SANUWAVE Health, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results. SANUWAVE develops acoustic shockwave technology; it sells CE-marked devices and accessories outside the United States. Its U.S. lead product, dermaPACE, remained in a supplemental Phase III study for diabetic foot ulcers.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $240,000 | $238,000 | $450,000 | $383,000 |
| Gross margin | 68% | 73% | 70% | 79% |
| Operating loss | $(1.007) million | $(1.615) million | $(2.134) million | $(3.635) million |
| Net loss | $(1.522) million | $(1.694) million | $(2.681) million | $(4.258) million |
| Loss per share, basic and diluted | $(0.02) | $(0.03) | $(0.04) | $(0.10) |
| Operating cash used | Not separately reported | Not separately reported | $(1.918) million | $(4.093) million |
Revenue rose 1% in Q2 and 18% for the first half, mainly on higher orthoPACE device sales; device sales carry lower margins than applicators. Lower research and development and general and administrative expenses drove the lower operating losses. Q2 included a $429,000 warrant fair-value loss; for the first half, the warrant revaluation loss was $373,000. Interest expense for the first half was $161,000, versus $620,000 in 2014, which included expense on notes repaid in March 2014.
Liquidity, debt and capital
- Cash was $1.616 million at June 30, down $1.931 million from year-end. Current assets were $2.078 million and current liabilities $1.414 million; working capital was approximately $664,000.
- Management estimated operating cash use of $400,000–$500,000 per month and said existing resources were expected to fund operations only into Q4 2015. The company stated it needed additional capital in Q3 or early Q4 and warned that failure to obtain financing could force a U.S. Bankruptcy Code filing. The filing therefore raises substantial going-concern uncertainty.
- Related-party notes had $5.337 million outstanding. A June amendment extended maturity from August 2015 to January 31, 2017, granted HealthTronics a first security interest in company assets, raised the interest rate to 8% effective August 1, 2015 (with a further 2% during default), and requires 20% of certain equity or intellectual-property licensing proceeds to prepay principal.
- In connection with the amendment, SANUWAVE issued HealthTronics 3.31 million ten-year warrants exercisable at $0.55. There were 38.30 million warrants outstanding at quarter-end. Common shares outstanding were 63.06 million; shareholders approved increasing authorized common shares to 355 million in July, and the amendment was filed in August.
Developments, outlook and risks
- The independent data monitoring committee reported that the study’s predefined predictive success criterion for 100% wound closure at 12 weeks had not been met at the 130-patient interim analysis, and was unlikely to be met at the next planned analysis assuming similar trends. The committee reported no safety issues. The FDA indicated that the totality of study data, including later endpoints and risk-benefit, would inform its review.
- All 130 patients completed 24-week follow-up. The company was auditing and closing sites and planned to unblind and analyze results after database lock, announce top-line results in Q3 2015, and, if results were positive, submit a PMA in Q4 2015 or Q1 2016. These were plans, not assured outcomes.
- In the prior pivotal study, the 12-week complete-closure endpoint was not statistically significant; a secondary analysis at 20 weeks was statistically significant. The FDA had issued a major deficiency letter in 2011, leading to the supplemental study.
- Management expected operating losses to continue for several years. Key risks include clinical and regulatory outcomes, commercialization and reimbursement, competition, and the availability and terms of financing. Equity or partnership financing could dilute shareholders or require concessions on intellectual property. Federal tax-loss carryforwards were approximately $66.0 million, but their use may be limited, including by ownership changes.
- Management concluded disclosure controls were effective at June 30. A previously reported material weakness in internal control over financial reporting concerned expertise and resources for complex financial instruments and derivatives; the company added a process to engage an outside consultant as needed. Management said ordinary-course litigation was not expected to materially affect financial position or results.
Investor verification points
- Check the subsequent financing and cash runway: the filing says additional capital was essential, but does not report a completed financing in the period.
- Review the final dermaPACE trial results, including 12-week and later closure endpoints, safety data, and any FDA feedback or PMA submission.
- Assess the HealthTronics amendment, collateral grant, increased interest rate, mandatory prepayments, and the potential dilution from 38.30 million outstanding warrants and expanded authorized shares.
- Reconcile the reported warrant revaluation expense across Q2 and the six-month period, and track any changes to the warrant liability.
- Monitor the disclosed material weakness and whether the added consultant control resolves the underlying financial-reporting risk.