Business context and reporting period
This is the Form 10-Q for the quarter ended September 30, 2016. The filing names Sunshine Heart, Inc. as the registrant; the request metadata identifies Nuwellis, Inc. The filing describes an early-stage medical-device company focused on heart failure products. It acquired the Aquadex product line from a Baxter subsidiary on August 5, 2016, and reported its first commercial Aquadex sales. Unless otherwise noted, dollar amounts below are in millions.
Financial results and liquidity
- Revenue: Third-quarter and nine-month revenue was $0.543 million, versus zero and $0.059 million, respectively, in 2015. Third-quarter revenue included $0.484 million from Aquadex and $0.059 million from a C-Pulse clinical-study implant.
- Gross profit and margin: Third-quarter gross profit was $0.356 million on $0.543 million of revenue, an approximate 65.6% blended gross margin. Cost of goods sold was $0.187 million.
- Operating costs and losses: Third-quarter operating loss was $4.062 million, compared with $6.273 million in 2015; nine-month operating loss was $12.599 million, compared with $19.604 million. R&D fell 61.9% to $1.735 million for the quarter and 44.0% to $7.511 million for nine months. Quarterly SG&A rose 55.5% to $2.683 million, including about $0.9 million of Aquadex transaction costs.
- Net loss: Third-quarter net loss was $3.917 million ($0.27 per share), versus $6.558 million ($0.36 per share). Nine-month net loss was $12.891 million ($0.76 per share), versus $19.979 million ($1.11 per share). The 2016 quarter included a $0.5 million loss on early debt retirement and a $0.646 million noncash gain from the change in warrant fair value.
- Cash flow: Nine-month operating cash use was $13.563 million, versus $18.232 million in 2015; investing cash use was $4.110 million, including $4.0 million for the Aquadex acquisition. Financing used $4.638 million, principally reflecting debt repayment partly offset by preferred-stock proceeds. Cash declined by $22.321 million to $0.792 million.
- Balance sheet and liquidity: At September 30, cash was $0.792 million, current assets $1.328 million and current liabilities $2.798 million. Total assets were $6.621 million, total liabilities $4.161 million, and stockholders’ equity $2.460 million. The company had an accumulated deficit of $166.1 million.
- Debt and financing: The company repaid $5.5 million outstanding under its prior Silicon Valley Bank loan on August 4; no borrowings were outstanding at quarter-end. A replacement facility offered up to $5.0 million, but advances were subject to liquidity covenants the company said it did not meet. July’s Series B preferred-stock and warrant financing generated approximately $3.5 million gross.
Material changes, outlook, and risks
- Strategy: The company stopped enrolling patients in its OPTIONS HF and COUNTER HF studies in March, shifted its therapeutic strategy toward neuromodulation in July, then announced in September that it would pause neuromodulation clinical evaluations and focus resources on Aquadex.
- Management outlook: Management expected Aquadex revenue to grow as disposable utilization increased across an installed base of more than 500 consoles. It expected selling expenses to rise as the sales organization expanded, while general and administrative and R&D expenses were expected to decrease.
- Going concern and funding: The filing states that continued operations depend on raising additional capital and successfully commercializing Aquadex; failure to do so could jeopardize the company’s ability to continue as a going concern. Management expected to seek additional financing during 2017, with no assurance it would be available on acceptable terms.
- Subsequent financing: After quarter-end, holders exchanged Series B preferred stock for Series B-1 with a lower $0.17 conversion price. On November 3, the company received $3.6 million gross in a preferred-stock and warrant financing; a further $0.2 million closing was subject to shareholder approval. The securities could result in substantial dilution, and conversion or exercise was restricted pending approval.
- Listing risk: Nasdaq had issued a delisting determination over the minimum bid-price requirement. The company requested a hearing and planned to seek an extension, including through a proposed reverse split; continued listing was not assured.
- Commitments and unusual items: The Aquadex supply agreement could require purchase of remaining inventory, estimated not to exceed $2.5 million. The acquisition also included contingent consideration if the assets are resold above $4.0 million within three years, and a seller repurchase right tied to Nasdaq trading status. The new preferred warrants are recorded as a liability and remeasured through earnings.
Most important facts for investors to verify
- Confirm the registrant and corporate-name relationship: the filing is for Sunshine Heart, Inc., not a registrant named Nuwellis, Inc.
- Assess cash runway, the timing and terms of further financing, and whether the company can meet its going-concern needs; quarter-end cash was only $0.792 million.
- Track Nasdaq’s listing decision, any reverse split, and required shareholder approvals for post-quarter financing securities.
- Monitor Aquadex sales growth, product margins, supply arrangements, and the expected inventory purchase obligation.
- Review potential dilution from preferred-stock conversion and warrants, including the post-quarter lower conversion price and warrant terms.