SANUWAVE Health, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; filed August 14, 2020. The interim financial statements are unaudited. SANUWAVE develops acoustic shock-wave technology; its lead U.S. product, dermaPACE, is marketed for diabetic foot ulcers.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $83,301 | $316,976 | $231,893 | $494,939 |
| Gross margin | $56,954 (68%) | $131,095 (41%) | $116,669 (50%) | $215,205 (43%) |
| Operating loss | $(3,272,663) | $(2,019,515) | $(6,068,492) | $(3,879,948) |
| Net loss | $(3,633,020) | $(2,734,431) | $(6,634,168) | $(4,931,748) |
| Net loss per share, basic and diluted | $(0.01) | $(0.02) | $(0.02) | $(0.03) |
| Operating cash used | — | $(4,511,968) | $(3,386,634) |
- Revenue fell 74% in Q2 and 53% for the first half. Management attributed the decline mainly to lower upfront international distribution fees; Q2 revenue was primarily from European device, parts and refurbishment-related sales.
- First-half operating expenses rose to $6.19 million from $4.10 million. General and administrative expense increased 66% to $4.47 million, reflecting consulting and legal costs, distribution-partner and acquisition work, higher D&O insurance, and other items. Selling and marketing expense increased 84% to $1.04 million.
- Cash and cash equivalents were $430,606 at June 30, down from $1.76 million at December 31, 2019. Working capital was approximately negative $13.41 million, based on current assets of $1.42 million and current liabilities of $14.83 million.
- Total liabilities were $15.78 million, up from $13.45 million at year-end. This included $5.37 million of related-party notes and $2.23 million of accrued related-party interest. Stockholders’ deficit was $14.82 million.
- First-half financing cash inflows of $4.30 million included $2.45 million from preferred stock, $1.10 million from a convertible note and $614,335 from SBA loans. Investing cash outflow was $1.11 million, principally associated with a $1.11 million deposit.
Material developments, outlook and risks
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern for at least 12 months from filing, citing recurring losses, limited cash, and defaults on short-term and HealthTronics-related notes. It stated additional capital was necessary and that failure to obtain it could require curtailed operations or bankruptcy relief.
- Cash needs: Management estimated operating cash use of approximately $300,000–$375,000 per month in the second half of 2020. Planned spending included dermaPACE commercialization, hiring, international expansion and research and development. Financing could dilute existing shareholders or impose restrictive terms.
- COVID-19: Restrictions on access to wound-care centers, doctors’ offices and hospitals delayed U.S. device placements and slowed commercialization. Clinical studies also faced patient-availability risks. Management said future effects remained uncertain.
- Debt and preferred stock: The company was in default on HealthTronics notes, which carried a first-priority security interest in company assets; it had not made required prepayments tied to certain proceeds. Series C and D preferred stock totaling $2.45 million was not convertible at June 30 because authorized common shares were insufficient; failure to complete the required authorization by December 31, 2020 could trigger a cash redemption obligation.
- Subsequent events: On August 6, SANUWAVE acquired Celularity’s UltraMIST assets for stated consideration of $24 million: $18.89 million cash, a $4 million promissory note and credit for the prior $1.11 million deposit. It also obtained wound-care product licenses. The same date, it announced a $15 million secured-note financing and a private placement of 119.125 million shares at $0.20 per share, with warrants for an equal number of shares; the filing reports that 24.5 million shares had been issued for $4.9 million cash by August 13. The filing also describes a HealthTronics debt settlement involving $4 million cash, a $1.37 million convertible note, warrant exercise and stock/warrant issuance, and repayment of the LGH note. These post-quarter transactions materially change the financing and capital structure picture; their final proceeds, terms and effects should be checked in later filings.
- Reporting controls: Management concluded disclosure controls were ineffective at June 30 and identified continuing material weaknesses involving technical accounting expertise and resources, complex transactions, equity components of service agreements and cybersecurity. Remediation efforts were underway, with no assurance they would be sufficient.
- Concentration and dilution: One distributor accounted for 86% of first-half revenue and 72% of receivables at June 30. Common shares outstanding were 302.1 million at quarter-end; the filing reports 326.6 million issued and outstanding as of August 13. Options, warrants, convertible securities and preferred stock create additional potential dilution.
Most important facts for investors to verify
- Whether the August financing transactions closed in full, how much cash was ultimately received, and the resulting secured debt, warrant overhang and share count.
- How the $24 million UltraMIST acquisition was funded, its ongoing cash requirements and commercial contribution, and the related Celularity license economics.
- Whether HealthTronics debt was fully extinguished and what liabilities and security interests remain after the settlement.
- Whether the company’s liquidity and going-concern assessment improved after the post-quarter financings and acquisition, and whether additional capital is still needed.
- Whether preferred-stock conversion authorization and the contemplated reverse split were completed, and whether the preferred redemption condition was avoided.
- The continued effects of COVID-19 on placements, revenue, clinical studies and distributor concentration, and progress remediating the disclosed control weaknesses.
- The six-month R&D expense is inconsistent within the filing: the financial statements report $551,661, while MD&A reports $559,981; verify the correct amount in subsequent company disclosures.