SANUWAVE Health, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; filed May 15, 2020. SANUWAVE develops acoustic shock-wave technology, with dermaPACE its lead U.S. product for diabetic foot ulcers. Common stock trades on OTCQB under SNWV.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $148,592 | $177,963; down 17% |
| Gross profit; gross margin | $59,715; 40% | $84,110; 47% |
| Operating expenses | $2,855,544 | $1,944,542 |
| Operating loss | $2,795,829 | $1,860,432 |
| Net loss; loss per share | $3,001,148; $0.01 | $2,197,317; $0.01 |
| Net cash used in operations | $2,645,479 | $1,285,551 |
Revenue was principally from European sales of orthoPACE devices, applicators and refurbishment parts. Lower international license fees drove the year-over-year revenue decline; increased spare-parts sales partly offset it. International revenue was $114,396 versus U.S. revenue of $34,196. Two distributors represented 66% and 9% of Q1 2020 revenue, indicating customer concentration.
Operating costs rose notably: selling and marketing increased to $607,850 from $158,083, general and administrative to $1,907,917 from $1,517,100, and research and development to $286,754 from $261,002. Management attributed the increases to commercialization hiring and activity, consulting and legal work, and clinical-trial costs. The filing’s MD&A describes the net loss as having “decreased” by $803,830, but the comparative statements show the loss increased by that amount, approximately 37%.
Cash and cash equivalents were $1,346,892 at March 31, down from $1,760,455 at year-end. Total assets were $3,116,826; total liabilities were $13,428,767, including $12,894,855 current liabilities. Current assets of $2,198,789 were substantially below current liabilities. Stockholders’ deficit was $12,561,941. The filing reports no significant recurring revenue and concludes that substantial doubt exists about the company’s ability to continue as a going concern for at least twelve months.
Debt, financing and material changes
- Related-party notes had $5,372,743 principal outstanding, plus $2,042,541 accrued interest payable. The notes bear 8% interest, increased to 10% following defaults; missed interest payments continued through March 31, 2020. HealthTronics holds a first-priority security interest and may exercise remedies. SANUWAVE said it was negotiating with HealthTronics and had not made required 20% prepayments from equity or licensing proceeds.
- Q1 financing included $2.25 million from a private placement of 90 Series C convertible preferred shares. The shares convert at $0.14, potentially into 16,071,429 common shares, but conversion requires an increase in authorized common shares. If the authorization is not obtained by December 31, 2020, the company must redeem the preferred shares in cash, at the greater of 200% of stated value or the specified market-based amount.
- The company converted $263,984 of short-term notes into 1,820,461 common shares and issued shares for warrant exercises and consulting services. Common shares outstanding were 297,663,672 at March 31; 298,663,672 were reported as issued and outstanding at May 13. Potential dilution also includes options, warrants and preferred-stock conversion shares.
- Net cash provided by financing was $2,231,945, while operating activities used $2,645,479; cash fell by $413,563 during the quarter. Management’s cash-use estimates were $225,000–$300,000 monthly for the first half of 2020 and $300,000–$375,000 monthly for the second half.
Outlook, risks and other disclosures
- Management expects to seek additional capital in 2020 through strategic partners, licensing, equity or debt. Financing may be unavailable or materially dilute shareholders; if unsuccessful, the company may curtail or discontinue operations or seek bankruptcy protection.
- COVID-19 had not materially affected results through the reporting date, but management cited lower customer demand and potential disruption to supply channels, marketing, operations and clinical trials. The future impact was uncertain. The company applied for SBA disaster-relief loans; the filing does not state the outcome.
- Two clinical studies were expected to conclude in Q4 2020, subject to patient availability and pandemic-related delays. No formal revenue or earnings guidance was provided.
- Management reported disclosure controls were ineffective at March 31, 2020, due to previously identified material weaknesses involving technical accounting expertise and resources, accounting for equity components of service agreements, and email-spoofing cybersecurity breaches. Remediation efforts included consultants, additional accounting and IT resources, and cybersecurity training; management cautioned that remediation was not assured.
- The filing describes ordinary-course legal claims, including contract and intellectual-property matters, and says adverse outcomes were not expected to be material; Part II lists no legal proceedings. Lease obligations and the related-party debt default are additional commitments and risks.
Important facts for investors to verify
- Whether the company obtained sufficient financing to fund operations and address its going-concern uncertainty.
- Current status of the HealthTronics default, negotiations, accrued interest and potential enforcement of its security interest.
- Whether shareholders approved the authorized-share increase by the preferred-stock deadline, or whether cash redemption became due.
- Actual cash burn, revenue trends, distributor concentration and the effects of COVID-19 on sales, supply and clinical studies.
- Progress in remediating material weaknesses and the potential dilution from outstanding and convertible securities.