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Sunshine Heart Inc (NASDAQ:SSH): Looking Forward Is Key

Sunshine Heart Inc (NASDAQ:SSH): Looking Forward Is Key
Written by
Chris Sandburg
Published on
January 19, 2017
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Sunshine Heart Inc (NASDAQ:SSH) is a tricky one. The company just effected a reverse split, a split that was pretty much unavoidable, but which has caused a rift among shareholders nonetheless, and this split has come against a backdrop of some pretty underhand transactions with an employee owned investment fund called Sabby Management, LLC.Things are pretty opaque from a capital structure perspective, and as usual in this sort of situation, sentiment is taking a hit on the back of this opacity. On the other side of the coin, however, Sunshine Heart has what looks to be a very effective cardiovascular asset, which targets an area of considerable unmet need, and – if new management is to be believed – (the company) is currently in a pivotal phase, the other side of which is consistently growing revenues.Here is our take.By way of a bit of background, prior to mid-2016, the company was focused on the development of a heart failure device called C-Pulse. The device looked promising, but in order to get it to commercialization in the US, Sunshine Heart would require millions of dollars and a large amount of investor patience as it pushed the device through trials.At the end of 2015, the then-CEO resigned, and a guy called John Erb took over as interim. A few months later, in March 2016, his role was made permanent.Fast forward to August, and the company announced it had acquired a heart failure device from Baxter International Inc (NYSE:BAX), by way of an acquisition of the latter's Aquadex product line. It was a $5 million acquisition, so not a bank breaker, but Sunshine Heart's PPS failed to respond. Finally, in its most recent conference call (third quarter, 2016), management announced that it was to stop the development of C-Pulse (reportedly, temporarily, but for how long, we don't know) in order to focus on the commercialization of Aquadex. This inflicted a blow to the company's market cap.Since then, some clarity has hit press regarding the above mentioned Sabby group acquiring the equivalent of 72% underlying equity in Sunshine Heart through two preferred stock offers in July and October 2016, and the company – as already discussed – has undertaken a 1:30 reverse.What this one comes down to now is whether shareholders have faith in management's belief that the dropping of the development product in favor of the commercialization of the approved asset is the right move. For us, it probably is. With so much uncertainty surrounding capital structure and liquidity, if there is one thing that Sunshine Heart needs right now, it is some degree of stability. An uninterrupted focus on fleshing out top line is the only real way to bring this stability to the table, and it seems that therein lies the justification for the decision. Additionally, if the company was to continue its C-Pulse development efforts, shareholders would have likely ended up getting diluted to an even higher degree than they currently are being, on the back of the numerous capital raises that a clinical development program in this sort of target indication necessitates.Financials aren’t great right now, and we are probably going to see some degree of dilution near-term anyway. Cash in hand came in at just short of $800,000 at September 30, and this won't be enough to carry the company through anywhere near FY 2017. With that said, Sunshine Heart was able to report revenues for the first time in over a year during the third quarter, reported at $543,000, which should take the edge off cash burn going forward.Bottom line here is that there still remains a high degree of uncertainty surrounding the stock, but the reverse split was unavoidable, and it is now a case of investors regrouping around what is essentially a fresh entity and basing valuation on the medium-term sales prospects of Baxter's unloaded Aquadex line.Applying this logic, we think there's growth on offer at Sunshine's current price.We will be updating our subscribers as soon as we know more. For the latest updates on SSH, sign up below!Disclosure: We have no position in SSH and have not been compensated for this article.

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