SANUWAVE Health, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted.
Business context
SANUWAVE commercializes noninvasive medical systems, including UltraMIST and PACE, for tissue repair and regeneration. Revenue is generated primarily in the United States from consumables, parts, systems, rentals, and licensing and other activities.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $4.953 | $4.166 | $13.404 | $11.242 |
| Gross profit / margin | $3.541 / 71% | $3.009 / 72% | $9.528 / 71% | $8.101 / 72% |
| Operating loss | $(0.531) | $(2.485) | $(1.579) | $(7.489) |
| Net loss | $(23.700) | $(1.139) | $(44.042) | $(4.596) |
| Operating cash used | Not provided quarterly | Not provided quarterly | $(3.253) | $(13.176) |
Q3 revenue rose 19%, primarily on increased UltraMIST sales; management cited higher average selling prices for consumables and parts and increased unit sales. Nine-month revenue also rose 19%. Gross margin declined one percentage point in both comparisons. Lower general and administrative and selling and marketing expenses improved operating losses, reflecting cost management, restructuring, and reduced sales headcount.
Net loss widened sharply, principally because of noncash losses from remeasuring derivative liabilities: $19.325 million in Q3 and $29.943 million for the first nine months, versus gains in the 2022 comparable periods. Nine-month interest expense was $12.504 million, up from $9.972 million. Adjusted EBITDA, a non-GAAP measure, was a loss of $0.264 million for Q3 and $1.841 million for the first nine months; it excludes derivative fair-value changes and specified other items.
Financial position and liquidity
- Cash was $1.095 million at September 30, 2023, compared with $1.153 million at December 31, 2022. Nine-month cash used in operations was $3.253 million; financing provided $3.356 million.
- Total current assets were $7.394 million and current liabilities were $85.434 million, indicating a substantial working-capital deficit. Total liabilities were $86.296 million against assets of $20.342 million; stockholders’ deficit was $65.954 million.
- Senior secured debt carrying value was $17.645 million and was classified as in default due to minimum-liquidity covenant violations. The company was accruing default interest; forbearance from remedies was extended only through the earlier of a new default or December 31, 2023.
- Convertible notes had a combined carrying value of $10.048 million. Asset-backed secured notes had a $9.670 million carrying value, were due January 21, 2024, and were secured by company assets, subordinate to senior secured debt.
- Warrant liabilities increased to $28.106 million from $1.416 million at year-end; these and embedded conversion derivatives are Level 3 fair-value measurements. Common shares outstanding increased to 1.026 billion from 548.7 million, largely after $18.6 million of convertible-note principal and interest converted into 464.4 million shares.
Material changes, outlook, and risks
Management stated that recurring operating losses, note defaults, and dependence on additional financing raise substantial doubt about the company’s ability to continue as a going concern for at least 12 months from filing. It plans to obtain capital primarily through the proposed SEPA merger, expected by management to provide approximately $12 million, or through other financing. There is no assurance that financing will be available on acceptable terms or on time; alternatives could significantly dilute shareholders, and failure could require curtailing or discontinuing operations. The filing provides no formal revenue or earnings guidance.
The August 2023 merger agreement contemplates conversion of SANUWAVE securities into SEPA Class A common stock and aggregate merger consideration of 7,793,000 shares, subject to the agreement’s terms. Closing conditions include at least $12 million in SEPA cash and cash equivalents after redemptions and transaction liabilities, Nasdaq listing approval, and specified noteholder and warrant-holder commitments. The filing reports commitments from approximately 95% of covered warrants and 100% of covered convertible notes to convert before closing; completion remains uncertain. As of the filing, no PIPE financing commitments had been secured.
Other notable risks include three disclosed material weaknesses in disclosure and financial-reporting controls, which management had not remediated; dependence on a limited number of suppliers, with three vendors each accounting for at least 10% of nine-month purchases; and an unresolved dispute with Celularity concerning the UltraMIST license and related agreements. Management said the outcome and potential impact of that dispute could not yet be determined. The company reported no pending legal proceeding it believed would have a material adverse effect, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether the SEPA merger closes, satisfies the $12 million minimum-cash and Nasdaq listing conditions, and delivers sufficient usable capital.
- Current status of senior-debt defaults, forbearance, default interest, and upcoming maturities, including the asset-backed notes due in January 2024.
- Cash runway, operating cash needs, and availability and terms of any financing if the merger is delayed or fails.
- Potential dilution from outstanding warrants, convertible instruments, merger conversions, and further equity issuance.
- Whether revenue growth and cost reductions can continue while maintaining gross margins and funding commercialization of UltraMIST and PACE.
- Progress remediating material weaknesses, and developments in the Celularity dispute and supplier concentration risk.