NUWELLIS, INC. 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 endedDecember 31, 2021 . 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 endedDecember 31, 2021 and in our subsequent filings with theSecurities and Exchange Commission (the "SEC").
Unless otherwise specified or indicated by the context, Nuwellis, Company, we,
us and our, refer to
OVERVIEW
About Nuwellis
We are a medical device company dedicated to transforming the lives of patients suffering from fluid overload through science, collaboration, and innovative technology. The company is focused on developing, manufacturing, and commercializing medical devices used in ultrafiltration therapy, including the Aquadex System. The Aquadex SmartFlow system is indicated for temporary (up to eight hours) or extended (longer than 8 hours in patients who require hospitalization) use in adult and pediatric patients weighing 20kg or more whose fluid overload is unresponsive to medical management, including diuretics. Prior toJuly 2016 , we were focused on developing the C-Pulse System for treatment of Class III and ambulatory Class IV heart failure. InAugust 2016 , we acquired the Aquadex Business from a subsidiary ofBaxter , a global leader in the hospital products and dialysis markets. InSeptember 2016 , we announced a refocus of our strategy that included halting all clinical evaluations of the C-Pulse System related technology to fully focus our resources on our recently acquired Aquadex Business. OnMay 23, 2017 , we announced that we were changing our name fromSunshine Heart, Inc. toCHF Solutions, Inc. to more appropriately reflect the direction of our business. OnApril 27, 2021 , we announced that we were changing our name fromCHF Solutions, Inc. toNuwellis, Inc. to reflect the expansion of our customer base from treating fluid imbalance resulting from congestive heart failure to also include critical care and pediatrics applications. 13
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Impact of COVID-19 Pandemic
During 2021 and through the second quarter of 2022, we continue to be 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 operations 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 in the front lines of COVID-19 and managing the spread 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 operational and financial performance will depend on certain future developments, including the duration and spread of the outbreak, the ongoing impact on our customers and hospital access restrictions imposed on our field employees, and effect on our vendors, all of which remain uncertain and cannot be predicted. We may experience curtailed customer demand or constrained supply that could materially adversely impact our business, results of operations and overall financial performance in future periods. Specifically, we may experience negative impacts from changes in how we conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, production delays, warehouses and staffing disruptions and shortages, decreases or delays in customer demand and spending, difficulties or changes to our sales process and customer support. We have seen 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 has created significant uncertainty about our ability to access the capital markets in future periods. As of the filing date of this Form 10-Q, the extent to which COVID-19 may continue to 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 COVID-19 pandemic may not be fully reflected in our results of operations and overall financial performance until future periods. See Part 1, Item 1-A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Recent Developments
Nasdaq Notice: OnMay 31, 2022 , we received a letter (the "Notice") from theListing Qualifications Department (the "Staff") of theNasdaq Stock Market ("Nasdaq") informing us that because the closing bid price for our common stock listed on Nasdaq was below$1.00 for 30 consecutive trading days, we were not in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Marketplace Rule 5550(a)(2) (the "Minimum Bid Price Requirement"). In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has a period of 180 calendar days fromMay 31, 2022 , or untilNovember 28, 2022 , to regain compliance with the Minimum Bid Price Requirement. If at any time beforeNovember 28, 2022 , the closing bid price of the Company's common stock closes at or above$1.00 per share for a minimum of 10 consecutive trading days (which number days may be extended by Nasdaq), Nasdaq will provide written notification that the Company has achieved compliance with the Minimum Bid Price Requirement, and the matter would be resolved. The Notice also disclosed that in the event the Company does not regain compliance with the Minimum Bid Price Requirement byNovember 28, 2022 , the Company may be eligible for additional time. To qualify for additional time, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, with the exception of the bid price requirement, and would need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. If the Company meets these requirements, Nasdaq will inform the Company that it has been granted an additional 180 calendar days. However, if it appears to the Staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice that the Company's securities will be subject to delisting. The Company intends to continue actively monitoring the closing bid price for the Company's common stock between now andNovember 28, 2022 , and it will consider available options to resolve the deficiency and regain compliance with the Minimum Bid Price Requirement. If the Company does not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company's common stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel. There can be no assurance that the Company will regain compliance with the Minimum Bid Price Requirement during the 180-day compliance period, secure a second period of 180 calendar days to regain compliance, or maintain compliance with the other Nasdaq listing requirements. 14
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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 preparation of the condensed consolidated financial statements, in conformity withU.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. There 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 endedDecember 31, 2021 . Revenue Recognition: We recognize revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Accordingly, we recognize revenue when our customers obtain control of their products or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods and services. See Note 2 - Revenue Recognition, included in Part I, Item 1 of this Quarterly Report on Form 10-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 ofJune 30, 2022 , as we have not had any write-offs or experienced a deterioration in the aging of our receivables, and do not expect to experience in the future.
Inventories: Inventories consist of finished goods, raw materials and subassemblies and are recorded at the lower of 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 consultants, including grants of stock options, and common stock awards in the consolidated statement of operations and comprehensive loss as an operating expense based on their fair values as established at the grant date. Other equity instruments issued to non-employees consist of warrants to purchase shares of our common stock. These warrants are either fully 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 aMonte 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. Stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures except for market-based warrants which are expensed based on the grant date fair value regardless of whether the award vests. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Loss per share: Basic loss per share is computed based on the net loss for each period divided by the weighted average number of common shares outstanding. The net loss allocable to common stockholders for the six months endedJune 30, 2021 , includes a deemed dividend of$33,000 that resulted from the change in the exercise price of warrants as a result of theMarch 2021 Offering. See Note 3 - Stockholders' Equity for 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. 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. 15
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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 various long-lived assets are highly interrelated and, as a result, the Company consists of a single asset group. As the Company expects to continue incurring losses in the foreseeable future, the undiscounted cash flow step was bypassed, and the Company proceeded to fair value the asset group. The Company has determined the fair value of the asset group using expected cash flows associated with its loaner consoles by considering sales prices for similar assets and by estimating future discounted cash flows expected from the consoles. For recently acquired assets within the asset group, primarily equipment, the Company determined the fair value based on the replacement cost. Because the Company consists of one asset group, consideration is also given to the relationship between the Company's market capitalization and its carrying value to further support the Company's determination of fair value. There have been no impairment losses recognized for the year endedDecember 31, 2021 , or the six months endedJune 30, 2022 . Going Concern: Our financial statements have been prepared and presented on a basis assuming we continue as a going concern. During the years endedDecember 31, 2021 , and 2020 and throughJune 30, 2022 , we incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated statements of operations and cash flows, respectively. AtJune 30, 2022 , we had an accumulated deficit of$261.7 million and we expect to incur losses for the foreseeable future. To date, we have been funded by equity financings, and although we believe that we will be able to successfully fund our operations, 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 the next twelve months. We became a revenue generating company after acquiring the Aquadex Business inAugust 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, manufacturing components, and complying with the requirements related to being aU.S. public company. To become and remain profitable, we must succeed in expanding the adoption and market acceptance of the Aquadex System. This will require us to succeed in training personnel at hospitals and outpatient care settings, and effectively and efficiently manufacturing, marketing and distributing the Aquadex System 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. During 2021, we closed on underwritten public and other equity offerings for aggregate net proceeds of approximately$27.9 million after deducting the underwriting discounts, commissions and offering expenses, as applicable, and other costs associated with the offerings. In addition, during 2021 we received approximately$1,300 in proceeds from the exercise of investor warrants. See Note 3 -Stockholders' Equity, to the condensed consolidated financial statements of this 10Q. The Company will require additional funding to grow its business, which may not be available on terms favorable to the Company, or at all. The Company may receive those funds from the proceeds from future warrant exercises, issuances of equity securities, or other financing transactions. Should warrant exercises not materialize or future capital raising be unsuccessful, the Company may not be able to continue as a going concern. No adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern. We believe that our existing capital resources will be sufficient to support our operating plan throughJune 30, 2023 , however, there can be no assurance of this. We may seek to raise additional capital to support our growth or other strategic initiatives through equity.
NEW ACCOUNTING PRONOUNCEMENTS
During the fiscal quarter ended
FINANCIAL OVERVIEW
We are a medical device company focused on commercializing the Aquadex 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 preclinical 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 and transferring manufacturing capabilities fromBaxter to our facilities inEden Prairie, Minnesota . As ofJune 30, 2022 , we had an accumulated deficit of$261.7 million and we expect to incur losses for the foreseeable future. To date, we have been funded by public and private equity financing and debt. Although we believe that we will be able to successfully fund our operations, there can be no assurance that we will be able to do so or that we will ever operate profitably. 16
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Results of Operations
Comparison of Three Months EndedJune 30, 2022 , to Three Months EndedJune 30, 2021 Net Sales (in thousands) Three Months Ended Three Months Ended June 30, 2022 June 30, 2021 Increase (Decrease) % Change $ 2,213 $ 2,508 $ (295 ) (11.8 )%
Revenue is generated mainly from the sale of disposable blood filters and
catheters used in conjunction with the Aquadex System consoles. We sell
primarily in
Costs and Expenses Our costs and expenses were as follows: (in thousands) Three Months Ended
Three Months Ended
June 30, 2022
$ 1,150 $ 997 $ 153 15.3 %
Selling, general and administrative $ 4,257 $ 5,063 $ (806 ) (15.9 )%
Research and development $ 1,107 $ 1,174 $ (67 ) (5.7 )%
Cost of Goods Sold
The increase in cost of goods sold and associated decrease in gross margin for
the three months ended June 30, 2022 , compared to the three months ended June
30, 2021 , was primarily due to lower fixed overhead absorption because of
decreased sales and finished goods inventory, along with a $112,000 inventory
write-off resulting from the discontinuation of a distribution agreement, partly
offset by favorable pricing.
Selling, General and Administrative
The decrease in selling, general and administrative expense primarily reflects
the Company's ongoing effort to optimize costs. General and administrative
expenses were also lower due to nonrecurring prior-period costs.
Research and Development The decrease in R&D expense was primarily driven by lower-than-expected investments in new products, partially offset by increased regulatory activity.
Comparison of Six Months EndedJune 30, 2022 to Six Months EndedJune 30, 2021 Net Sales (in thousands) Six Months Ended Six Months Ended June 30, 2022 June 30, 2021 Increase (Decrease) % Change $ 4,139 $ 4,426 $ (287 ) (6.5 )%
Revenue is generated mainly from the sale of disposable blood filters and
catheters used in conjunction with the Aquadex system consoles. We sell
primarily in
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Costs and Expenses Our costs and expenses were as follows: (in thousands) Six Months Ended Six
Months Ended
June 30, 2022 June
30, 2021 Increase (Decrease) % Change Cost of goods sold
$ 1,974 $ 1,949 $ 25 1.3 %
Selling, general and administrative $ 8,669 $ 10,300 $ (1,631 ) (15.8 )%
Research and development $ 2,213 $ 2,121 $ 92 4.3 %
Cost of Goods Sold
The increase in cost of goods sold and associated decrease in gross margin for
the six months ended June 30, 2022 , compared to the six months ended June 30,
2021 , was primarily due to lower fixed overhead absorption because of decreased
sales and finished goods inventory, along with a $112,000 inventory write-off
resulting from the discontinuation of a distribution agreement.
Selling, General and Administrative
The decrease in selling, general and administrative expense primarily reflects
the Company's ongoing effort to optimize costs. General and administrative
expenses were also lower due to nonrecurring prior-period costs.
Research and Development
The increase in R&D expense over the prior year was primarily driven by spending
related to our pediatric continuous renal replacement therapy device, along with
increased regulatory activity.
Liquidity and Capital Resources
Sources of Liquidity We have funded our operations primarily through cash on hand and a series of equity issuances. OnMarch 19, 2021 , we closed on an underwritten public offering of 3,795,816 shares of common stock, which included the full exercise of the underwriter's over-allotment option, for gross proceeds of approximately$20.9 million . Net proceeds totaled approximately$18.9 million after deducting the underwriting discounts and commissions and other costs associated with the offering and after giving effect to the underwriters' full exercise of their overallotment option. OnSeptember 17, 2021 , the Company closed on an underwritten public offering of 4,005,588 shares of common stock, for gross proceeds of approximately$10.0 million . Net proceeds totaled approximately$9.0 million after deducting the underwriting discounts and commissions and other costs associated with the offering and after giving effect to the underwriters' full exercise of their overallotment option. As ofJune 30, 2022 andDecember 31, 2021 , cash and cash equivalents were$15.3 million and$24.2 million , respectively. Our business strategy and ability to fund our operations in the future depends in part on our ability to grow the Aquadex Business by establishing a sales force, selling our products to hospitals and other healthcare facilities, and controlling costs. While we expect to continue to receive proceeds from the exercise of warrants, we will need to seek additional financing in the future, which, to date, has been through offerings of our equity. The disruption created by COVID-19 in our operations, our sales outlook, and the capital markets where we would seek such financing, have created uncertainty about our ability to access the capital markets in future periods. Cash Flows from Operating Activities Net cash used in operating activities was$8.8 million and$9.2 million for the six months endedJune 30, 2022 , and 2021, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by stock-based compensation, depreciation and amortization, and the effects of changes in operating assets and liabilities, including working capital. Cash Flows from Investing Activities Net cash used in investing activities was$81,000 and$137,000 for the six months endedJune 30, 2022 , and 2021, respectively. The cash used in investing activities was for the purchase of manufacturing, laboratory and office equipment. Cash Flows from (used in) Financing Activities As described above, net cash (used in) provided by financing activities was ($13,000 ) and$18.9 million for the six months endedJune 30, 2022 , and 2021, respectively. 18
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Capital Resource Requirements
As of
Off-Balance Sheet Arrangements
We 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.
Forward-Looking Statements and Risk Factors
Certain statements in this Quarterly Report on Form 10-Q are forward-looking
statements within the meaning of the safe harbor provisions of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), that are based on
management's beliefs, assumptions and expectations and 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 COVID-19 pandemic on our
business operations, cash flow, business development, and employees, our ability
to execute on our strategic realignments, our post-market clinical data
collection activities, benefits of our products to patients, our expectations
with respect to product development and 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 anticipated operations, intellectual property
protection, our ability to integrate acquired businesses, our expectations
regarding anticipated synergies with and benefits from acquired businesses and
other risks and uncertainties described in our filings with the SEC . 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 when made. However, you
should not place undue reliance on forward-looking statements because they speak
only as of the 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, 2021 , 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 June 30, 2022 .
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 accept our application or approve the marketing of
our products, the possibility we may be unable to raise the funds necessary for
the development and commercialization of our products, and those described in
our filings with the SEC .
We can give no assurance that we will be able to satisfy the continued listing
requirements of Nasdaq in the future, including maintaining a minimum
closing bid price of $1.00 per share. Since April 18, 2022 , the closing price of
our common stock has been below $1.00 . On May 31, 2022 , we received a Notice
from the Staff of Nasdaq informing us that because the closing bid price for our
common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days,
the Company was not in compliance with the Minimum Bid Price Requirement. In
accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has a period
of 180 calendar days from May 31, 2022 , or until November 28, 2022 , to regain
compliance with the Minimum Bid Price Requirement. If at any time before
November 28, 2022 , the closing bid price of the Company's common stock closes at
or above $1.00 per share for a minimum of 10 consecutive trading days (which
number days may be extended by Nasdaq), Nasdaq will provide written notification
that the Company has achieved compliance with the Minimum Bid Price Requirement,
and the matter would be resolved. If we fail to maintain compliance with the
minimum closing bid price requirement, or any other of the continued listing
requirements of Nasdaq, Nasdaq may take steps to de-list our common stock. If
such delisting should occur, it would likely have a negative effect on the price
of our common stock and would impair an investor's ability to sell or purchase
our common stock when desired. In the event of a delisting, we can provide no
assurance that any action taken by us to restore compliance with listing
requirements would allow our common stock to become listed again, stabilize the
market price or improve the liquidity of our common stock, prevent our common
stock from dropping below the Nasdaq minimum bid price requirement, or prevent
future non-compliance with Nasdaq's listing requirements.
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