SANUWAVE Health, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparative figures are for FY 2013. This is an annual filing, not a standalone fourth-quarter report.
Business context
SANUWAVE develops noninvasive acoustic shockwave devices for regenerative medicine. Its lead U.S. candidate, dermaPACE, is being studied for diabetic foot ulcers and is not approved for sale in the United States. Revenue came primarily from CE-marked dermaPACE and orthoPACE devices and accessories sold through distributors in Europe, Canada, Asia and Asia/Pacific.
Financial results and liquidity
| Metric | FY 2014 / Dec. 31, 2014 | FY 2013 / Dec. 31, 2013 |
|---|---|---|
| Revenue | $847,367 | $800,029 |
| Gross profit / gross margin | $627,392 / 74% | $610,238 / 76% |
| Operating expenses | $6,590,882 | $6,586,199 |
| Operating loss | ($5,963,490) | ($5,975,961) |
| Net loss | ($5,974,080), or ($0.12) per share | ($11,299,721), or ($0.40) per share |
| Cash used in operating activities | $6,678,369 | $3,924,204 |
| Cash and cash equivalents | $3,547,071 | $182,315 |
| Working capital | Negative $2,183,859 | Not clearly stated in the filing text |
At year-end, total assets were $4.67 million, total liabilities $6.22 million and stockholders’ deficit $1.55 million. Related-party notes payable were $5.37 million, unsecured, bearing 6% interest and due August 1, 2015; the balance included accrued interest due at maturity. The company reported an additional $81,864 of current interest payable to related parties.
Changes versus FY 2013
- Revenue rose 6%, mainly from higher orthoPACE sales in Asia/Pacific and refurbished applicator sales in Europe. Gross margin declined two percentage points as device sales, which carry lower margins than applicators, made up a larger share.
- R&D expense increased 31% to $3.00 million, including $1.77 million of dermaPACE trial costs. General and administrative expense fell 18% to $3.27 million, primarily because of lower stock-based compensation and consulting costs.
- Net loss narrowed by 47%, but the comparison was heavily affected by FY 2013 noncash charges related to Senior Secured Notes, including conversion-feature, extinguishment and debt-discount expenses. Operating loss was essentially unchanged.
- Operating cash use increased 70%, reflecting higher R&D costs and reductions in accounts payable and accrued expenses. Financing provided $10.07 million in 2014, including net proceeds of $8.56 million from a private placement.
Outlook, risks and unusual items
- Management expected cash on hand to fund operations into the third quarter of 2015 and forecast operating cash use of approximately $400,000–$500,000 per month in 2015. It said additional capital would be needed during or before Q3 2015 to fund operations and repay, extend or otherwise address the related-party notes. Potential financing could substantially dilute existing shareholders; management warned that failure to secure funding could lead to a U.S. Bankruptcy Code filing.
- The supplemental Phase III dermaPACE study enrolled 130 patients by November 2014. The Data Monitoring Committee’s next review was expected in April 2015, with possible recommendations to stop for success, expand enrollment to 170, or stop for poor results. Following positive results, management anticipated submitting a PMA application, with possible FDA approval in 2016.
- The earlier pivotal study did not meet its primary endpoint of complete wound closure at 12 weeks at the 95% confidence level. Later secondary analyses showed statistically significant results at 20 weeks and for a 90% or greater wound-closure measure; the FDA issued a major deficiency letter in 2011 and requested further clinical work. These results do not establish FDA approval.
- The 2014 financing issued common and convertible preferred shares and substantial warrant coverage. At December 31, 2014, the company reported 50.56 million outstanding warrants and 7.21 million outstanding options, presenting potential dilution.
- Management concluded disclosure controls were not effective and identified a material weakness in accounting for complex financial instruments and derivatives due to insufficient internal expertise and resources. Remediation was in progress. The auditor gave an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern; the auditor did not express an opinion on internal-control effectiveness.
- Revenue concentration and supply dependence are notable: two distributors accounted for 60% of 2014 revenue combined, and the company said most product components were purchased from single suppliers. No material pending legal proceedings were reported.
Most important facts for investors to verify
- Whether the company obtained financing or other arrangements sufficient to fund operations and address the $5.37 million related-party notes due August 1, 2015.
- The actual Data Monitoring Committee recommendation and subsequent status and results of the dermaPACE trial, including the primary endpoint.
- Whether the company’s cash burn, revenue and distributor concentration changed materially after year-end.
- How much potential dilution could result from outstanding warrants, options, preferred-stock conversions or subsequent financing.
- Whether the material weakness in financial reporting controls was remediated and independently assessed.