SANUWAVE Health, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The unaudited statements are consolidated. SANUWAVE develops acoustic shockwave technology; its U.S. dermaPACE diabetic-foot-ulcer device remained in a supplemental Phase III study, while revenue came primarily from device and accessory sales outside the United States.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $143,605 | $227,492 | $594,040 | $610,705 |
| Gross profit | $104,853 | $159,415 | $420,691 | $460,892 |
| Gross margin | 73% | 70% | 71% | 76% |
| Operating loss | $(1,320,575) | $(1,409,520) | $(3,454,239) | $(5,044,116) |
| Net loss | $(1,026,844) | $(1,492,905) | $(3,707,492) | $(5,750,509) |
| Loss per share, basic and diluted | $(0.02) | $(0.03) | $(0.06) | $(0.12) |
| Cash used by operating activities | Not presented by quarter | $(3,007,790) | $(5,542,192) |
- At September 30, cash and cash equivalents were $625,450, down from $3,547,071 at December 31, 2014. Current assets were $1.10 million versus current liabilities of $1.28 million.
- Related-party notes payable were $5.34 million, classified as noncurrent; total liabilities were $6.63 million. The notes were amended to mature January 31, 2017, bear 8% interest from August 1, 2015, are secured by a first security interest in company assets, and require prepayment of 20% of cash proceeds from equity sales or intellectual-property licensing.
- Stockholders’ deficit was $5.13 million and accumulated deficit was $91.89 million. Common shares outstanding were 63,056,519 at September 30.
Changes versus the prior comparable periods
- Q3 revenue declined 37%, primarily due to lower orthoPACE device and applicator sales in Europe. Nine-month revenue declined 3%; management cited foreign-exchange effects, particularly the euro.
- Gross margin rose in Q3, reflecting fewer lower-margin device sales, but fell for the nine-month period because of product mix, including more device sales and fewer high-margin wound kits.
- Research and development expense fell 20% in Q3 and 33% year to date, mainly from fewer active clinical-study patients and lower clinical staffing or site costs. General and administrative expense was nearly flat in Q3 and down 29% year to date.
- Net losses narrowed in both comparisons, principally due to lower operating expenses. Q3 also included a $302,300 noncash gain from warrant revaluation and a $100,000 gain on sale of OssaTron inventory/property and equipment. For the nine months, the 2014 comparison included substantial interest expense on notes repaid in March 2014.
- Operating cash use improved by 46% year over year for the first nine months. No financing cash was raised during that period, compared with $10.07 million of financing cash provided in the first nine months of 2014.
Outlook, risks and unusual items
- Going concern and funding: Management said additional capital was required before the end of Q4 2015 to fund operations. It estimated remaining-2015 operating cash use at approximately $200,000–$250,000 per month, excluding FDA submission costs. Management discussed equity, debt, strategic investment, partnerships, licensing, joint ventures, or asset/product sale as potential funding sources; none was assured. Failure to raise funds could force a bankruptcy filing. The statements include no adjustments for a potential inability to continue as a going concern.
- Clinical and regulatory: In the supplemental dermaPACE study, the 12-week primary-endpoint monitoring success criterion was not met at the interim review. After database lock, the company reported that the combined trials showed efficacy at 20 weeks, but not statistical significance at 12 weeks. It reported no serious or related adverse events and planned to submit a PMA in early Q1 2016. FDA approval and commercialization remain uncertain; management expected continuing losses for several years.
- Potential dilution: The amended debt generated 3.31 million Class K warrants. At September 30, 38.30 million warrants were outstanding across classes; options outstanding totaled 7.93 million. Warrants include exercise-price and, for certain classes, down-round adjustment provisions.
- Other risks: The company reported $66.04 million of federal net operating loss carryforwards, but maintained a full valuation allowance on deferred tax assets and warned that ownership changes could limit NOL use. Management considered ordinary-course litigation not likely to have a material adverse effect. Disclosure controls were considered effective; a previously reported material weakness concerned accounting for complex financial instruments and derivatives, and the company added a control involving outside-consultant assistance.
Important facts for investors to verify
- Whether SANUWAVE obtained sufficient financing by the stated Q4 2015 deadline, and the terms, dilution, and effect on liquidity.
- The dermaPACE clinical results underlying the 20-week efficacy statement, FDA feedback, PMA submission timing, and any subsequent regulatory outcome.
- Cash burn versus the $200,000–$250,000 monthly estimate, including excluded FDA submission costs, and the company’s ability to meet obligations under the secured related-party notes.
- The potential dilution and accounting effects of outstanding warrants, options, and anti-dilution provisions.
- The filing states a $302,300 Q3 warrant valuation gain, while the nine-month statement reports a $70,985 warrant valuation loss; investors should distinguish the period-specific effects and review the warrant-liability disclosures.