SANUWAVE Health, Inc. — 2014 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. SANUWAVE develops acoustic shockwave technology for regenerative medicine. It earns revenue mainly from device and accessory sales outside the United States; its lead U.S. product, dermaPACE, was in a supplemental Phase III trial for diabetic foot ulcers.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $227,492 | $148,421 | $610,705 | $510,272 |
| Gross profit / margin | $159,415 / 70% | $118,954 / 80% | $460,892 / 75% | $401,211 / 79% |
| Operating loss | $(1,409,520) | $(1,890,015) | $(5,044,116) | $(4,749,376) |
| Net loss | $(1,492,905) | $(4,436,790) | $(5,750,509) | $(10,624,454) |
| Net loss per share, basic and diluted | $(0.03) | $(0.14) | $(0.12) | $(0.43) |
| Cash used by operating activities | Not stated by quarter | $(5,542,192) | $(3,374,894) |
- Revenue increased 53% in Q3 and 20% year to date, principally from higher orthoPACE sales in Asia/Pacific and refurbished applicator sales in Europe. Lower device margins reduced gross margin versus 2013.
- Q3 operating expenses were $1.57 million, including $708,304 in research and development and $780,115 in general and administrative expenses. Year-to-date R&D rose 43% to $2.49 million as the clinical trial moved into enrollment; G&A fell 12% to $2.77 million.
- Net losses improved substantially versus 2013 largely because 2013 included noncash losses and interest associated with senior secured notes that were converted to equity. Year-to-date operating loss nevertheless increased from 2013.
- At September 30, cash was $4.69 million, versus $182,315 at December 31, 2013. Working capital was negative $1.13 million. Total liabilities were $6.33 million; current liabilities were $6.33 million, including $5.37 million of related-party notes payable and $81,864 of related-party interest payable.
- Related-party notes bear 6% interest and are due August 1, 2015. The balance was reclassified as current during 2014. Total stockholders’ deficit was $422,000; accumulated deficit was $87.96 million.
Material changes, outlook and risks
- The company raised $9.28 million gross in a March 2014 private placement, receiving $8.56 million net, and received a further $900,000 under a stock subscription agreement. The placement included common and preferred shares and warrants. Common shares outstanding rose to 50.71 million from 37.98 million at year-end 2013; 50.56 million warrants were outstanding at September 30. Potential exercises and conversions could materially dilute existing shareholders.
- Management estimated operating cash use of $550,000–$650,000 per month through December 2014 and $450,000–$550,000 per month thereafter in 2015. It believed existing resources would fund operations into Q3 2015, but said additional capital would be needed in the second half of 2015 to fund operations and repay or refinance the related-party notes. Financing could cause significant dilution; management warned that failure to obtain funding could require a U.S. Bankruptcy Code filing. The statements are prepared on a going-concern basis without adjustments that might be required if the company cannot continue.
- The independent Data Monitoring Committee reviewed 12-week results for the first 90 patients in the supplemental dermaPACE trial and recommended continuing enrollment to the next planned analysis point of 130 patients. The company expected to complete enrollment in November 2014 and anticipated the 130-patient analysis in Q1 2015. The committee could recommend stopping for success, expanding enrollment to 170, or stopping for poor results. Subject to positive results, the company expected to submit a PMA in Q3 2015 and cited possible FDA approval in 2016.
- Regulatory and clinical outcomes remain uncertain. In the prior pivotal trial, the 12-week primary endpoint of complete wound closure was not statistically significant; the FDA subsequently issued a major deficiency letter and the company pursued a supplemental study. The company reported favorable secondary analyses from that earlier trial, but they do not remove the risk of failing the current study or obtaining approval.
- The company reported ordinary-course legal matters; management did not expect their resolution to materially adversely affect financial position or results. Management concluded disclosure controls were effective at September 30, 2014, with no material change in internal control reported.
Important facts for investors to verify
- Results and DMC recommendations for the 130-patient dermaPACE analysis, enrollment timing, and any FDA discussions or changes to the study plan.
- Cash burn and runway against the stated Q3 2015 funding horizon, and plans to fund operations and address the $5.37 million notes due August 2015.
- Terms, availability, and dilution impact of future financing, including the substantial outstanding warrant and preferred-stock conversion overhang.
- Whether international sales growth can continue and whether revenue can increase enough to reduce reliance on external capital.
- Potential limits on use of $59.36 million in federal net operating loss carryforwards, including ownership-change limitations.