SANUWAVE Health, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results. SANUWAVE develops and commercializes shock-wave and ultrasound technologies for wound care, including dermaPACE and UltraMIST.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $4.166 million | $3.725 million | $11.242 million | $8.750 million |
| Gross margin | $3.560 million; 85.5% | $2.170 million; 58.3% | $8.652 million; 77.0% | $5.092 million; 58.2% |
| Operating loss | $1.840 million | $3.335 million | $5.246 million | $11.775 million |
| Net loss | $0.413 million | $4.252 million | $2.135 million | $17.804 million |
| Cash used in operations | Not separately stated for the quarter | $13.176 million | $6.506 million |
Revenue increased 12% for Q3 and 28% for the nine-month period, primarily from higher UltraMIST device and single-use accessory sales. Management attributed improved gross margin to the greater mix of higher-margin accessories and discontinuation of lower-margin biologics sales. Lower selling, marketing, and R&D expenses also contributed to reduced operating losses.
Net losses narrowed substantially, but results included large noncash fair-value gains on derivative liabilities: $5.252 million in Q3 and $16.597 million for nine months. These gains materially affected reported net loss; operating cash use rose year over year to $13.176 million. Nine-month financing cash inflow was $12.664 million, while investing activities provided $1.022 million, mainly from asset-sale proceeds.
Financial position, debt, and liquidity
- At September 30, cash was $1.112 million, total current assets $6.863 million, and current liabilities $52.465 million, implying a working-capital deficit of approximately $45.6 million. Total liabilities were $52.961 million; stockholders’ deficit was $32.852 million.
- Carrying value of short-term debt, including notes in default, was $31.999 million. The $18 million senior secured note was in default, as were other legacy notes and advances. Accrued interest was $4.534 million in total, including related-party interest.
- The August 2022 private placement provided $16.2 million in aggregate note principal, including approximately $12.3 million of newly raised capital and amounts refinanced. The notes bear 15% interest and are convertible at $0.04 per share, subject to adjustments and share-authorization conditions.
- The company issued warrants for up to approximately 809.6 million shares in that placement, in addition to other outstanding warrants. The filing reports 1.006 billion warrants outstanding overall. Common shares outstanding were 548.7 million at September 30 and November 10, 2022.
- Management stated that recurring losses, defaults on notes, and reliance on additional financing raise substantial doubt about the company’s ability to continue as a going concern for at least 12 months. Additional capital may not be available or may cause significant dilution; absent financing, operations could be curtailed or discontinued.
Outlook, risks, and notable items
- No quantitative revenue or earnings guidance was provided. Management expects to need further capital for commercialization, research and development, and working capital, and described possible strategic investment, licensing, equity, warrant conversion, or debt financing.
- On November 14, 2022, after quarter-end, the company issued approximately $2 million of additional notes and warrants covering approximately 90 million shares. The notes carry 15% interest and are subject to conversion and share-authorization provisions.
- The August financing documents require sufficient authorized and unissued shares for conversion and exercise; the notes include a covenant requiring a reverse stock split by December 31, 2022 to meet that condition. Failure may constitute an event of default.
- The company reported ineffective disclosure controls and internal control over financial reporting, citing material weaknesses in accounting expertise and resources for complex transactions and in accounting and IT controls. Remediation efforts were underway, with no assurance they would be sufficient.
- Management cited COVID-related customer-demand and supply-chain disruption. The company also depends on limited suppliers; loss of a key supplier could disrupt production. A Celularity dispute alleges noncompliance with a license agreement; the company denies breach and says the outcome and potential impact are uncertain.
- Other notable items included $1.0 million of gain from forgiveness of an SBA loan, a $0.9 million loss on extinguishment of legacy debt, and $0.690 million gain on sale of property and equipment during the nine months.
Important facts for investors to verify
- Availability, timing, and terms of additional financing, and whether the going-concern uncertainty can be resolved.
- Status of defaulted debt, lender forbearance, accrued interest, and any required repayments or remedies.
- Completion and consequences of the required share-authorization or reverse-stock-split actions, including potential dilution from notes and warrants.
- Progress in remediating material weaknesses and the reliability of future financial reporting.
- Resolution and potential business impact of the Celularity license dispute, as well as supplier continuity and sales trends.