SANUWAVE Health, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed May 14, 2013. Financial statements are unaudited.
Business context
SANUWAVE develops noninvasive acoustic shockwave technology for regenerative medicine. Its lead U.S. candidate, dermaPACE, was in a supplemental Phase III trial for diabetic foot ulcers; the company was not marketing products in the United States. Revenue came from CE-marked devices and accessories sold in Europe, Canada, and Asia/Pacific.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $201,234 | $238,540; down 16% |
| Gross profit / margin | $145,423 / 72% | $166,768 / 70% |
| Operating expenses | $1,278,286 | $1,923,236 |
| Operating loss | $(1,132,863) | $(1,756,468) |
| Net loss | $(5,369,333), or $(0.25) per share | $(1,835,315), or $(0.09) per share |
| Cash used by operations | $(1,043,674) | $(1,490,445) |
| Cash and cash equivalents | $671,027 at March 31 | $70,325 at December 31, 2012 |
At March 31, total assets were $2.33 million and total liabilities were $13.65 million, including $8.27 million of current liabilities. Working capital was negative $7.13 million, and stockholders’ deficit was $11.32 million. Related-party notes payable were $5.37 million, bearing 6% interest and due August 1, 2015. The company had also issued $2.0 million of 18% senior secured convertible notes; the balance sheet reported a $5.737 million derivative liability associated with their conversion feature. No income tax expense was recorded.
Changes and unusual items
- Revenue declined primarily because European orthoPACE device sales were lower amid economic weakness; higher applicator sales partly offset the decline. Gross margin improved with the product mix.
- Research and development expense fell 43% and general and administrative expense fell 31%, mainly due to reduced headcount and lower operating, clinical, and legal costs.
- Net loss increased 193%, primarily because the new notes generated a $3.737 million noncash loss on their embedded conversion feature and $428,467 of accrued interest expense, including debt-discount amortization.
- Operating cash use improved 30% year over year. Financing provided $1.64 million, mainly from note subscriptions and a related-party stock subscription; cash increased by $600,702 during the quarter.
- The company issued 346,000 shares for consulting services and granted substantial options and warrants, including options to its new CEO. Potential dilution is significant; the filing reported 26.7 million anti-dilutive potential shares at quarter-end.
Outlook, risks, and contingencies
- Going concern: Management stated that continued operations depended on raising additional capital in Q2 2013. Quarter-end cash was expected to fund operations only through May 2013. The filing says there is substantial doubt about the company’s ability to continue as a going concern.
- Management planned to seek up to $600,000 through unsecured notes and/or the affiliated shareholder subscription, and up to $6 million through a best-efforts registered equity offering. Even if these efforts succeeded, further funding might be needed by year-end. Monthly cash use was projected at $575,000–$625,000.
- The senior secured notes automatically convert only upon a qualifying financing and/or license transaction of at least $4 million. Otherwise they become due and payable; maturities began in May 2013, and the company was seeking an extension through Q2. The notes are secured by company assets.
- Patient enrollment in the supplemental dermaPACE Phase III trial was expected to begin by the end of Q2 2013. Management estimated direct trial costs of approximately $3.8 million through 2014 and possible FDA approval in 2015, subject to satisfactory results. The prior pivotal trial missed its 12-week primary endpoint; later secondary analyses showed some statistically significant results.
- The filing warns that financing may be unavailable or dilutive and that failure to raise capital could force a bankruptcy filing. A lawsuit seeks more than $3 million; the company had prevailed at summary judgment, but an appeal was heard April 29, 2013. Management considered the outcome not expected to materially adversely affect the company, while noting it was not determinable.
Important facts for investors to verify
- Whether the planned Q2 financing, shareholder subscription payments, and note maturity extensions were completed, and on what terms.
- Actual cash runway, subsequent cash use, and the status of any additional financing needed by year-end.
- Clinical-trial enrollment, interim monitoring results, final sample size, costs, and FDA milestones for dermaPACE.
- The senior notes’ conversion or repayment outcome and the effect of the derivative liability and potential equity dilution.
- Developments in the appeal of the lawsuit seeking more than $3 million.