SANUWAVE Health, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company develops and commercializes regenerative medical technologies, including dermaPACE for diabetic foot ulcers. In August 2020, it acquired Celularity’s UltraMIST assets and obtained licenses to market Biovance and Interfyl wound-care products.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.97 million | $0.20 million | $2.20 million | $0.69 million |
| Gross margin | 72% | 38% | 70% | 42% |
| Operating loss | $5.77 million | $2.39 million | $11.84 million | $6.27 million |
| Net loss | $6.01 million | $2.75 million | $12.65 million | $7.68 million |
| Loss per share, basic and diluted | $0.02 | $0.01 | $0.04 | $0.04 |
Revenue growth primarily reflects the UltraMIST acquisition and related product sales, licensing and international distribution fees; it should not be read as like-for-like organic growth. Q3 and nine-month gross margins improved, which management attributed to acquired products and higher-margin dermaPACE treatment fees. Operating expenses rose substantially, including acquisition/integration and professional costs, expanded sales and marketing, and higher depreciation and amortization.
Cash flow, liquidity and capital structure
- At September 30, 2020, cash was $5.39 million and current assets were $9.95 million, versus current liabilities of $19.72 million. Total liabilities were $33.74 million; stockholders’ deficit was $0.87 million.
- For the first nine months, operating cash use was $9.78 million, investing cash use was $20.04 million (principally the UltraMIST acquisition), and financing provided $33.45 million. Cash increased by $3.63 million from year-end 2019.
- The UltraMIST purchase consideration was $24 million: $18.89 million cash, a $4 million seller note, and credit for a prior $1.11 million deposit. The acquisition added preliminary recorded goodwill of $7.26 million and intangible assets of $14.44 million; valuations remain subject to change.
- The company issued $15 million face amount of secured senior notes in August, with a September 30 carrying amount of $10.45 million after discounts and issuance costs. The notes mature September 30, 2025, bear interest at prime (subject to a 3% floor) plus 9%, and are secured by substantially all company assets. The company reported compliance with financial covenants at quarter-end.
- Other material obligations include a $4 million Celularity seller note due August 2021 at 12% and related-party convertible notes. The seller note and certain related-party notes may be converted at $0.10 per share under specified conditions. PPP loan balance was $0.46 million; forgiveness was uncertain.
- Warrant liabilities totaled $9.32 million at quarter-end. A $1.04 million gain from warrant remeasurement reduced reported other expense; it was a noncash fair-value item.
- Shares outstanding were 466.1 million at September 30 and 467.2 million as of November 20, 2020. The August PIPE issued 123.55 million shares and warrants, contributing to significant dilution.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern for at least 12 months from issuance. It said additional capital is needed, with potential financing through equity, debt, strategic partners or licensing; such financing may be unavailable or materially dilute shareholders. Failure to raise funds could require curtailing operations or bankruptcy relief.
- Management estimated operating cash use of approximately $100,000–$205,000 per month for the second half of 2020, while also describing the need for additional funding through the next quarter and into Q1 2021. No formal revenue or earnings guidance was provided.
- COVID-19 restrictions constrained wound-care visits and slowed dermaPACE placements and clinical-study enrollment. Management said future effects were uncertain. Poland dosage and U.S. perfusion pilot studies were expected to conclude in Q4 2020, subject to patient availability.
- Integration and execution risks accompany the UltraMIST acquisition. The acquisition’s audited historical financial statements required under Regulation S-X had not been timely filed in a Form 8-K/A; the company said it could not have a registration statement declared effective until required statements were filed.
- Disclosure controls and internal control over financial reporting were ineffective at September 30, 2020. Management identified three material weaknesses involving technical accounting resources for complex transactions and distribution agreements, accounting for equity issued for services, and cybersecurity breaches from email spoofing. Remediation efforts were underway, with no assurance they would be sufficient.
- The company reported ordinary-course litigation but believed pending claims would not materially affect its business or financial results. Acquisition-related costs of $1.08 million were expensed in the first nine months; Q3 included a $0.50 million debt-extinguishment loss.
Most important facts for investors to verify
- Whether SANUWAVE raises sufficient additional capital and sustains liquidity as operating cash is consumed; review subsequent financing, covenant compliance and near-term obligations.
- Whether the required audited UltraMIST financial statements were filed, and the final acquisition valuation and integration results.
- Actual revenue contribution, margins and commercial traction from UltraMIST, Biovance and Interfyl versus the acquired businesses’ pro forma results.
- Share and warrant dilution, authorized-share capacity, warrant-liability remeasurement, and the terms or conversion of outstanding notes.
- Progress in remediating material weaknesses and any further effects of COVID-19 on placements, sales and clinical studies.