SANUWAVE Health, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 16, 2016. The company develops acoustic pressure shock-wave technology. It reported sales primarily of orthoPACE devices and accessories in international markets; it did not market products for sale in the United States. Its lead U.S. candidate, dermaPACE, is being evaluated for diabetic foot ulcers.
Financial highlights
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $269,324 | $210,452; up 28% |
| Gross profit / gross margin | $196,143 / approximately 73% | $151,634 / approximately 72% |
| Operating expenses | $886,612 | $1,278,529 |
| Operating loss | $(690,469) | $(1,126,895) |
| Net loss | $(1,724,576), or $(0.02) per share | $(1,159,115), or $(0.02) per share |
| Net cash used in operations | $(1,011,542) | $(1,080,154) |
| Cash and cash equivalents | $604,135 | $152,930 at Dec. 31, 2015 |
| Total assets / liabilities | $1,300,830 / $6,654,577 | At March 31, 2016 |
| Related-party notes | $5,353,806, classified current | Due Jan. 31, 2017; 8% interest and secured by a first security interest in company assets |
Operating expenses declined mainly because clinical enrollment and related study costs had fallen, and general and administrative costs were lower after a workforce reduction. The net loss nevertheless increased 49%, principally because of a $797,697 warrant-valuation loss and higher interest and debt-related costs. The warrant remeasurement is noncash; cash flow also adds back a warrant valuation adjustment. Financing provided $1,458,775, including $1,352,775 net proceeds from the equity offering and $106,000 from convertible notes.
Material changes, financing and dilution
- In March, SANUWAVE issued 25,495,835 common shares for $1,529,750 gross proceeds and Class L warrants to purchase an equal number of shares at $0.08. The placement agent also received warrants. The related-party lender waived its 20% mandatory principal prepayment for this offering.
- In January, holders exchanged 23.7 million Series A warrants for common stock and 293 Series B preferred shares. The preferred shares were converted into 3,657,278 common shares on April 29, 2016. Further equity sales and the substantial warrant overhang may dilute existing holders.
- The company reported 96,000,308 common shares outstanding at March 31 and 104,178,421 as of May 4, 2016.
- February convertible notes had an 8% rate, an August 1, 2016 maturity and a conversion price set at 30% of the lowest reported common-stock sale price over a specified 20-trading-day period. The notes were unsecured and included default-related repayment rights. The filing reports $100,601 of notes payable, net of issuance costs, at quarter-end.
- After quarter-end, the company sold additional shares for $271,200 gross proceeds and issued additional Class L warrants in April.
Outlook, risks and unusual items
- Going concern and liquidity: Management said additional capital would be required during or before Q3 2016 to fund operations. It estimated operating cash use of $175,000–$225,000 per month during the first two quarters, excluding FDA submission costs. The filing states that failure to secure financing could force a U.S. Bankruptcy Code filing; financing may be dilutive or restrictive. The financial statements include no adjustments for a possible inability to continue as a going concern.
- FDA pathway: Management planned an in-person FDA meeting on submission strategy and a subsequent formal dermaPACE submission, with possible approval targeted in 2016. The company said the combined study analysis showed 12-week wound closure of 22.7% for dermaPACE versus 18.3% for control, without statistical significance; at 24 weeks, rates were 37.8% versus 26.2% (p=0.023). The supplemental study had been stopped after the monitoring committee found its predefined 12-week success criterion was not met. FDA approval is uncertain.
- Commercial and development risks: The company had no U.S. commercial product, limited recurring revenue, and expected operating losses to continue. Results depend on clinical and regulatory outcomes, financing, reimbursement, commercialization and market acceptance.
- Other exposures: The company reported ordinary-course litigation that management did not expect to have a material adverse effect. Its federal net operating loss carryforwards were approximately $70.1 million, but their use may be limited, including by ownership changes; a full valuation allowance was recorded.
- Controls: Management concluded disclosure controls were effective at March 31, 2016. A previously reported material weakness related to accounting for complex financial instruments and derivatives was addressed in part by adding access to outside accounting consultants as needed.
Important facts for investors to verify
- Progress and cost of the FDA meeting, submission, review and any additional clinical or regulatory requirements.
- Actual cash burn, financing availability and whether funding is sufficient to meet near-term obligations, including the related-party debt maturity and short-term convertible notes.
- Fully diluted share count and potential dilution from Class L, other warrants, preferred-stock conversions and discounted convertible-note terms.
- Underlying warrant valuation assumptions and the clinical-study analysis, including endpoint definitions, populations and the statistical significance of later follow-up results.