SANUWAVE Health, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated financial statements. SANUWAVE develops acoustic shock-wave devices for regenerative medicine; its lead U.S. product, dermaPACE, received FDA authorization to market for diabetic foot ulcers in December 2017, and U.S. commercialization began in 2018.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2018 | $453,210 | $797,482 |
| Revenue, 2017 | $111,045 | $260,614 |
| Gross margin | 63% (2017: 78%) | 58% (2017: 69%) |
| Operating loss, 2018 | $2.12 million | $3.24 million |
| Net loss, 2018 | $2.89 million | $8.74 million |
| Net loss, 2017 | $1.42 million | $1.91 million |
| Net loss per share, 2018 | $0.02 | $0.06 |
Revenue grew 308% in Q2 and 206% in the first half year over year, driven by device and applicator sales and distribution-license revenue. Gross margin declined as device sales, which carry lower margins than applicators, made up more of revenue. First-half general and administrative expense rose 113% to $2.98 million; research and development expense was $718,000, up 3%.
First-half net cash used in operations was $1.60 million, compared with $572,000 in 2017. Financing provided $1.56 million; cash decreased $59,000 to $671,000. At June 30, current assets were $1.22 million against current liabilities of $15.78 million. Total liabilities were $15.85 million and stockholders’ deficit was $14.56 million.
Current obligations included $2.65 million of convertible notes, $5.30 million of related-party notes, a $517,000 related-party line of credit, $85,000 of short-term notes, $843,000 of related-party interest payable, and a $3.64 million warrant liability. The related-party notes and several convertible notes were in default; the related-party notes were callable. Convertible-note defaults carry an 18% default rate, and the related-party notes accrue at 10% during default.
Material changes and notable items
- Higher G&A reflected new executives, stock-based compensation, travel, recruiting, public-company costs, and commercialization consultants. First-half interest expense increased to $3.67 million, while warrant revaluation produced a $1.81 million loss; these items contributed materially to the larger net loss.
- Common shares issued and outstanding increased from 139.3 million at December 31, 2017 to 151.9 million at June 30, 2018. The company reported 154.6 million shares outstanding on August 10, 2018. Convertible-note conversions and warrant exercises contributed to issuance; substantial additional potential dilution remained.
- In June, Johnfk Medical paid $500,000 for initial Taiwan distribution rights; an additional $500,000 for Southeast Asia rights was expected in Q3 2018. A related-party agreement with entities owned by director A. Michael Stolarski provided for minimum purchases of 100 dermaPACE units over three years and recorded $135,340 of revenue in the period.
- The equipment-financing arrangement with NFS was paid in full in June after the company had defaulted on it. The related-party line of credit is payable on demand.
Outlook, risks, and controls
Management said additional capital would be required in Q3 and Q4 2018 and that operating losses could continue for several years during commercialization. Planned funding sources included strategic partnerships or licensing, warrant exercises or tenders, equity, convertible securities, and debt; financing could substantially dilute shareholders or require unfavorable terms. Management warned that failure to obtain funding could force a bankruptcy filing and concluded that substantial doubt existed about the company’s ability to continue as a going concern.
No specific revenue or earnings guidance was provided. Key business uncertainties include successful commercialization and distribution, reimbursement, competition, regulatory and clinical outcomes, and the timing and availability of financing. Management stated that disclosure controls were not effective at June 30, 2018 because material weaknesses involving complex instruments and derivatives, complex distribution agreements, equity components of service agreements, and completeness of GAAP disclosures remained unremediated.
The company reported that pending ordinary-course litigation, if decided adversely, was not expected to have a material adverse effect. It also disclosed a change-of-control purchase option associated with the related-party distribution agreement. Revenue accounting adopted Topic 606 in 2018 without material impact. No formal outlook was quantified.
Important facts for investors to verify
- Whether the company secured sufficient funding after June 30, 2018, and the status of note defaults, callable debt, and any bankruptcy-related risk.
- Whether the expected $500,000 Southeast Asia distribution payment was received and whether distribution arrangements are producing repeat device sales and cash collections.
- The potential dilution from outstanding warrants, convertible notes, options, and subsequent share issuances; assess the terms and registration status of these instruments.
- The related-party nature and economic terms of the Premier Shockwave agreement, including its purchase option and change-of-control provisions.
- Resolve a filing inconsistency: the income statement reports Q2 research and development expense of $368,337, while MD&A reports $368,377.