| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2016.2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 20162022 and in our subsequent filings with the Securities and Exchange Commission (SEC(the “SEC”).
Unless otherwise specified or indicated by the context, CHF Solutions, Company, we, us“Nuwellis,” “Company,” “we,” “us” and our,“our,” refer to CHF Solutions,Nuwellis, Inc. and its subsidiaries.subsidiary.
OVERVIEW
About CHF SolutionsNuwellis
We are a medical devicetechnology companydedicated to transforming the lives of patients suffering from fluid overload through science, collaboration, and innovation. The Company is focused on commercializing the Aquadex FlexFlow SystemSmartFlow system for Aquapheresisultrafiltration therapy. The Aquadex FlexFlow SystemSmartFlow system is indicated for temporary (up to eight hours) ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy, andor extended (longer than 8 hours) ultrafiltration treatment ofhours in patients withwho require hospitalization) use in adult and pediatric patients weighing 20 kg. or more whose fluid overload who have failed diuretic therapy and require hospitalization.is unresponsive to medical management, including diuretics.
Prior to July 2016, we were focused on developing the C-Pulse Heart Assist System for treatment of Class III and ambulatory Class IV heart failure. The C-Pulse System utilized the known concept of counterpulsation applied to the aorta. In March 2016, we announced that we were no longer enrolling patients into our two clinical studies for the C-Pulse System and that we planned to pursue a new strategic direction. In July 2016, we announced that we were moving forward with a therapeutic strategy utilizing neuromodulation rather than counterpulsation.
In August 2016, we acquired the Aquadex Business from a subsidiary of Baxter, International, Inc. (“Baxter”), a global leader in the hospital products and dialysis markets.
On In September 29, 2016, we announced a strategic refocus of our near-term strategy that includesincluded halting all clinical evaluations of our neuromodulationthe C-Pulse System related technology to fully focus our resources on our recently acquired Aquadex Business, taking actions to reduce our cash burn in connection with such strategic refocus, and reviewing potential strategic alliances and financing alternatives.
Business. On May 23, 2017, we announced that we were changing our name from Sunshine Heart, Inc. to CHF Solutions, Inc. to more appropriately reflect the direction of our business. On April 27, 2021, the Company announced that it was changing its name from CHF Solutions, Inc. to Nuwellis, Inc. to reflect the expansion of its customer base from treating fluid imbalance resulting from congestive heart failure to also include critical care and pediatrics applications.
Impact of COVID-19 Pandemic
During 2017,2021 and 2022, we were subject to challenging social and economic conditions created as a result of the outbreak of the novel strain of coronavirus, SARS-CoV-2. The resulting impact of the COVID-19 pandemic created disruptions in our boardoperations resulting from rapid and evolving changes implemented to keep our customers, their patients, and our employees safe. These changes included restrictions on hospital access imposed on our field employees by customers dealing on the front lines of directorsCOVID-19 and stockholders approved two reverse stock splits. Neither reverse stock split changedmanaging the par valuespread of the virus, changes to work practices by requiring employees to work remotely, and increased protocols to ensure the safety of those employees that remained on site. The ongoing impact of the COVID-19 outbreak on our common stockoperational and financial performance has diminished, but we may still experience downstream effects that will depend on certain future developments, including the ongoing impact on our customers, hospital access restrictions imposed on our field employees, and effects on our vendors, all of which remain uncertain and cannot be predicted.
Several hospitals in the U.S. initially included the Aquadex System in their treatment protocol for fluid management of COVID-19, especially when dialysis equipment and staff were limited, but treatment regimens subsequently evolved so that the need to restore fluid balance became less prevalent. However, we also experienced changes to our sales practices due to restrictions on hospital access and believe that revenue in other areas was negatively impacted by these restrictions. In addition, the disruption created by COVID-19 created significant uncertainty about our ability to access the capital markets in future periods. As of the filing date of this Form 10-Q, while we are not currently experiencing direct effects of the COVID-19 pandemic, the extent to which COVID-19 or a future pandemic outbreak may impact our financial condition or results of operations or guidance is uncertain and cannot be reasonably estimated but could be material and last for an extended period of time. The effect of the numberCOVID-19 pandemic may not be fully reflected in our results of common or preferred shares authorized by the Company’s Fourth Amendedoperations and Restated Certificate of Incorporation. The first reverse stock split was a 1-for-30 reverse split ofoverall financial performance until future periods. See Part 1, Item 1-A “Risk Factors”in our outstanding common stock that became effective after trading on January 12, 2017. The second reverse stock split was a 1-for-20 reverse split of our outstanding common stock that became effective after trading on October 12, 2017. All share and per share amounts in this QuarterlyAnnual Report on Form 10-Q10-K for the three and nine monthsyear ended September 30, 2017 and 2016, including the consolidated financial statements and notes thereto, have been retroactively adjusted to reflect the reverse stock splits for all periods presented.December 31, 2022.
Warrant Exercise Agreement
On February 15, 2017, we entered into a letter agreement with the institutional investors that held the majority of our outstanding warrants, to incent the cash exercise of these warrants on or before March 31, 2017. In exchange for any such exercise, we agreed to provide the Investors a replacement warrant (the “Replacement Warrants”) to purchase the same number of shares of common stock as were issued upon exercise of the exercised warrants, with an exercise price equal to the consolidated closing bid price of our common stock on the date of issuance. The Replacement Warrants are in the same form as the exercised warrants except the exercise prices are not subject to reduction for subsequent equity issuances and the Replacement Warrants do not allow the investor to demand that we purchase the Replacement Warrants in the event of a fundamental transaction involving the Company. In connection with this agreement, the investors exercised all of the Original Warrants for gross cash proceeds to us of $2.0 million, and we issued 43,396 Replacement Warrants with exercise prices ranging from $34.6 per share to $99.8 per share.
We entered into the letter agreement with the investors to incent the exercise of the Original Warrants in order to receive the cash proceeds from the exercise of the Original Warrants and because the exercise of the Original Warrants would allow us to remove the warrant liability from our balance sheet and avoid future fair value adjustments and associated volatility in our consolidated financial statements. As of September 30, 2017, we had no Original Warrants outstanding and we had issued all Replacement Warrants under the letter agreement.
Public Offering
On April 24, 2017, we closed on an underwritten public offering of 140,000 shares of common stock, 6,400 shares of Series E Convertible Preferred Stock and warrants to purchase 460,000 shares of common stock, which includes the full exercise of the underwriter’s over-allotment option to purchase additional shares and warrants, for gross proceeds of $9.2 million. Net proceeds totaled approximately $8.0 million after deducting the underwriting discounts and commissions and other costs associated with the offering. See Note 4 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Nasdaq Compliance
On September 21, 2016, we received notice from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Staff had determined to delist our securities from The Nasdaq Capital Market due to our then continued non-compliance with the minimum bid price requirement. We timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”), which occurred on November 10, 2016. On November 11, 2016, we received notice from the Staff that we no longer satisfied Nasdaq Listing Rule 5550(b) insofar as we did not expect to report stockholders’ equity of at least $2.5 million upon the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and that the deficiency could serve as an additional basis for the delisting of the Company’s common stock from The Nasdaq Capital Market. On November 21, 2016, Nasdaq informed us that the Panel had granted us continued listing on The Nasdaq Capital Market while we implemented our plan to regain compliance with the minimum bid price and minimum stockholders’ equity requirements. The Panel granted us until January 30, 2017 to evidence a closing bid price of $1.00 or more for a minimum of ten prior consecutive trading days. After implementing the reverse stock split described above, we received confirmation from Nasdaq on February 9, 2017 that we regained compliance with the minimum bid price rule. The Panel had granted us until March 20, 2017 to evidence compliance with the $2.5 million stockholder’s equity requirement. On March 28, 2017, we announced that the Panel had granted us an extension through May 10, 2017 to evidence compliance with the minimum shareholder’s equity requirement. On May 4, 2017, we were formally notified by Nasdaq that we had regained compliance with the minimum stockholders’ equity requirement and we were in compliance with all other applicable requirements for listing on The Nasdaq Capital Market.
On June 1, 2017, we received a subsequent notification from Nasdaq informing us that we were no longer in compliance with the minimum bid price requirement, as the bid price of our shares of common stock (“Common Stock”) closed below the minimum $1.00 per share for the 30 consecutive business days prior to the date of the notice. Nasdaq also notified us that we were provided 180 calendar days, or until November 28, 2017, to regain compliance with the minimum bid price requirement. We effected a 1-for-20 reverse split of our outstanding common stock that became effective after trading on October 12, 2017, After implementing the reverse stock split described above, we received confirmation from Nasdaq on October 27, 2017, that we had regained compliance with the minimum bid price rule and the listing matter was closed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various accounting policies to prepare the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States. (U.S. GAAP)States (“U.S. GAAP”). Our most significant accounting policies are disclosed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to stock-based compensation, valuation of equity and debt securities, and income tax reserves are updated as appropriate, which in most cases is quarterly. We base our estimates on historical experience, valuations, or various assumptions that are believed to be reasonable under the circumstances. Other than new estimates made in connection with the valuation of our warrant liability, thereThere have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Revenue Recognition: Recognition: We recognize revenue in accordance with ASC Topic 606, Revenue from product salesContracts with Customers. Accordingly, we recognize revenue when earned. Specifically, revenue is recognized when persuasive evidenceour customers obtain control of their products or services, in an arrangement exists, delivery has occurred,amount that reflects the price is fixed or determinable, and collectability is reasonably assured. Revenue is not recognized until title and risk of loss have transferred to the customer. The shipping terms for our revenue arrangements are FOB shipping point.
Accounts Receivable: Our accounts receivable have termsconsideration that require payment in 30 days. We did not establish an allowance for doubtful accounts at September 30, 2017 as we have not experienced any write offs or a deterioration in the aging of our receivables to date and do not expect to experiencereceive in the future.
Inventories: Inventories represent finishedexchange for those goods purchased from our supplier and are recorded as the lower of cost or market using the first-in-first out method.
Intangible assets: Our intangible assets consist of $3.1 million for customer relationships, $1.1 million for developed technology, and $0.4 million for trademarks and tradenames. All intangible assets are estimated to have a useful life of 7 years. We review our definite-lived intangible assets for impairment when impairment indicators exist. When impairment indicators exist, we determine if the carrying value of the intangible assets exceeds the related undiscounted cash flows. In cases where the carrying value exceeds the undiscounted cash flows, the carrying value is written down to its fair value, generally using a discounted cash flow analysis. No impairments have been identified or recorded in the periods presented.
Goodwill: Goodwill is the cost of an acquisition in excess of the fair value of acquired assets and liabilities and is recorded as an asset on our balance sheet. Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to an appropriate reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount.
We evaluate goodwill for impairment annually on November 1st of each calendar year, or to the extent events or conditions indicate a risk of possible impairment during the interim periods prior to our annual impairment test. Generally, the evaluation of goodwill for impairment involves a two-step test, although under certain circumstance an initial qualitative evaluation may be sufficient to conclude that goodwill is not impaired without conducting the quantitative test.
Step 1 involves comparing the estimated fair value of each respective reporting unit to its carrying value, including goodwill. If the estimated fair value exceeds the carrying value, the reporting unit’s goodwill is not considered impaired. If the carrying value exceeds the estimated fair value, step 2 must be performed to determine whether goodwill is impaired and, if so, the amount of the impairment. Step 2 involves calculating an implied fair value of goodwill by performing a hypothetical allocation of the estimated fair value of the reporting unit determined in step 1 to the respective tangible and intangible net assets of the reporting unit. The remaining implied goodwill is then compared to the actual carrying amount of the goodwill for the reporting unit. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. No impairments have been identified or recorded in the periods presented.
In January 2017, the FASB issued amended guidance to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. This guidance is to be applied on a prospective basis effective for our interim and annual periods beginning after January 1, 2020, with early adoption permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the timing of adoption and the effect, if any, of this guidance on our consolidated financial statements.
Contingent consideration: In connection with the purchase of Aquadex, we have an obligation to pay additional consideration that is contingent upon the occurrence of certain future events. Contingent consideration was recognized at the acquisition date at the estimated fair value of the contingent milestone payments. The fair value of the contingent consideration is remeasured to its estimated fair value at the end of each reporting period, with changes recorded to earnings.
Common stock warrant liability: We record the common stock warrant liability at fair value at the date of issuance using primarily a Monte Carlo valuation model (services. See Note 6 to the condensed consolidated financial statements2 – Revenue Recognition, included in Part I, Item 1 of this Quarterly Report on Form 10-Q). The fair value is remeasured10-Q, for additional disclosures.
Accounts Receivable: Our accounts receivables generally have terms that require payment within 30 days. We did not establish an allowance for doubtful accounts as of March 31, 2023, as we have not incurred any write-offs or experienced a deterioration in the aging of our receivables, and we do not expect to its estimated fair valueexperience write-offs in the future.
Inventories: Inventories consist of finished goods, raw materials and subassemblies and are recorded at the endlower of each reporting period with changes recorded to earnings.cost or net realizable value using the first-in, first-out method.
Stock-Based Compensation: We recognize all share-based payments to employees, directors, and directors,consultants, including grants of stock options restricted stock units (RSUs), warrants and common stock awards, in the consolidated statement of operations and comprehensive loss as an operating expense based on their fair values over the requisite service period.
We compute the estimated fair values of stock options and warrants using the Black-Scholes option pricing model. Market priceas established at the date of grant is used to calculate the fair value of restricted stock units and common stock awards.
Stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Equitydate. Other equity instruments issued to non-employees include RSUs,consist of warrants or options to purchase shares of our common stock. These RSUs, warrants or options are either fully-vestedfully vested and exercisable at the date of grant or vest over a certain period during which services are provided.
We compute the estimated fair values of stock options and warrants using the Black-Scholes option pricing model and market-based warrants using a Monte Carlo valuation model. Market price at the date of grant is used to calculate the fair value of any restricted stock units and common stock awards.
We expense the fair market value of fully vested awards at the time of grant, and of unvested awards over the period in which the related services are received. UnvestedStock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures, except for market-based warrants, which are remeasured toexpensed based on the grant date fair value until they vest.regardless of whether the award vests. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
EarningsAccounting for Warrants: We have issued and may continue to issue warrants to purchase shares of common stock through our public and private offerings. We account for such warrants in accordance with ASC 480, Distinguishing Liabilities from Equity, which identifies three categories of freestanding financial instruments that are required to be accounted for as a liability. If determined to be classified as a liability, we will remeasure the fair value of the warrants at each balance sheet date. If determined to be classified as equity, the fair value of the warrants will be measured as of the date of issuance and will not be subject to remeasurement at each balance sheet date.
The fair value of the warrant liability is estimated using a Monte Carlo simulation model using relevant inputs and assumptions based upon the terms of the warrants.
Loss per share: We compute basic earningsBasic loss per share is computed based on the net loss allocable to common stockholders for each period divided by the weighted average number of common shares outstanding. The net loss allocable to common stockholdersSee Note 3 – Stockholders’ Equity below for the nine months ended September 30, 2017, reflects a $1.0 million increase for the net deemed dividend to preferred stockholders provided in connection with the close of the public offering of Series E Convertible Preferred Stock in April of 2017, representing the intrinsic value of the shares at the time of issuance. In addition, the net loss allocable to common stockholders reflects an increase for net deemed dividends of $1.8 million to preferred stockholders provided in connection with the shareholder approval of the Series C and D Convertible Preferred Stock transactions in January of 2017, representing the intrinsic value of the shares at the time of issuance. additional disclosures.
Diluted earnings per share is computed based on the net loss allocable to common stockholders for each period divided by the weighted average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued, and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include shares underlying outstanding convertible preferred stock, warrants, stock options and other stock-based awards granted under stock-based compensation plans. These potentially dilutive shares were excluded
Impairment of Long-Lived Assets: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the impairment tests indicate that the carrying value of the asset or asset group is greater than the expected undiscounted cash flows to be generated by such asset or asset group, further analysis is performed to determine the fair value of the asset or asset group. To the extent the fair value of the asset or asset group is less than its carrying value, an impairment loss is recognized equal to the amount the fair value of the asset or asset group is exceeded by its carrying amount. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets or asset groups, and accordingly, actual results could vary significantly from such estimates.
The Company continues to report operating losses and negative cash flows from operations, both of which it considers to be indicators of potential impairment. Therefore, the Company evaluates its long-lived assets for potential impairment at each reporting period. The Company has concluded that its cash flows from the computationvarious long-lived assets are highly interrelated and, as a result, the Company consists of loss per share as their effecta single asset group. As the Company expects to continue incurring losses in the foreseeable future, the undiscounted cash flow step was antidilutive duebypassed, and the Company proceeded to our net loss in eachmeasure fair value of those periods.the asset group. The Company has determined the fair value of the asset group associated with its loaner units by using expected cash flows estimating future discounted cash flows expected from the rental of these units. For recently acquired assets within the asset group, primarily equipment, the Company determined the fair value based on the replacement cost. There have been no impairment losses recognized for the three months ended March 31, 2023 or the year ended December 31, 2022.
Going Concern:Our consolidatedConsolidated financial statements have been prepared and presented on a basis assuming we continue as a going concern. During the years ended December 31, 20162022 and 2015,2021, and through September 30, 2017,March 31, 2023, we incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated statements of operations and comprehensive loss and cash flows, respectively. As of March 31, 2023, we had an accumulated deficit of $273.9 million, and we expect to incur losses for the foreseeable future. To date, we have been funded by debt and equity financings, and although we believe that we will be able to successfully fund our operations into the future, there can be no assurance that we will be able to do so or that we will ever operate profitably. These factors raise substantial doubt about the Company’s ability to continue as a going concern through at least twelve months from the report date.
We became a revenue generating company onlyrevenue-generating Company after acquiring the Aquadex Business in August 2016. We expect to incur additional losses in the near-term as we grow the Aquadex Business, including investments in expanding our sales and marketing capabilities, purchasing inventory and manufacturing components, investing in clinical research, and complying with the requirements related to being a U.S. public company. To become and remain profitable, we must succeed in expanding the adoption and market acceptance of the Aquadex FlexFlow.System. This will require us to succeed in training personnel at hospitals and effectively and efficiently manufacturing, marketing and distributing the Aquadex FlexFlowSystem and related components. There can be no assurance that we will succeed in these activities, and we may never generate revenues sufficient to achieve profitability.
We may be required During 2022, we closed on an underwritten public offering for aggregate net proceeds of approximately $9.4 million after deducting the underwriting discounts and commissions and offering expenses. See Note 4 –Stockholders’ Equity, to seekthe consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022. The Company will require additional funding to grow our Aquadex Business,its business, which may not be available on terms favorable to us,the Company, or at all. In addition,The Company may receive those funds from the risk that we may not be able to continue as a going concern may make it more difficult to obtain necessary additional funding on terms favorable to us,issuance of equity securities or at all. Furthermore, our ability to continue as a going concern is subject to our ability to achieve commercial milestones.other financing transactions. Should future capital raising be unsuccessful, wethe Company may not be able to continue as a going concern. On April 24, 2017, we closed on an underwritten public equity offering for net proceeds of approximately $8.0 million after deducting the underwriting discounts and commissions and other costs associated with the offering (See Note 4 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). WeNo adjustments have been made no adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should wethe Company not continue as a going concern.
We believe that our existing capital resources will be sufficient to support our operating plan through December 31, 2023; however, there can be no assurance of this. We will likely seek to raise additional capital to support our growth or other strategic initiatives through debt, equity, or a combination thereof. There can be no assurance the Company will be successful in raising additional capital.
NEW ACCOUNTING PRONOUNCEMENTS
Information regardingIn June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses.” This ASU added a new accounting pronouncements is included in Note 1 toimpairment model (known as the current period’s condensedexpected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses, and entities will need to measure expected credit losses on assets that have a low risk of loss. As a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended, these changes became effective for the Company on January 1, 2023. The adoption of ASU 2016-13 did not have any impact on the Company’s consolidated financial statements.
FINANCIAL OVERVIEW
We are a medical devicetechnology company focused on commercializing the Aquadex FlexFlow system for ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy. Activities since inception have consisted principally of raising capital, performing research and development, and conducting preclinicalpre-clinical and clinical studies. During 2016, we acquired the Aquadex Business and announced that we were halting all clinical evaluations of our prior technology, the C-Pulse System. Since then, our activities have consisted mainly of expanding our sales and marketing capabilities, performing clinical research, and transferring manufacturing capabilities from Baxter to our facilitiesengaging in Eden Prairie, Minnesota. At September 30, 2017,new product development. As of March 31, 2023, we had an accumulated deficit of $175$273.9 million, and we expect to incur losses for the foreseeable future. To date, we have been funded by public and private equity financings and debt. Although we believe that we will be able to continue to successfully fund our operations, in the future, there can be no assurance that we will be able to do so or that we will ever operate profitably.
Results of Operations
Comparison of Three Months Ended September 30, 2017March 31, 2023, to Three Months Ended September 30, 2016March 31, 2022
Net Sales
(dollars in thousands)
| | | Three Months Ended September 30, 2017 | | | | Three Months Ended September 30, 2016 | | | | Increase | | | | % Change | |
| | $ | 957 | | | $ | 543 | | | $ | 414 | | | | 76.2 | % |
Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | | | Increase (Decrease) | | | % Change | |
$ | 1,826 | | | $ | 1,926 | | | $ | (100 | ) | | | (5.2 | )% |
We generated revenues of $1.0 million for the three months ended September 30, 2017, compared to $0.5 million for the same period in 2016. Revenue is generated mainly from the sale of disposable blood filters and catheters used in conjunction with ourthe Aquadex System consoles. We had no commercial sales priorsell primarily in the United States to the acquisitionhospitals and clinics through our direct salesforce. We sell outside of the Aquadex Business, which we acquired from Baxter on August 5, 2016.
On March 3, 2016, we announced that we were no longer enrolling patientsUnited States to independent specialty distributors, who in our two clinical studies for our now discontinued C-Pulse System. Prior to this announcement, all of our revenue was generated by sales of the C-Pulse Systemturn sell to hospitals and clinics in conjunction with our U.S. clinical study.their geographic regions. The C-Pulse System was not approved for commercial sale, however, the FDA had assigned it to a Category B designation, making it eligible for reimbursement at certain U.S. sites when implantedslight decrease in connection with our clinical studies. During the three months ended September 30, 2016, we received reimbursement and recognized $59,000 in revenue for one implant that was performed before the announcement that we were no longer enrolling patientssales in the study. Since we terminated enrollmentcurrent year period is due to decreased utilization in our OPTIONS HFtop accounts and COUNTER HF clinical trials, we do not expect to generate revenuelower order volume from those clinical trials in the foreseeable future.our Pediatrics customers.
Costs and Expenses
Our costs and expenses were as follows:
(dollars in thousands) | | Three Months Ended September 30, 2017 | | | Three Months Ended September 30, 2016 | | | Increase (Decrease) | | | % Change | | |
| (in thousands) | | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | | | Increase (Decrease) | | | % Change | |
| Cost of goods sold | | $ | 782 | | | $ | 187 | | | $ | 595 | | | | 318.2 | % | | $ | 759 | | | $ | 824 | | | $ | (65 | ) | | (7.9 | )% |
| Selling, general and administrative | | $ | 2,671 | | | $ | 2,683 | | | $ | (12 | ) | | | (0.4 | )% | | $ | 5,490 | | | $ | 4,412 | | | $ | 1,078 | | | 24.4 | % |
| Research and development | | $ | 367 | | | $ | 1,735 | | | $ | (1,368 | ) | | | (78.8 | )% | | $ | 1,428 | | | $ | 1,106 | | | $ | 322 | | | 29.1 | % |
Cost of Goods Sold
In connection with the acquisition of the Aquadex product line, we entered into a manufacturing and supply agreement with Baxter. Cost of sales reflects the agreed-upon price paid to Baxter for the manufacturing of the disposables and consoles. The acquisition closed on August 5, 2016. Prior to that date, we did not have commercial sales or related product costs.
In May 2017, we provided notice to Baxter to cease the manufacturing of the Aquadex product line as of June 30, 2017, and we began transitioning activitiesincrease in house. We expect to begin manufacturing our products in house in the fourth quarter of 2017. We will continue to purchase materials and finished goods from Baxter into the first quarter of 2018.
Cost of salesgross margin percent for the three months ended September 30, 2017, include startup costs for the planning and preparation associated with the transfer of these manufacturing activitiesMarch 31, 2023, compared to our facilities in Eden Prairie, Minnesota. In 2018, we expect our gross margins to improve as volumes increase and we achieve larger efficiencies of scale.
Selling, General and Administrative
Our selling, general and administrative expenses for the three months ended September 30, 2017 have remained consistent with the same period a year ago. Expenditures during the three months ended September 30, 2017, reflect approximately $0.9 million of incremental expenses relatedMarch 31, 2022, was due primarily to the commercialization of the Aquadex FlexFlow, which we acquired from Baxter in August of 2016. Expenditures during the three months ended September 30, 2016, reflect approximately $0.9 million in transaction fees (accounting, audit, valuation,increased selling prices and, legal fees) incurred in connection with the acquisition of the Aquadex product line.
As we continue to ramp up our sales organization we expect that our selling expenses will continue to increase in future quarters, and that general and administrative expenses will either remain constant or decrease as we continue to streamline activities.
Research and Development
The decrease in research and development expense resulted primarily from our decision to stop enrollment in our two clinical studies for our now discontinued C-Pulse System, which was announced on March 3, 2016. In July 2016, we announced that we were moving forward with a therapeutic strategy utilizing neuromodulation rather than counterpulsation. Further, on September 29, 2016, we announced a strategic refocus of our near-term strategy that includes halting all clinical evaluations of the neuromodulation technology to fully focus the Company’s resources on our recently acquired Aquadex system. We expect to make modest future investments in research and development related to our Aquadex system, and as a result, we expect that our research and development expenditures will increase modestly in future quarters, subject to future decisions on clinical studies.
Other Income (Expense)
The following is a summary of other income (expense)
(dollars in thousands) | | Three Months Ended September 30, 2017 | | | Three Months Ended September 30, 2016 | | | Decrease | | | % Change | |
| Interest expense | | $ | - | | | $ | (68 | ) | | $ | (68 | ) | | | N/A | |
| Loss on early retirement of long-term debt | | $ | - | | | $ | (500 | ) | | | (500 | ) | | | N/A | |
| Change in fair value of warrant liability | | $ | 4 | | | $ | 646 | | | $ | (642 | ) | | | (99.4 | )% |
Interest Expense
The decrease in interest expense is related to the repayment of borrowings outstanding under our prior term loan with Silicon Valley Bank. On August 4, 2016, we repaid all amounts outstanding under this loan facility, totaling $5.5 million.
Loss on Early Retirement of Long-Term Debt
On August 4, 2016, we repaid all amounts outstanding under our prior term loan with Silicon Valley Bank, totaling $5.5 million. In connection with the repayment of this debt, we incurred a $0.5 million loss, including the accelerated write-off of unamortized warrants and debt issuance costs.
Change in Fair Value of Warrant Liability
The gain recognized for the change in fair value of warrant liability relates to the decrease in value of the warrants issued to the investors and placement agent in connection with financings completed on July 26, 2016, November 3, 2016 and January 10, 2017. These warrants were classified as liabilities on our balance sheet as of September 30, 2017 and December 31, 2016 and required to be marked to market at each reporting period, with the changes in fair value recorded on our consolidated statement of operations and comprehensive loss.
Income Tax Benefit (Expense), net
(dollars in thousands) | | | Three Months Ended September 30, 2017 | | | | Three Months Ended September 30, 2016 | | | | Decrease | | | | % Change | |
| Income tax benefit (expense), net | | $ | (5 | ) | | $ | 65 | | | $ | (70 | ) | | | (107.7 | )% |
Our income tax benefit for the three months ended September 30, 2016 resulted primarily from a research and development tax credit in Australia. We have substantially reduced research and development expenditures in Australia, so future research and development tax credits refunds, if any, are expected to decrease.
We generate minimal amounts of income tax expense in connection with activities incurred by our Irish subsidiary.
Comparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016
Net Sales
(dollars in thousands)
| | Nine Months Ended September 30, 2017 | | | | Nine Months Ended September 30, 2016 | | | | Increase | | | | % Change | |
| | $ | 2,722 | | | $ | 543 | | | $ | 2,179 | | | | 401.3 | % |
We generated revenues of $2.7 million for the nine months ended September 30, 2017, compared to $0.5 million in the same period in 2016. Revenue is generated mainly from the sale of disposable blood filters and catheters used in conjunction with our Aquadex consoles. We had no commercial sales prior to the acquisition of the Aquadex Business, which we acquired from Baxter on August 5, 2016.
On March 3, 2016, we announced that we were no longer enrolling patients in our two clinical studies for our now discontinued C-Pulse System. Prior to this announcement, all of our revenue was generated by sales of the C-Pulse System to hospitals and clinics in conjunction with our U.S. clinical study. The C-Pulse System was not approved for commercial sale, however, the FDA had assigned it to a Category B designation, making it eligible for reimbursement at certain U.S. sites when implanted in connection with our clinical studies. One C-Pulse System was implanted for which we recognized $59,000 in revenue during the nine months ended September 30, 2016. Since we terminated enrollment in these clinical studies, we do not expect to generate revenue from these clinical studies in the foreseeable future.lesser extent, favorable product and geographic mix.
Costs and Expenses
Our costs and expenses were as follows:
(dollars in thousands) | | Nine Months Ended September 30, 2017 | | | Nine Months Ended September 30, 2016 | | | Increase (Decrease) | | | % Change | |
| Cost of goods sold | | $ | 1,912 | | | $ | 187 | | | $ | 1,725 | | | | 922.5 | % |
| Selling, general and administrative | | $ | 7,478 | | | $ | 5,444 | | | $ | 2,034 | | | | 37.4 | % |
| Research and development | | $ | 1,002 | | | $ | 7,511 | | | $ | (6,509 | ) | | | (86.7 | )% |
Cost of Goods Sold
In connection with the acquisition of the Aquadex product line, we entered into a manufacturing and supply agreement with Baxter. Cost of sales reflects the agreed-upon price paid to Baxter for the manufacturing of the disposables and consoles. The acquisition closed on August 5, 2016. Prior to that date, we did not have commercial sales or related product costs.
In May 2017, we provided notice to Baxter to cease the manufacturing of the Aquadex product line as of June 30, 2017, and we began transitioning activities in house. We expect to begin manufacturing our products in house in the fourth quarter of 2017. We will continue to purchase materials and finished goods from Baxter into the first quarter of 2018.
Cost of sales for the nine months ended September 30, 2017, include startup costs for the planning and preparation associated with the transfer of these manufacturing activities to our facilities in Eden Prairie, Minnesota. In 2018, we expect our gross margins to improve as volumes increase and we achieve larger efficiencies of scale.
Selling, General and Administrative
The increase in selling, general and administrative expense reflect primarily the impact of our transition from a researchreflects increased staffing expenses and development stage company to a commercially focused organization. As a result, during the nine months ended September 30, 2017, we incurred approximately $2.6 million of incremental expensesincreased professional fees related to the commercialization of the Aquadex FlexFlow, compared to the same period a year ago.
Expenditures for the nine months ended September 30, 2016, reflect approximately $0.9 million in transaction fees (accounting, audit, valuation,consulting, marketing initiatives, and accounting and legal fees) incurred in connectionexpenses associated with the acquisition of the Aquadex product line, which we acquired from BaxterCompany’s year-end audit and at-the-market offering filed in August of 2016.March 2023.
As we continue to ramp up our sales organization we expect that our selling expenses will continue to increase in future quarters, and that general and administrative expenses will either remain constant or decrease as we continue to streamline activities.
Research and Development
The decreaseincrease in research andR&D expenses was primarily driven by increased spending on new product development expense resulted primarily fromassociated with our decision to stop enrollment in our two clinical studies for our now discontinued C-Pulse System, which was announced on March 3, 2016. In July 2016, we announced that we were moving forward with a therapeutic strategy utilizing neuromodulation rather than counterpulsation. Further, on September 29, 2016, we announced a strategic refocus of our near-term strategy that includes halting clinical evaluations of the neuromodulation technology to fully focus the Company’s resources on our recently acquired Aquadex system. We expect to make modest future investments in research and development related to our Aquadex system, and as a result, we expect that our research and development expenditures will increase modestly in future quarters, subject to future decisions on clinical studies.pediatric dedicated device.
Other Income (Expense)
The following is a summary of other income (expense)
(dollars in thousands) | | Nine Months Ended September 30, 2017 | | | Nine Months Ended September 30, 2016 | | | Increase (Decrease) | | | % Change | |
| Interest expense | | $ | - | | | $ | (504 | ) | | $ | (504 | ) | | | N/A | |
| Loss on early retirement of long-term debt | | $ | - | | | $ | (500 | ) | | $ | (500 | ) | | | N/A | |
| Change in fair value of warrant liability | | $ | 1,470 | | | $ | 646 | | | $ | 824 | | | | 127.6 | % |
| Warrant valuation expense | | $ | (67 | ) | | $ | - | | | $ | (67 | ) | | | N/A | |
Interest Expense
The decrease in interest expense is related to the repayment of borrowings outstanding under our prior term loan with Silicon Valley Bank. Beginning January 1, 2016, we began repaying the principal due on this loan, and on August 4, 2016, we repaid all amounts outstanding under this loan facility, totaling $5.5 million.
Loss on Early Retirement of Long-Term Debt
On August 4, 2016, we repaid all amounts outstanding under our prior term loan with Silicon Valley Bank, totaling $5.5 million. In connection with the repayment of this debt, we incurred a $0.5 million loss, including the accelerated write-off of unamortized warrants and debt issuance costs.
Change in Fair Value of Warrant Liability
The gain recognized for the change in fair value of warrant liability relates to the decrease in value of the warrants issued in connection with financings completed on July 26, 2016, November 3, 2016 and January 10, 2017. These warrants were classified as liabilities on our balance sheet as of December 31, 2016 and required to be marked to market at each reporting period, with the changes in fair value recorded on our consolidated statement of operations and comprehensive loss. All Original Warrants were exercised during the period ended September 30, 2017 pursuant to the warrant exercise agreement described above. Accordingly, we remeasured each of these warrants as of the date of exercise, and recorded $1.5 million as an unrealized gain on our statement of operations and comprehensive loss. Although we issued Replacement Warrants under the warrant exercise agreement, the Replacement Warrants are not accounted for as liabilities based on their terms.
Income Tax Benefit (expense), net
(dollars in thousands) | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | | Decrease | | | % Change | |
| Income tax benefit (expense), net | | $ | (6 | ) | | $ | 64 | | | $ | (70 | ) | | | (109.4 | )% |
Our income tax benefit for the nine months ended September 30, 2016 resulted primarily from a research and development tax credit in Australia. We have substantially reduced research and development expenditures in Australia, so future research and development tax credits refunds, if any, are expected to decrease.
We generate minimal amounts of income tax expense in connection with activities incurred by our Irish subsidiary.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our operations primarily through cash on hand and a series of equity and debt issuances. On July 26, 2016, pursuant to a Securities Purchase Agreement dated July 20, 2016, we completed an equity financing with an institutional investor of shares of Series B Convertible Preferred Stock and warrants for gross cash proceeds of approximately $3.5 million in a registered direct offering and simultaneous private placement. Also, on October 30, 2016, we entered into securities purchase agreement with an institutional investor pursuant to which we agreed to issue shares of Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and warrants with an aggregate purchase price of $3.8 million in a registered direct offering and simultaneous private placement. The first closing occurred on November 3, 2016, whereby we received $3.6 million in gross proceeds and issued and sold shares of Series C Convertible Preferred Stock, shares of Series D Convertible Preferred Stock and warrants. At the second closing in January 2017, which was subject to receipt of shareholder approval of the transactions, we received $0.2 million in gross proceeds and issued and sold shares of Series D Convertible Preferred Stock and warrants.
In February 2017, we entered into an agreement with the holder of the majority of our outstanding warrants to incent their exercise of warrants for cash on or before March 31, 2017. In exchange for any such exercise, we agreed to provide the investors a replacement warrant to purchase the same number of shares of common stock as were issued upon exercise of each exercised warrants with an exercise price equal to the consolidated closing bid price of our common stock on the date of issuance. In connection with this agreement, the investors exercised all of the original warrants for gross cash proceeds to us of $2.0 million, and we issued 43,396 replacement warrants with exercise prices ranging from $34.6 per share to $99.8 per share.
On August 5, 2016, we entered into a loan agreement with Silicon Valley Bank for proceeds of up to $5.0 million, including a $1.0 million revolving line of credit and a $4.0 million term loan. The term loan expired unused on November 30, 2016 andOctober 18, 2022, the term loan is no longer available to be drawn. Under the revolving line, we may borrow the lesser of $1 million or 80% of our eligible accounts (subject to customary exclusions), minus the outstanding principal balance of any advances under the revolving line. Advances under the revolving line, if any, will accrue interest at a floating per annum rate equal to 1.75% or 1.0% above the prime rate, depending on whether we have maintained net liquidity in an amount equal to or greater than six times our monthly cash burn amount for the period specified. Interest on the principal amount outstanding under the revolving line, if any, is payable monthly on the last calendar day of the month until March 31, 2020, at which time all outstanding principal and unpaid interest with respect to any advances under the revolving line are due and payable in full. Advances under the revolving line are subject to various conditions precedent, including our compliance with financial covenants relating to net liquidity relative to monthly cash burn, which we do not currently meet. The revolving line of credit expires on March 31, 2020. We had no borrowings outstanding under the Silicon Valley Bank facility as of September 30, 2017 or December 31, 2016.
The new loan agreement contains customary representations, as well as customary affirmative and negative covenants. Among other restrictions, the negative covenants, subject to exceptions, prohibit or limit our ability to declare dividends or redeem or purchase equity interests; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in businesses that are not related to its existing business. The new loan agreement also requires us to maintain at all times upon the funding date of the initial advance under the revolving line, tested on the last day of each month: (i) net liquidity in an amount equal to or greater than four times our monthly cash burn amount and (ii) unrestricted cash and cash equivalents in accounts with the Bank or its affiliates equal to or greater than 1.25 of the amount of all of our outstanding obligations to the Bank.
Our obligations under the new loan agreement are secured by a security interest in our assets, excluding intellectual property and certain other exceptions. We are subject to a negative pledge covenant with respect to our intellectual property.
In 2014, we entered into a sales agreement with Cowen and Company LLC (“Cowen”), allowing Cowen to sell from time to time, shares of our common stock having an aggregate offering price of up to $40.0 million, through an “at the market” equity offering program (the “Sales Agreement”). We pay Cowen a commission of up to 3.0% of the gross proceeds from the sale of any shares pursuant to the Sales Agreement. There were no issuances of common stock under this facility during the nine months ended September 30, 2017 or 2016. As of September 30, 2017, we had a total of $32.6 million remaining for future sales under the Sales Agreement.
On April 24, 2017, we closed on an underwritten public offering of 209,940 shares of common stock and 23,157,124 shares of Series I convertible preferred stock, for netgross proceeds of approximately $8.0$11.0 million (the “October 2022 Offering”). Net proceeds totaled approximately $9.4 million after deducting the underwriting discounts and commissions and other costs associated with the offering which includedand after giving effect to the underwriters’ full exercise of the underwriter’s over-allotment option to purchase additional shares and warrants. In connection with this offering, we issued a total of 140,000 shares of common stock, 6,400 shares of Series E Convertible Preferred Stock (which were convertible into 320,000 shares of common stock), and warrants to purchase 460,000 shares of common stock. See Note 4 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.their overallotment option.
As of September 30, 2017,March 31, 2023 and December 31, 2016,2022, cash and cash equivalents were $2.5$11.5 million and $1.3$17.7 million, respectively. Prior to our acquisition of the Aquadex FlexFlow in August 2016, we did not have a product approved for commercial sale and focused our resources on developing, manufacturing, and commercializing our C-Pulse System. In September 2016, we announced a strategic refocus of our near-term strategy that includes halting all clinical evaluations to fully focus our resources on our recently acquired Aquadex Business, taking actions to reduce our cash burn in connection with such strategic refocus and reviewing potential strategic alliances and financing alternatives. Our business strategy and ability to fund our operations in the future dependsdepend in part on our ability to grow ourthe Aquadex Business by establishing a sales force,expanding our salesforce, selling our products to hospitals and other healthcare facilities, and controlling costs. We believe we will need to seek additional funds to finance our operationsfinancing in the fourth quarterfuture, which, to date, has been primarily through offerings of 2017 or first quarter of 2018. We may receive those funds from the proceeds from future warrant exercises, issuances ofour equity securities, or other financing transactions.securities.
Cash Flows fromused in Operating Activities
Net cash used in operating activities was $8.8$6.1 million and $13.6$4.8 million for the ninethree months ended September 30, 2017March 31, 2023, and 2016,2022, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, as well as investments in working capital necessary to run our new commercial operations,partially offset in part by non-cash charges for stock-based compensation, depreciation and amortization, and revaluation of debt discountthe warrant liability (in the current year period), and financing fees.the effects of changes in operating assets and liabilities, including working capital.
Cash Flows fromused in Investing Activities
Net cash used in investing activities was $0.2 million$98,000 and $4.1 million$70,000 for the ninethree months ended September 30, 2017March 31, 2023, and 2016,March 31, 2022, respectively. The majority of cash used in investing activities in 2017 was for legal costs related to new patent applications and for the purchase of manufacturing, laboratory, and office equipment. In 2016, we paid $4.0 million for the acquisition of the Aquadex Business.equipment, respectively, in those periods.
Cash Flows fromused in Financing Activities
Net cash provided by (used in) financing activities was $10.2 million and $(4.6) million for the nine months ended September 30, 2017 and 2016, respectively. Net cash provided by financing activities was attributable to proceeds from the public stock offering completed in April 2017, net proceeds from the exercise of warrants, and from the second closing of the Series D Convertible Preferred Stock. Net cash used in financing activities was attributable$11,000 and $6,000 for the three months ended March 31, 2023, and 2022, respectively. The use of cash in the current year period related to repaymentspublic offering financing costs. The use of cash in the principal amounts outstanding on our debt facility with Silicon Valley Bank, offset by net proceeds from the issuance of preferred stock in July 2016.prior year period related to lease payment expense.
Capital Resource Requirements
As of September 30, 2017,March 31, 2023, we did not have any material commitments for capital expenditures.
Off-Balance Sheet Arrangements
In April 2015, we amended our lease agreement for our office space leased in Eden Prairie, Minnesota, to extend it for an additional thirty-six months beyond its original expiration date. This amended lease agreement expires March 31, 2019.
On August 5, 2016, we entered into an asset purchase agreement for the Aquadex Business with Baxter, whereby we agreed that if we dispose of any of the acquired assets for a price that exceeds $4.0 million within three years of the closing, we will pay Baxter 40% of the amount of such excess; and if shares of our common stock cease to be publicly traded on the Nasdaq Capital Market, Baxter has the option to require us to repurchase, in cash, all or any part of the common shares held by Baxter at a price equal to their fair market value, as determined by a third-party appraiser.
In connection with the acquisition of the Aquadex Business, we entered into a manufacturing and supply agreement with Baxter that will expire within a period not to exceed 18 months from the close of the transaction. In May 2017, we notified Baxter to cease the manufacturing of the Aquadex product line by Baxter as of June 30, 2017. In connection with this notification, we agreed to purchase the remaining Aquadex inventory, which consists mainly of raw materials priced at cost, through February 2018, for a total of $2.4 million. As of September 30, 2017, we had purchased and paid $0.8 million of this inventory and $1.6 million remained to be purchased.
Except as disclosed above, weWe have no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995Forward-Looking Statements and Risk Factors
The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe harbor” for forward-lookingCertain statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. We desire to take advantage of the safe harbor provisions with respect to any forward-looking statements we may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases “will,” “may,” “is expected,” “is anticipated,” “believe,” “estimate,” “projected,” “forecast,” or similar expressionsQuarterly Report on Form 10-Q are intended to identify forward-looking statements within the meaning of the Act. Forward-looking statements suchsafe harbor provisions of Section 27A of the Securities Act of 1933, as theseamended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), that are based on management’s currentbeliefs, assumptions and expectations asand information currently available to management. All statements that address future operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements, including without limitation, our expectations regarding the potential impacts of the date of this report but involve risks, uncertaintiesCOVID-19 pandemic on our business operations, cash flow, business development, and other factors which may cause actual results to differ materially from those contemplated by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In accordance with the Act, we identify the following important general factors which, if altered from the current status, could cause our actual results to differ from those described in any forward-looking statements: tour ability to general substantial revenue and become profitable, employees, our ability to continue as a going concern, our ability to raise funds, variability in quarterly results, risk associated with executingexecute on our strategic imperatives, includingrealignments, our post-market clinical data collection activities, our ability to demonstrate the benefits of our products to patients, our reliance on a singleexpectations with respect to product family, our ability to development and commercialize product improvements or new products,commercialization efforts, our ability to increase market and physician acceptance of our products, potentially competitive product offerings, the possibility that we may be unable to raise sufficient funds necessary for our ability to protect ouranticipated operations, intellectual property protection, our reliance on third-party suppliers, the impact over significant government regulation on our business, our ability to integrate acquired businesses, and our realization ofexpectations regarding anticipated synergies with and benefits from acquired businesses and other risks related to international business, and those factors set forth under the heading “Risk Factors”uncertainties described in our Registration Statement on Form S-1 filedfilings with the SecuritiesSEC. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Management believes that these forward-looking statements are reasonable as and Exchange Commissionwhen made. However, you should not place undue reliance on October 18, 2017. This list is not exhaustive, and we may supplement this list in any future filing withforward-looking statements because they speak only as of the Securities and Exchange Commission or in connection with the making of any specific forward-looking statement.date when made. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that might subsequently arise. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual events to adversely differ from the expectations indicated in these forward-looking statements, including without limitation, the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, in other reports filed thereafter with the SEC, which risk factors may by updated from time to time, and in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. We operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. We may not actually achieve the plans, projections or expectations disclosed in forward-looking statements, and actual results, developments or events could differ materially from those disclosed in the forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, including without limitation, the possibility that regulatory authorities do not intendaccept our application or approve the marketing of our products, the possibility we may be unable to revise or update publicly any forward-looking statementraise the funds necessary for any reason.the development and commercialization of our products, and those described in our filings with the SEC.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and ChiefPrincipal Financial Officer (together, the “Certifying“Certifying Officers”), as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of September 30, 2017,March 31, 2023, the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of management, including the Certifying Officers, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Act. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives. Based on their evaluation, our Chief Executive Officer and ChiefPrincipal Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2017.March 31, 2023.
Changes in Internal Controls over Financial Reporting
There werewas no changeschange in the Company’sour internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2017,our most recently completed fiscal quarter that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting. On August 5, 2016, the Company completed the acquisition of certain assets used in the production and sale of the Aquadex product line from an indirect subsidiary of Baxter International Inc. We are in the process of integrating Aquadex’s operations into the Company. We are in the process of implementing our internal control structure over the acquired operations, and we expect to complete this effort during fiscal 2017.
PART II—OTHER INFORMATION
We are not currently subject to any material legal proceedings.
You should carefully consider the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022, and in other reports filed thereafter with the SEC, before deciding to invest in or retain shares of our common stock. There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
Not applicable
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
Not applicable.
None.
The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index below
Exhibit Index
CHF Solutions,Nuwellis, Inc.
Form 10-Q for the Quarterly Period Ended September 30, 2017March 31, 2023
| | | | | Incorporated By Reference | | |
Exhibit Number | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | Furnished Herewith |
| | Fourth Amended and Restated Certificate of Incorporation | | 10 | | 001-35312 | | February 1, 2012 | | 3.1 | | | |
| | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | January 13, 2017 | | 3.1 | | | |
| | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | May 23, 2017 | | 3.1 | | | |
| | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | October 12, 2017 | | 3.1 | | | |
| | | | | | | | | | | | | | |
| | Second Amended and Restated Bylaws | | 8-K | | 001-35312 | | May 23, 2017 | | 3.2 | | | |
| | | | | | | | | | | | | | |
| | Form of Common Stock Purchase Warrant issued pursuant to the Letter Agreement dated February 15, 2017 | | 8-K | | 001-35312 | | February 16, 2017 | | 4.1 | | | |
| | | | | | | | | | | | | | |
| | Form of Warrant to purchase shares of common stock | | S-1/A | | 333-216841 | | April 4, 2017 | | 4.8 | | | |
| | | | | | | | | | | | | | |
| 15.1 | | Letter regarding unaudited interim information | | | | | | | | | | X | |
| | | | | | | | | | | | | | |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X | |
| | | | | | | | | | | | | | |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X | |
| | | | | | | | | | | | | | |
| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | X |
| | | | | | | | | | | | | | |
| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | | X |
| | | | | Incorporated By Reference | | | | | | |
Exhibit Number | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | | Furnished Herewith |
| | Fourth Amended and Restated Certificate of Incorporation | | 10 | | 001-35312 | | February 1, 2012 | | 3.1 | | | | |
| | | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | January 13, 2017 | | 3.1 | | | | |
| | | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | May 23, 2017 | | 3.1 | | | | |
| | | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | October 12, 2017 | | 3.1 | | | | |
| | | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K/A | | 001-35312 | | October 16, 2020 | | 3.1 | | | | |
| | | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | January 2, 2019 | | 3.1 | | | | |
| | | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | April 27, 2021 | | 3.1 | | | | |
| | | | | | | | | | | | | | | |
| | Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation | | 8-K | | 001-35312 | | December 9, 2022 | | 3.1 | | | | |
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| | Form of Certificate of Designation of Series A Junior Participating Preferred Stock | | 8-K | | 001-35312 | | June 14, 2013 | | 3.1 | | | | |
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| | Form of Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock | | S-1/A | | 333-221010 | | November 17, 2017 | | 3.7 | | | | |
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| | Form of Certificate of Designation of Preferences, Rights and Limitations of Series I Convertible Preferred Stock | | 8-K | | 001-35312 | | October 18, 2022 | | 3.1 | | | | |
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| | Third Amended and Restated Bylaws | | 8-K | | 001-35312 | | April 27, 2021 | | 3.2 | | | | |
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101.INS | | XBRL Instance Document | | | | | | | | | | X | |
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101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | X | |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X | |
| | | | | Incorporated By Reference | | | | | | |
Exhibit Number | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | | Furnished Herewith |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X | |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X | |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X | |
| | Amendment to Third Amended and Restated Bylaws | | 8-K | | 001-35312 | | October 5, 2022 | | 3.1 | | | | |
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| | Second Amendment to 2021 Inducement Plan | | 8-K | | 000-35312 | | March 1, 2023 | | 10.1 | | | | |
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| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X | | |
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| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X | | |
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| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | |
| X
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| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | |
| X |
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| 101.INS | | Inline XBRL Instance Document | | | | | | | | | | X | | |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | X | | |
| | | | | | | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X | | |
| | | | | | | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X | | |
| | | | | | | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X | | |
| | | | | | | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X | | |
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| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | | | X | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CHF Solutions,Nuwellis, Inc. |
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Date: November 2, 2017May 9, 2023 | By: | /s/ Nestor Jaramillo, Jr. |
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| Nestor Jaramillo, Jr. |
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| President and Chief Executive Officer |
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| Date: May 9, 2023 | By: | /s/ John L. ErbLynn Blake |
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| Lynn Blake |
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| | John L. Erb | |
| | Chief Executive Officer and Chairman of the Board |
| | (principal executive officer) | |
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Date: November 2, 2017 | By: | /s/ Claudia Drayton | |
| | Claudia Drayton | |
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| Chief Financial Officer | |
| | (principal financial officer) |
|