SANUWAVE Health, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparative figures are for fiscal 2017. This is an annual filing, not a standalone fourth-quarter report.
Business context
SANUWAVE develops and sells noninvasive acoustic shock-wave devices using its PACE technology. Its lead U.S. product, dermaPACE, received FDA Class II de novo clearance in December 2017 to treat diabetic foot ulcers; U.S. commercialization began in 2018. The company also sells devices and accessories internationally and is pursuing orthopedic and non-medical applications.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1.85 million | $738,527 |
| Gross profit / margin | $1.16 million / 63% | $496,557 / 67% |
| Operating loss | $7.18 million | $3.82 million |
| Net loss | $11.63 million ($0.08 per share) | $5.54 million ($0.04 per share) |
| Cash used in operations | $3.62 million | $1.53 million |
| Cash and cash equivalents at year-end | $364,549 | $730,184 |
| Working capital | Negative $15.40 million | Not stated here |
| Total liabilities | $16.53 million | $11.16 million |
Revenue rose 151%, reflecting initial U.S. dermaPACE sales, higher orthoPACE and applicator sales, and distribution-license fees. International revenue was $1.62 million, about 87% of total revenue. The lower gross margin reflected reduced device-sale margins and increased sales of lower-margin applicators, partly offset by license and refurbishment revenue with little or no associated cost. General and administrative expense increased 121% to $6.65 million, including higher personnel costs and $1.70 million of additional non-cash stock-based compensation. Interest expense rose to $4.50 million.
Year-end debt and financing obligations included $5.37 million of HealthTronics notes, $1.17 million of accrued related-party interest, $2.65 million of convertible notes, $1.88 million of short-term notes, and an $883,224 related-party line of credit. Several obligations were in default; the line of credit is payable on demand. Current liabilities were $16.49 million against current assets of $1.08 million.
Material changes and outlook
- Management reported substantial doubt about the company’s ability to continue as a going concern. It said existing resources were expected to fund operations only into the second quarter of 2019 and that additional financing would be needed. Planned funding sources included strategic partners, licensing, warrants, equity or debt; financing could materially dilute shareholders. Failure to raise funds could require major cutbacks or cessation of operations.
- Management estimated operating cash use of $225,000–$300,000 per month in the first half of 2019 and $275,000–$350,000 per month in the second half, as it planned to expand commercialization, international activity and research. These are estimates, not assured results.
- The HealthTronics notes were past due at December 31, 2018. HealthTronics holds a first-priority security interest in company assets, and the company said it was negotiating with the lender. Defaults on convertible and short-term notes also increased financing and default-interest pressure.
- The Brazil distribution arrangement with MundiMed was terminated in October 2018 after a dispute over unpaid fees and alleged breaches. A Singapore joint venture with FKS was formed on a 50/50 basis. FKS had paid $500,000 for Taiwan rights; the company expected the remaining $400,000 of a further distribution fee in April 2019.
- Clinical results were mixed at the prespecified 12-week endpoint: wound closure was 22.67% for dermaPACE versus 18.29% for sham, a difference that was not statistically significant (p=0.320). Secondary analyses showed statistically significant closure results at 20 weeks (35.47% versus 24.39%; p=0.027) and 24 weeks (37.8% versus 26.2%; p=0.023). The filing described planned 2019 dosage and post-market perfusion studies.
- Two new wound-healing CPT Category III codes were published for use beginning January 1, 2019. The filing cautions that coding does not guarantee payer coverage or payment; reimbursement and market adoption remain important uncertainties.
Risks, contingencies and unusual items
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end, identifying three material weaknesses: accounting expertise/resources for complex transactions, accounting for equity components of vendor agreements, and IT/cybersecurity weaknesses associated with email-spoofing breaches. Remediation was in progress.
- The company disclosed potential securities-law exposure from registration-statement and deregistration errors. If a violation is found, eligible investors could seek rescission, potentially requiring refunds; no such claims had been filed as of the report.
- Related-party dealings include financing and a distribution agreement with entities owned by director A. Michael Stolarski. The distribution agreement includes change-of-control options that could affect a transaction and potentially dilute shareholders.
- Three distributors or partners accounted for 67% of 2018 revenue combined. The company also relies on single or limited-source suppliers for many components.
- Outstanding potential dilution is substantial: the filing lists 31.7 million options, 104.0 million warrants and 24.1 million shares underlying convertible notes as anti-dilutive securities for 2018. These amounts are not a fully diluted share count.
- Ordinary-course legal matters were disclosed; management did not expect their resolution to materially affect financial position or results. The filing also cites competition, regulatory, intellectual-property, reimbursement, product-liability and international-market risks.
Important facts for investors to verify
- Whether the company obtained sufficient financing after filing, and the status, terms and dilution effects of subsequent equity, warrant, note or strategic-partner funding.
- Whether HealthTronics exercised remedies or reached a restructuring agreement, and the status and accrued cost of other defaulted or callable debt.
- Whether the expected FKS payment was received and whether the joint venture generated sales, cash or other measurable commercial progress.
- Actual dermaPACE U.S. sales, repeat orders, reimbursement, payer coverage and progress toward broader commercial adoption.
- Progress and outcomes of the planned 2019 clinical studies, assessed alongside the nonsignificant 12-week primary endpoint and significant later secondary analyses.
- Remediation of the disclosed material weaknesses, including cybersecurity controls, and any resolution or claims related to the securities-registration issue.
- Share-count changes and potential dilution: the cover reports 160,322,580 common shares outstanding as of March 28, 2019, versus 155,665,138 at December 31, 2018.