SANUWAVE Health, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. The company develops acoustic shockwave technology; revenue came from CE-marked devices and accessories sold outside the United States. It was not marketing commercial products in the U.S.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $148,421 | $178,256 | $510,272 | $627,153 |
| Gross profit / margin | $118,954 / 80% | $134,291 / 75% | $401,211 / 79% | $429,255 / 68% |
| Operating expenses | $2,008,969 | $1,499,714 | $5,150,587 | $4,889,141 |
| Operating loss | $(1,890,015) | $(1,365,423) | $(4,749,376) | $(4,459,886) |
| Net loss | $(4,436,790) | $(1,447,271) | $(10,624,454) | $(4,707,212) |
| Loss per share, basic and diluted | $(0.14) | $(0.07) | $(0.43) | $(0.23) |
- At September 30, cash was $333,830; working capital was negative $1,698,241. Total liabilities were $7,803,252 versus assets of $1,758,616.
- Nine-month operating cash use was $3,374,894, compared with $3,546,299 in 2012. Financing activities provided $3,636,703, primarily from note subscriptions and public and private offerings. Cash increased by $263,505 over the period.
- Related-party notes payable were $5,372,743, bearing 6% interest and due August 2015; $81,864 of related-party interest was payable. The company also reported $655,061 of liabilities related to discontinued operations.
Material changes and unusual items
- Revenue fell 17% year over year in Q3, primarily because the prior-year quarter included a one-time sale of applicators to an Asian distributor. Nine-month revenue declined 19%, mainly due to lower European orthoPACE device sales amid economic weakness. Higher-margin applicator sales lifted gross margin.
- Research and development expense rose 76% in Q3 and 25% for the nine months, reflecting the dermaPACE clinical trial. General and administrative expense was up 18% in Q3 but down 3% year to date; excluding stock-based compensation and stock issued for consulting, it declined 22% and 27%, respectively.
- Net loss included substantial noncash charges tied to the 18% Senior Secured Notes: embedded-conversion-feature losses of $964,813 for Q3 and $2,373,813 year to date; a $1,073,572 extinguishment loss for warrants issued to holders; and $421,060 and $2,178,390, respectively, of interest and debt-discount accretion. Holders converted $2,186,906 of principal and interest into 10,934,533 shares in July, with warrants for 1,988,095 additional shares.
- Common shares outstanding were 37,196,536 at quarter-end and 37,561,515 as of November 8. Equity offerings and the note conversion increased potential dilution.
Outlook, risks and contingencies
- Management disclosed substantial doubt about the company’s ability to continue as a going concern. It said additional capital was necessary in Q4 2013 and that failure to obtain financing could require a U.S. Bankruptcy Code filing. Potential financing could materially dilute shareholders.
- Management estimated cash use of $575,000–$625,000 per month in Q4 2013 and the first half of 2014, with direct dermaPACE trial costs of approximately $3.8 million through 2014. The company reported a $405,000 private offering on September 30 and a further $121,187 issuance in October; it also cited a related-party subscription agreement with $900,000 still unpaid as of quarter-end.
- The supplemental Phase III dermaPACE study had enrolled over half of its minimum 90 patients. Management expected enrollment completion in Q1 2014, follow-up completion in Q2, and top-line data in summer 2014. A successful interim analysis could permit an FDA PMA submission. FDA approval remained uncertain: the prior pivotal trial did not meet its primary 12-week endpoint, though some later and secondary analyses favored treatment. Management previously indicated possible approval in 2015, conditional on satisfactory results.
- Other risks include clinical and regulatory uncertainty, commercialization and reimbursement challenges, competition, and possible limits on use of approximately $53.6 million of federal net operating loss carryforwards. The filing says ordinary-course litigation was not expected by management to have a material adverse effect. Disclosure controls were concluded effective as of September 30, 2013.
Investor verification priorities
- Verify whether the company completed the additional Q4 2013 financing and whether proceeds, including October offering and subscription payments, were sufficient to fund operations.
- Track cash burn, working-capital deficit, and the status and maturity terms of related-party and other debt.
- Check clinical-trial enrollment, patient follow-up, interim monitoring, top-line results, and any FDA submission or decision against the stated timetable.
- Assess dilution from issued shares, outstanding warrants and options, and any further financing; confirm the post-quarter-end share count.
- Review the prior trial’s missed primary endpoint and the evidence supporting the supplemental study design and its success criteria.