SANUWAVE Health, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. SANUWAVE develops acoustic shock-wave technology; its lead U.S. product, dermaPACE, is FDA-cleared for diabetic foot ulcers and is being commercialized alongside international product sales and licensing.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $317,000 | $453,000 | $495,000 | $797,000 |
| Gross margin | $131,000 (41%) | $287,000 (63%) | $215,000 (43%) | $465,000 (58%) |
| Operating loss | $(2.02) million | $(2.12) million | $(3.88) million | $(3.24) million |
| Net loss | $(2.73) million | $(2.89) million | $(4.93) million | $(8.74) million |
| Net loss per share | $(0.02) | $(0.02) | $(0.03) | $(0.06) |
- Quarterly revenue fell 30%; first-half revenue fell 38%. Management cited lower international device and applicator sales and lower upfront distribution fees. First-half revenue was principally product sales, license fees and other revenue.
- Gross margin contracted as product mix shifted toward lower-margin device sales and due to costs associated with new and refurbished dermaPACE devices and applicators.
- First-half operating cash use was $3.39 million, versus $1.60 million in 2018. Investing cash use was $26,000; financing cash provided was $3.20 million, mainly from warrant exercises, short-term notes and related-party advances. Cash declined $210,000 to $154,000.
- At June 30, current assets were $1.01 million against current liabilities of $17.53 million; total liabilities were $17.87 million and stockholders’ deficit was $16.36 million. The filing identifies substantial doubt about the company’s ability to continue as a going concern.
- Significant obligations included $3.08 million of short-term notes payable, $2.86 million of convertible notes net, $5.37 million of related-party notes, $1.50 million of accrued related-party interest and $726,000 under a related-party line of credit. Certain notes were in default; short-term notes and convertible notes accrued default interest at 10% and 18%, respectively. Related-party notes accrued 10% after defaults.
Material changes and notable items
- Although first-half net loss improved by $3.81 million year over year, operating loss increased by $637,000. The improvement in net loss principally reflected lower non-operating expense, including a favorable warrant-valuation adjustment compared with a large loss in 2018, and lower debt-related expense.
- Selling and marketing expense rose 168% for the first half, to $566,000, as the company hired trainers and salespeople and increased travel for dermaPACE placements and training. Research and development expense declined 16%, partly due to employee cost reclassification.
- Common shares outstanding increased from 155.7 million at year-end 2018 to 188.7 million at June 30, 2019, largely reflecting warrant exercises and other equity transactions. The filing reported 195.9 million shares outstanding as of August 9, 2019.
- Adoption of ASU 2017-11 reclassified a $1.54 million warrant liability to equity and affected opening equity; the warrant liability was zero at June 30. The company also recorded $630,000 of interest expense for a 10% bonus-share incentive offered to certain warrant holders.
- The company terminated its joint venture with Johnfk Medical and Holistic Wellness Alliance. Johnfk Medical was to pay $63,275 for equipment and a $50,000 termination fee; only $10,000 of the fee had been received by July 18. A separate anticipated $400,000 fee had not been received.
Outlook, risks and controls
- Management estimated operating cash use of approximately $275,000–$350,000 per month for the remainder of 2019. It planned to seek capital through strategic partners, licensing, warrant exercises, equity or debt financing; no assurance was given that financing would be available on acceptable terms. Failure to raise capital could require curtailed operations or bankruptcy relief, and equity funding could materially dilute shareholders.
- Management expects continued operating losses while commercializing dermaPACE and developing other applications. A Poland dosage study began in April 2019 and was expected to conclude late in Q4 2019; a U.S. post-market pilot study also began enrollment in April.
- The filing warns of potential rescission claims or refunds related to possible securities-registration deficiencies, which could materially harm financial condition. The company also disclosed ordinary-course litigation and said it did not expect pending claims to have a material adverse effect.
- Disclosure controls and internal control over financial reporting were ineffective. Three material weaknesses involved complex accounting, equity components of vendor service agreements, and IT/cybersecurity weaknesses following email-spoofing breaches. Management described remediation efforts, including outside accounting support and planned cybersecurity training and procedural changes.
Most important facts for investors to verify
- Whether the company secured sufficient new financing to cover its disclosed cash needs and address defaults and near-term obligations.
- Current cash, monthly cash burn, note balances, default interest, payment status and any creditor enforcement or restructuring developments.
- Actual commercial traction for dermaPACE, including product revenue, gross margins, distributor concentration and collection of amounts due from Johnfk Medical.
- Updated share count, warrant exercises, potential share issuance and resulting dilution.
- Progress in remediating material weaknesses and any further developments regarding the possible securities-registration exposure.