Nuwellis, Inc. (then CHF Solutions, Inc.; Nasdaq: CHFS) — Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company is a medical-device business focused on developing, manufacturing, and commercializing the Aquadex FlexFlow system for patients with fluid overload who have not responded to diuretic therapy. Financial amounts below are in U.S. dollars; tables are in thousands unless stated otherwise.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,677 | $1,099 | $2,892 | $2,136 |
| Gross profit | $842 | $229 | $1,445 | $365 |
| Gross margin | 50.2% | 20.8% | 50.0% | 17.1% |
| Operating loss | $(4,428) | $(4,179) | $(9,153) | $(8,533) |
| Net loss | $(4,430) | $(4,181) | $(9,157) | $(8,535) |
- Q2 sales increased 52.6% year over year; first-half sales increased 35.4%. Management attributed growth to expansion of its sales and clinical-support teams and broader commercialization.
- Gross margin improved substantially as the company shifted to internally manufactured inventory. Cost of goods sold declined 4.0% in Q2 and 18.3% for the first half, while sales rose.
- Q2 selling, general and administrative expense was $3.973 million, up 5.5%; research and development was $1.297 million, up 101.7%. First-half SG&A was $7.991 million, up 2.8%, and R&D was $2.607 million, up 132.4%.
- Basic and diluted loss per share was $1.93 for Q2 and $8.82 for the first half, compared with $13.03 and $28.03, respectively, in 2018. Share and per-share data were retroactively adjusted for the 1-for-14 reverse split. The first-half 2019 loss attributable to common shareholders included a $4.5 million deemed preferred-stock dividend from the March offering.
- Cash and cash equivalents were $7.402 million at June 30, 2019, versus $5.480 million at December 31, 2018. Current assets were $10.302 million and current liabilities $2.637 million. Operating cash use was $8.874 million for the first half; investing cash use was $158,000.
- Financing provided $10.959 million in the first half, primarily from the March 2019 public offering. The company reported no borrowings under its Silicon Valley Bank revolving facility; the $4 million term loan had expired unused. The revolver, with availability subject to conditions and covenants, expires March 31, 2020.
- Total liabilities were $2.994 million, including $533,000 of operating lease liabilities. The company adopted the new lease standard in 2019, recording approximately $0.6 million of lease-related assets and liabilities.
Material changes, outlook, and risks
- Funding and going concern: The company reported a $208.5 million accumulated deficit, ongoing operating losses and cash outflows, and substantial doubt about its ability to continue as a going concern through the next 12 months. Management expected continued near-term losses and said additional funding may be needed; future warrant exercises or capital raising are uncertain.
- Management outlook: Management expected gross margins to continue improving as volumes increase and manufacturing achieves scale efficiencies. It expected selling expense to rise with distribution expansion, general and administrative expense to remain around the current-quarter level, and R&D spending to increase slightly.
- Commercial and regulatory execution: U.S. sales depend on adoption of Aquadex by hospitals and effective training and distribution. The Aquadex circuit CE Mark renewal was received in Q2; console renewal was expected in the latter half of 2019. Management said it had sufficient console inventory in the EU and did not expect the renewal timing to materially affect revenue.
- Concentration: One customer accounted for 20% of Q2 sales and 12% of first-half sales; one customer represented 23% of accounts receivable at June 30.
- Equity dilution: The March offering generated approximately $11.0 million net proceeds and included common stock, Series G convertible preferred stock, and warrants exercisable for approximately 4.7 million common shares. At June 30, 550,842 Series G preferred shares remained outstanding. The filing also reported 5.43 million warrants to purchase common stock outstanding, alongside other potentially dilutive securities.
- Unusual items and commitments: The company reduced the fair value of acquisition-related contingent consideration from $126,000 to zero, judging payment remote. A commitment to pay Baxter on certain asset disposals expired August 6, 2019. Baxter also retained a right to require repurchase of its shares at fair market value if the company’s common stock ceases to trade on Nasdaq.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls at June 30, 2019.
Important facts for investors to verify
- Whether sales growth and the improved gross margin persist as product adoption and manufacturing volumes develop.
- Cash burn and financing needs relative to the going-concern warning, including the timing and terms of any additional capital or warrant exercises.
- Current dilution exposure from preferred-stock conversions, warrants, and equity incentive plans, and the resulting common-share count.
- Whether console CE Mark renewal was obtained as anticipated and whether regulatory or commercial developments affect EU sales.
- Customer concentration, receivable collection, and the status of Baxter-related rights and commitments.