SANUWAVE Health, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 6, 2014. Financial statements are unaudited.
Business context and reporting period
SANUWAVE develops noninvasive acoustic shockwave technology for regenerative medicine. Its lead U.S. product, dermaPACE, was in a supplemental Phase III study for diabetic foot ulcers; the company had no commercial products marketed in the United States. Revenue came primarily from device and accessory sales in Europe, Canada, Asia and Asia/Pacific.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $238,115 | $160,617 | $383,213 | $361,851 |
| Gross profit | $174,716 | $136,834 | $301,477 | $282,257 |
| Gross margin | 73% | 85% | 79% | 78% |
| Operating loss | $(1,614,797) | $(1,726,498) | $(3,634,596) | $(2,859,361) |
| Net loss | $(1,693,650) | $(818,331) | $(4,257,604) | $(6,187,664) |
| Net loss per share, basic and diluted | $(0.03) | $(0.04) | $(0.10) | $(0.29) |
Q2 revenue increased 48%, primarily from higher orthoPACE sales in Asia/Pacific and refurbished applicator sales in Europe. First-half revenue rose 6%. Q2 gross margin declined because devices, which have lower margins than applicators, made up a larger share of sales. First-half R&D expense rose 84% to $1.78 million, reflecting the clinical study; Q2 G&A fell 40%, largely because of lower stock compensation following the former CEO’s option forfeitures.
At June 30, cash and cash equivalents were $6.15 million, versus $182,315 at year-end 2013. First-half operating cash use was $4.09 million, compared with $1.98 million in 2013; financing provided $10.07 million. Total liabilities were $6.33 million, including $5.37 million of related-party notes payable, due August 1, 2015, and $80,968 of related-party interest payable. Current assets were $6.59 million and current liabilities $955,000. Stockholders’ equity was $1.05 million, compared with a $6.13 million deficit at December 31, 2013.
Material changes and unusual items
- The March 2014 private placement raised $9.28 million gross and $8.56 million net, issuing common and preferred shares and substantial warrant coverage. The company also received $900,000 under a subscription agreement and issued shares.
- First-half net loss improved by $1.93 million year over year, partly because 2013 included a $1.41 million noncash loss on an embedded conversion feature and $1.76 million of Senior Secured Note interest expense. Q2 2014 net loss increased year over year, in part because Q2 2013 included a $2.33 million noncash gain on that feature.
- Common shares outstanding increased to 50.7 million from 38.0 million at year-end. At June 30, 52.8 million warrants were outstanding, in addition to preferred stock convertible into common shares and outstanding options.
- The former CEO was terminated in April; 1.5 million unvested options were forfeited, reversing $217,450 of previously recognized compensation expense.
Outlook, risks and contingencies
Management estimated operating cash use of $550,000–$650,000 per month through September 2014 and $450,000–$550,000 per month thereafter. It believed available cash would fund operations into Q3 2015, but stated that additional capital would be needed in the second half of 2015 to commercialize dermaPACE, assuming favorable clinical results and FDA approval. Management expected FDA approval in 2015 following trial completion and PMA submission, contingent on satisfactory results; this was not assured.
As of April 30, the company had enrolled the minimum 90 patients for the first interim analysis and continued enrollment while collecting 12-week efficacy data. The pivotal trial had not met its primary endpoint of complete wound closure at 12 weeks at the 95% confidence level; the FDA had issued a major deficiency letter, prompting the supplemental study. Failure to achieve positive results or FDA approval could require strategic alternatives and further financing. Management warned that equity financing could materially dilute shareholders, debt could constrain flexibility, and collaboration could require unfavorable licensing terms. The company reported an accumulated deficit of $86.5 million and expected operating losses to continue for several years. Management said ordinary-course litigation was not expected to materially affect financial position or results.
Important facts for investors to verify
- Clinical-trial progress, interim analysis findings, and whether results support PMA submission and FDA approval.
- Cash burn relative to management’s monthly estimates and the expected Q3 2015 funding horizon.
- Availability, timing and terms of additional financing, including potential dilution and warrant or preferred-stock conversion.
- Repayment arrangements for the $5.37 million related-party notes and accrued interest due in August 2015.
- Commercial sales growth, gross-margin trends, and the company’s ability to generate recurring revenue.