SANUWAVE Health, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated financial statements. SANUWAVE develops acoustic shock-wave technology; revenue came primarily from device and accessory sales outside the United States. It had no U.S. commercial product sales.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $111,045 | $203,406 | $260,614 | $472,730 |
| Gross margin | 78% | 62% | 69% | 68% |
| Operating loss | $(1,309,425) | $(1,018,171) | $(1,930,064) | $(1,707,640) |
| Net loss | $(1,415,937) | $(1,122,123) | $(1,909,469) | $(2,846,699) |
- Q2 loss per share was $(0.01), unchanged year over year; first-half loss per share was $(0.01), versus $(0.03) in 2016.
- First-half operating cash used was $572,492, down from $1,731,124. Financing provided $514,757, including $421,690 in related-party advances and $93,067 from warrant exercises. Cash fell $71,502 to just $62,069.
- At June 30, current assets were $548,520, against liabilities of $8,819,865; stockholders’ deficit was $8,192,508. The balance sheet lists all reported liabilities under current liabilities.
- Related-party notes payable were $5,369,361 net of discount; related-party interest payable was $388,095. The notes bore 10% interest following payment defaults. Accounts payable rose to $1,188,459 from $712,964 at year-end.
Changes versus comparable periods
- Revenue declined 45% in both Q2 and the first half, reflecting lower sales of new orthoPACE devices and accessories; first-half sales also included fewer applicator refurbishments.
- Q2 gross margin improved to 78%, which management attributed to the product mix, while first-half margin was nearly unchanged.
- Q2 net loss increased 26%, principally from $482,295 of stock-based compensation and a higher bad-debt reserve, partly offset by lower R&D expense. First-half net loss improved 33%, mainly due to a favorable warrant valuation change and lower operating cash costs; this comparison includes significant noncash warrant-related effects.
- G&A increased 61% in Q2 and 29% in the first half, including stock compensation, European trade-show and travel costs, and a higher bad-debt reserve. R&D declined 8% and 11%, respectively.
Outlook, risks and unusual items
- Going concern: Management said additional capital was required during Q3 2017. It considered strategic investment or partnerships, licensing, equity, convertible securities, or debt; financing could materially dilute shareholders. Management warned that failure to obtain funding could force a U.S. Bankruptcy Code filing. The financial statements include no adjustments for a possible failure to continue as a going concern.
- FDA/regulatory: The company had submitted a de novo petition for dermaPACE for diabetic foot ulcers and anticipated a possible FDA decision in Q4 2017 or Q1 2018; approval was not assured. In the combined trials, 12-week closure was not statistically significant (22.67% versus 18.29%; p=0.320), while reported results were significant at 20 and 24 weeks. FDA review would consider the totality of efficacy and safety evidence.
- Receivables: A South Korean distributor represented 88% of outstanding accounts receivable. Because of delays and political uncertainty, SANUWAVE reserved 50% of that distributor’s balance and was seeking payment by early Q4 2017.
- Debt amendment after quarter-end: On August 3, 2017, HealthTronics extended the related-party notes’ due date to December 31, 2018 and revised prepayment terms. The amendment did not waive existing interest-payment defaults. SANUWAVE also issued HealthTronics 2,000,000 warrants at $0.11 per share.
- Litigation was described as ordinary-course matters; management did not expect resolution to materially adversely affect financial position or results. Operating lease payments totaled $634,425 through 2021.
Important facts for investors to verify
- Whether SANUWAVE secured sufficient financing after June 30, 2017, and the resulting dilution, terms, and runway.
- Whether HealthTronics defaults were cured or further amended, and the amount and terms of outstanding debt and accrued interest.
- FDA review status and any decision on the dermaPACE de novo petition; distinguish 12-week primary-endpoint results from later follow-up analyses.
- Collection of the South Korean distributor receivable and any further allowance or revenue impact.
- Warrant and option dilution: the filing reports 75,794,837 outstanding warrants and 97,388,222 potentially dilutive securities excluded from diluted loss per share as anti-dilutive.