SANUWAVE Health, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are with fiscal 2012. The filing was signed March 31, 2014. SANUWAVE develops noninvasive acoustic shockwave technology for regenerative medicine. It had no U.S. commercial product sales; revenue came primarily from CE Mark devices and accessories sold internationally.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $800,029 | $769,217 |
| Gross profit / gross margin | $610,238 / approximately 76% | $548,960 / approximately 71% |
| Research and development | $2,296,662 | $1,762,194 |
| General and administrative | $3,963,206 | $4,521,957 |
| Operating loss | $5,975,961 | $6,062,323 |
| Net loss | $11,299,721 ($0.40 per share) | $6,401,494 ($0.30 per share) |
| Net cash used in operating activities | $3,924,204 | $4,290,121 |
- Revenue increased 4%, primarily from higher applicator sales. Gross margin improved because applicators carry higher margins.
- Operating expenses were nearly flat overall: higher clinical-trial R&D costs were largely offset by lower G&A, including reduced headcount and lower option compensation.
- Net loss widened mainly because of approximately $5.6 million in noncash charges related to the 18% Senior Secured Notes: embedded conversion feature, debt extinguishment and interest/debt-discount amortization. A $655,061 noncash gain from releasing old discontinued-operation liabilities partly offset the loss.
- At year-end, cash was $182,315, working capital was negative $1,700,118, total assets were $1,588,057, total liabilities were $7,715,938, and stockholders’ deficit was $6,127,881. Accumulated deficit was $82,210,043.
- Cash provided by financing activities was $4,035,122 in 2013. The Senior Secured Notes converted into 10,934,533 common shares; the company also issued warrants to noteholders.
- Related-party notes payable totaled $5,372,743, bearing 6% interest and due August 1, 2015. The balance includes accrued interest not payable until then. Current liabilities also included an $8% convertible note and short-term promissory notes.
Material changes, outlook and risks
- The pivotal U.S. dermaPACE trial did not meet its primary endpoint of complete wound closure at 12 weeks: 21% of treated participants versus 15% of sham-control participants, not statistically significant (p=0.363). Later secondary analyses showed statistical significance for complete closure at 20 weeks and for a 90%-or-greater closure endpoint; the FDA nevertheless issued a major deficiency letter in December 2011.
- A supplemental Phase III trial began enrolling in June 2013. At filing, enrollment exceeded 90% of the minimum 90 patients. Management expected minimum enrollment early in Q2 2014, followed by 12-week efficacy follow-up and, if results were positive, a PMA submission and possible FDA approval in 2015. Approval and timing were uncertain.
- Management estimated 2014 operating cash use of $550,000–$650,000 per month through July and $450,000–$550,000 per month thereafter. It expected year-end 2014 financing to support operations into Q3 2015, but said additional capital would be needed in the second half of 2015 to commercialize dermaPACE, assuming positive trial results and FDA approval. Failure to obtain approval would require strategic alternatives and further financing.
- After year-end, the company raised $9.28 million in a March 17, 2014 private offering and issued $815,000 of 18% convertible notes, which converted into equity in that offering. The financing included convertible preferred stock and substantial warrant issuance, creating significant potential dilution. Shares outstanding were 46,796,519 as of March 24, 2014, versus 37,984,182 at year-end 2013.
- Key risks include ongoing losses and dependence on external capital; clinical, FDA-approval and reimbursement uncertainty; competition; reliance on select distributors and single-source suppliers; and potential shareholder dilution. The filing reports no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2013.
Important facts for investors to verify
- Progress, enrollment, follow-up and independently monitored results of the supplemental dermaPACE trial, and any FDA correspondence or PMA decision.
- Cash burn and remaining runway against management’s projections, including the timing and terms of any further financing.
- Full dilution from the March 2014 financing: preferred-stock conversion, warrants, converted notes and other outstanding options or warrants.
- Repayment or refinancing of the $5.37 million related-party notes due August 2015, and the status of other short-term obligations.
- Whether international product sales can grow beyond the reported $800,029 revenue base and remain supported by distributors and reimbursement arrangements.