SANUWAVE Health, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited; dollar amounts below are in millions unless otherwise noted.
Business context
SANUWAVE commercializes noninvasive medical systems for tissue repair and regeneration, including its UltraMIST and PACE systems. Revenue is primarily generated in the United States. The company reported one operating segment.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4.675 | $3.882 | $8.450 | $7.077 |
| Gross profit | $3.473 | $2.786 | $5.986 | $5.091 |
| Gross margin | 74% | 72% | 71% | 72% |
| Operating income (loss) | $0.931 | $(3.048) | $(1.047) | $(5.005) |
| Net income (loss) | $(7.262) | $1.644 | $(20.342) | $(3.457) |
| Adjusted EBITDA, non-GAAP | $0.171 | $(1.904) | $(1.576) | $(3.669) |
Second-quarter revenue increased 20%, primarily on higher UltraMIST system sales. First-half revenue rose 19%. Q2 gross margin improved on stronger pricing; the first-half margin declined, which management attributed to higher third-party manufacturing costs. Operating expenses fell, reflecting restructuring, lower sales headcount, and cost controls.
Net results were weighed down by interest expense of $4.381 million in Q2 and $8.659 million in the first half, and derivative fair-value expense of $3.821 million and $10.618 million, respectively. The company recorded a $12.424 million loss from warrant remeasurement in the first half. The Q2 operating profit therefore did not translate into net profit.
At June 30, cash was $0.332 million and restricted cash was $0.850 million, for total cash and restricted cash of $1.182 million. Current assets were $6.101 million versus current liabilities of $79.277 million. Operating cash use was $1.215 million in the first half, compared with $5.201 million a year earlier; financing provided $1.426 million. Total liabilities were $80.035 million, and stockholders’ deficit was $60.838 million.
Current liabilities included $16.123 million of carrying value for senior secured debt in default, $26.058 million of convertible notes, and a $1.476 million bridge advance. The senior secured note was in default for failure to meet minimum-liquidity requirements; the company accrued default interest. Total accrued interest on the balance sheet was $7.612 million, including related-party interest.
Material changes and subsequent financing
- Compared with Q2 2022, Q2 revenue rose $0.793 million and operating results improved by $3.979 million, while net income shifted to a $7.262 million loss, primarily due to derivative and interest expense. For the first half, the net loss widened by $16.885 million year over year, despite a $3.958 million improvement in operating loss.
- A June amendment to the senior secured debt provided forbearance from remedies until the earlier of another default or December 31, 2023. It deferred certain interest, which compounds at 20.25%, and required at least $2.5 million of gross equity financing by July 15; the company reported that the financing closed after quarter-end.
- In July, the company issued asset-backed secured notes with $4.6 million aggregate principal at a 33.33% original issue discount, receiving approximately $3.0 million. The notes bear 0% interest and mature January 21, 2024; they are secured by company property, subordinate to senior secured debt. A side letter provides for future convertible notes and warrants at maturity or upon a specified fundamental transaction.
- In August, the company converted $16.2 million principal and $2.4 million interest on August 2022 convertible notes into 464,440,813 common shares. Shares outstanding were 561,637,651 at June 30 and 1,026,078,464 as of August 7, indicating substantial post-quarter dilution.
Outlook, risks, and unusual matters
- Going concern: Management states that recurring operating losses, debt defaults, and reliance on additional financing raise substantial doubt about the company’s ability to continue as a going concern for at least 12 months from the filing. Additional capital may be dilutive; financing plans may fail, potentially requiring curtailed or discontinued operations. No quantified revenue or earnings guidance is provided.
- Debt and dilution: The senior secured debt remains in default, with high default interest and a forbearance period subject to conditions. Convertible notes carry a 15% stated interest rate and conversion features; outstanding warrants and convertible securities create potential dilution.
- Legal contingency: Celularity has alleged noncompliance with the UltraMIST asset license agreement. SANUWAVE disputes the allegation and asserts counterclaims; the outcome and potential impact are not clear from the filing.
- Operations: The company depends on a limited number of suppliers; two vendors each represented more than 10% of purchases in the first half of 2023. Loss of a key supplier could disrupt production.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30 due to material weaknesses involving complex accounting, resources, and accounting and IT controls. Remediation was ongoing and not yet validated as effective.
- Market-sensitive accounting: Warrant and embedded-conversion liabilities are Level 3 fair-value measurements using significant unobservable inputs; changes can materially affect reported earnings.
Important facts for investors to verify
- Whether the company can sustain liquidity and meet obligations as the debt forbearance and January 2024 asset-backed notes mature.
- The terms and full dilution effects of the August note conversion, warrants, and any future convertible securities.
- Progress in addressing senior debt defaults and remediating material weaknesses in financial reporting controls.
- Developments in the Celularity license dispute and continuity of supply from key vendors.
- Underlying operating trends, including UltraMIST sales growth, gross margins, and cash use, apart from non-cash derivative remeasurement effects.