SANUWAVE Health, Inc. quarterly report, Q2 FY2016

SANUWAVE Health, Inc. — Q2 2016 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. The filing was signed August 15, 2016.

Business context

SANUWAVE develops acoustic pressure shock-wave technology for regenerative medicine. Its U.S. lead candidate, dermaPACE, is intended to treat diabetic foot ulcers; the company reported no U.S. commercial product sales. Revenue came primarily from sales of orthoPACE devices and related products in Europe, Canada, Asia and Asia/Pacific.

Financial performance

MetricQ2 2016Q2 2015Six months 2016Six months 2015
Revenue$203,406$239,983$472,730$450,435
Gross profit$125,418$164,204$321,561$315,838
Operating loss$(1,018,171)$(1,006,769)$(1,708,640)$(2,133,664)
Net loss$(1,122,123)$(1,521,533)$(2,846,699)$(2,680,648)
Net loss per share, basic and diluted$(0.01)$(0.02)$(0.03)$(0.04)
  • Q2 revenue declined 15%, mainly reflecting fewer new devices sold. Six-month revenue increased 5%, with higher device, applicator-refurbishment and wound-kit sales.
  • Gross margin was 62% in Q2 versus 68% a year earlier; for the six-month period it was approximately 68% versus 70%. The filing attributes pressure to demonstration-device sales and product mix.
  • Six-month research and development expense fell 28% to $786,122; general and administrative expense fell 9% to $1,089,028. Q2 R&D expense increased 4% year over year.
  • Q2 net loss improved chiefly because warrant revaluation produced a $28,250 gain, compared with a $429,311 loss in Q2 2015. For the six months, warrant revaluation was a $769,447 loss, contributing to higher net loss year over year.

Cash, liquidity and debt

  • Cash and cash equivalents were $122,948 at June 30, 2016, down from $152,930 at year-end 2015. Six-month operating cash use was $1,731,124, compared with $1,917,858 in 2015.
  • Financing provided $1,702,855 in the first half: $1,596,855 net from the 2016 equity offering and $106,000 from convertible promissory notes.
  • Current assets were $548,831 and current liabilities were $1,507,096, a working-capital deficit of approximately $958,000. Total liabilities were $6,841,330, including $5,334,234 of related-party notes payable and $115,933 of promissory notes payable.
  • The related-party notes bear 8% interest and are secured by a first lien on company assets. Their maturity was extended to January 31, 2018. The company also owes accrued related-party interest of $108,224.
  • Management estimated operating cash use of $175,000–$225,000 per month for the next two quarters of 2016.

Developments, outlook and risks

  • The company submitted a de novo petition to the FDA on July 23, 2016 for dermaPACE classification as a Class II device. Management said approval might occur in late 2016 or early 2017; this is not assured. The first pivotal study missed its 12-week primary endpoint, though wound closure differences were statistically significant at later time points; the supplemental study did not meet its monitoring success criterion at 12 weeks and enrollment was stopped.
  • Management stated that additional capital was required during 2016 to continue operations. The filing warns that financing may significantly dilute shareholders and that failure to raise capital could force a bankruptcy filing. The financial statements are prepared on a going-concern basis without adjustments for a possible inability to continue operations.
  • After quarter-end, the company entered a convertible debenture financing with up to $500,000 principal; it received $175,000 from the first tranche after stated discounts and fees. Conversion pricing is based on a discount to recent market prices, creating potential dilution. The company also reported repaying its $58,300 convertible note in August with accrued interest and a 140% prepayment amount.
  • An August private placement was opened at $0.06 per unit, each unit comprising one common share and a warrant; $130,000 had been collected as of the filing. The filing also reports 51,888,481 warrants outstanding at June 30 and 104,178,421 common shares outstanding then; 105,013,421 shares were outstanding August 10.
  • Management expects operating losses to continue for the next few years, with possible improvement dependent on FDA approval and successful commercialization. No quantified full-year financial guidance was provided.
  • Management expected ordinary-course litigation not to have a material adverse effect. Disclosure controls were deemed effective; the filing also describes a previously reported material weakness involving accounting for complex financial instruments and a control added to use outside consultants when needed.

Investor verification priorities

  1. Confirm the status, timing and regulatory pathway for the dermaPACE FDA de novo petition, including whether the agency requests additional analysis or data.
  2. Verify cash runway, actual monthly cash burn and the availability and terms of additional financing, including the debenture and private placement.
  3. Assess dilution from outstanding warrants, convertible securities and any further equity issuance, and confirm the share count after subsequent transactions.
  4. Review the related-party debt maturity, security interest, interest obligations and any required prepayments or defaults.
  5. Track revenue growth, product mix and gross margins in the company’s non-U.S. markets, which were its reported commercial revenue base.