SANUWAVE Health, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results. SANUWAVE develops and commercializes noninvasive wound-care technologies, including UltraMIST and dermaPACE; its lead U.S. product, dermaPACE, is used to treat diabetic foot ulcers.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $3.882 million | $2.909 million | $7.077 million | $5.025 million |
| Gross margin | $2.786 million; 71.8% | $1.861 million; 64.0% | $5.091 million; 71.9% | $2.922 million; 58.1% |
| Operating expenses | $4.854 million | $5.907 million | $8.498 million | $11.362 million |
| Operating loss | $(2.068) million | $(4.046) million | $(3.407) million | $(8.440) million |
| Net income (loss) | $2.702 million | $(8.615) million | $(1.722) million | $(13.552) million |
| Cash from operating activities | Not separately presented for the quarter | $(5.201) million | $(5.249) million |
Q2 revenue increased 33%; six-month revenue increased 41%, primarily from higher UltraMIST device and single-use accessory sales. Gross-margin improvement reflected the higher mix of accessories, which carry higher margins, and the discontinuation of lower-margin biologics sales. Selling and marketing and R&D costs declined year over year; six-month G&A also decreased.
Q2 net income reflects a $7.861 million gain from changes in the fair value of derivative liabilities, rather than operating profitability: the company still recorded a $2.068 million operating loss and $2.826 million of interest expense. The six-month fair-value gain was $11.343 million; the company nevertheless reported a net loss for the period.
Financial position and liquidity
- At June 30, cash was $1.484 million, versus $0.619 million at December 31, 2021. Current assets were $5.339 million and current liabilities were $51.299 million, a working-capital deficit of approximately $45.960 million.
- Total liabilities were $52.423 million, compared with total assets of $18.623 million; stockholders’ deficit was $33.800 million. Accumulated deficit stood at $185.671 million.
- Carrying value of total debt was $23.368 million, including $22.607 million classified as current. The senior secured note and convertible notes were in default; accrued interest was $4.002 million, including related-party interest.
- Six-month operating cash use was $5.201 million. Investing activities provided $0.948 million, primarily from asset-sale proceeds; financing activities provided $5.104 million, including proceeds from senior and short-term notes.
Material changes, outlook, and risks
- Going concern: Management stated that recurring operating losses, dependence on additional financing, and defaults on notes raise substantial doubt about the company’s ability to continue as a going concern for at least 12 months. It warned financing may not be available on acceptable terms, may significantly dilute shareholders, and failure to secure funds could require curtailing or discontinuing operations. No specific revenue or earnings guidance was provided.
- Subsequent financing: On August 5, 2022, the company closed a private placement of future-advance convertible notes with approximately $16.1 million aggregate principal, including about $12.2 million of new capital and $3.8 million of rolled-forward expenses and fees. It received approximately $14.4 million in proceeds and issued warrants for approximately 806 million shares in total, at stated exercise prices of $0.067 and $0.04, subject to adjustment. The company also paid $3.9 million and issued 19.4 million shares to retire specified notes and related warrants. These transactions occurred after quarter-end and are not reflected in June 30 balances.
- The company’s June 30 forbearance extension with its senior secured lender ran only to the earlier of an event of default or August 30, 2022. A $1.0 million SBA loan was subsequently approved for forgiveness on July 8, 2022.
- Management cited COVID-19-related demand and supply-chain disruption, competition, commercialization and regulatory uncertainty, financing needs, and supplier/customer disputes as risks. Most product-component materials were purchased from single suppliers. A dispute with Celularity over the UltraMIST-related license agreement remained unresolved; the company said the outcome and potential impact could not yet be determined.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30, 2022. Reported material weaknesses included insufficient expertise and resources for complex U.S. GAAP transactions and inadequate accounting and IT controls. Remediation efforts were underway, with no assurance they would be sufficient.
Important facts for investors to verify
- Whether the August financing proceeds and subsequent note repayments provide sufficient near-term liquidity, and the resulting debt, default, and dilution profile.
- The status of lender forbearance, defaults, accrued interest, and any further amendments or remedies.
- Whether revenue growth and improved gross margins can continue, particularly given the company’s operating losses and cash burn.
- The resolution and potential financial or commercial impact of the Celularity license dispute and reliance on concentrated suppliers.
- Progress in remediating material weaknesses and the status of the SBA loan forgiveness and other post-quarter transactions.