cash outflow was $8.769 million, investing outflow $0.206 million, and financing inflow $10.167 million. Cash increased $1.190 million from $1.323 million at year-end 2016. The accumulated deficit was $175.219 million.
Material Changes Versus Comparable Periods
- Sales rose 76.2% in Q3 and 401.3% for the nine months. The comparisons are not like-for-like: the company acquired Aquadex in August 2016 and had no Aquadex commercial sales before that acquisition; 2016 sales also included limited C-Pulse clinical-study revenue.
- Q3 operating loss narrowed by $1.199 million year over year; nine-month operating loss narrowed by $4.929 million. Lower research and development spending following the discontinuation of prior programs drove much of the nine-month improvement, while commercialization increased selling, general and administrative costs by about $2.6 million year over year.
- Gross margin was lower than in the comparable periods as the company incurred product costs and manufacturing-transition startup costs. Management expected margins to improve in 2018 as volumes and manufacturing efficiencies increased.
- Nine-month net loss included a $1.470 million gain from changes in the fair value of warrant liabilities. This noncash accounting gain contributed to the reported net-loss improvement.
- The company raised approximately $8.0 million net in an April 2017 public offering and received approximately $2.0 million gross from warrant exercises. Convertible preferred shares issued in financings were converted into common stock during 2017.
Outlook, Risks, and Unusual Items
- Funding and going concern: The company reported recurring operating losses and cash outflows, expected near-term losses, and stated it would need additional funding in Q4 2017 or Q1 2018. It warned that funding might not be available on favorable terms, or at all, and that failure to raise capital could threaten its ability to continue as a going concern.
- Manufacturing transition: The company planned to begin manufacturing in-house in Q4 2017 while continuing to purchase materials and finished goods from Baxter into early 2018. It had agreed to purchase $2.4 million of remaining inventory through February 2018; $1.6 million remained to be purchased at September 30.
- Operating outlook: Management expected sales expenses to rise as it expanded its sales organization, general and administrative costs to remain constant or decrease, and modest future research and development investment. It said 2018 gross margins could improve with higher volumes and scale efficiencies; these are expectations, not guarantees.
- Commercial and concentration risks: The business depended on adoption of a single product family, hospital training and market acceptance, and effective manufacturing and distribution. Two customers represented 24.7% of nine-month sales; three customers represented 41.1% of receivables at period-end.
- Contingencies and other items: The company had agreed to pay Baxter 40% of any proceeds above $4.0 million from a qualifying disposal of Aquadex assets within three years of acquisition. It reported no material legal proceedings. It also disclosed a 2017 ownership change that could limit use of tax net operating losses; a formal Section 382 analysis was not complete.
- Listing status: After the reporting date, a 1-for-20 reverse split took effect October 12, 2017, and Nasdaq confirmed on October 27 that the company had regained compliance with the minimum bid-price rule.
Important Facts for Investors to Verify
- Whether the company obtained the additional financing management said it expected to need, and how much operating runway that funding provided.
- Whether in-house manufacturing began as planned, whether product supply remained reliable, and whether manufacturing costs and gross margins improved.
- Whether Aquadex sales growth translated into stronger recurring demand and customer diversification, given the disclosed customer concentrations.
- How much of reported earnings improvement reflected durable operating progress versus reduced research and development spending and warrant fair-value gains.
- The dilution and potential exercise effects of outstanding warrants and stock-based awards, and the completed analysis of limitations on tax-loss carryforwards.