SANUWAVE Health, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated financial statements; amounts in U.S. dollars. SANUWAVE develops noninvasive acoustic-shockwave technology. Its lead U.S. product, dermaPACE, was in a supplemental Phase III study for diabetic foot ulcers; sales were from CE-marked devices and accessories outside the United States.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $160,617 | $210,357 | $361,851 | $448,897 |
| Gross profit / margin | $136,834 / 85% | $128,196 / 61% | $282,257 / 78% | $294,964 / 66% |
| Operating loss | $(1,726,498) | $(1,337,995) | $(2,859,361) | $(3,094,463) |
| Net loss | $(818,331) | $(1,424,626) | $(6,187,664) | $(3,259,941) |
| Net loss per share, basic and diluted | $(0.04) | $(0.07) | $(0.29) | $(0.16) |
| Operating cash used | Not separately provided for the quarter | $(1,983,647) | $(2,504,284) |
Q2 revenue declined 24% and first-half revenue declined 19%, primarily due to lower orthoPACE device sales in Europe amid economic weakness, partly offset by applicator sales. Gross margin improved due to higher-margin applicators and fewer or no lower-margin demonstration-device sales. First-half net loss widened 90%, mainly due to noncash charges tied to the new senior secured convertible notes. Q2 net loss narrowed, largely because a $2.328 million fair-value gain on the notes’ embedded conversion feature offset part of related interest and discount-amortization expense.
Financial position and capital
- At June 30, cash was $70,700; current assets were $512,154 versus current liabilities of $7,992,275. Management reported a $7.48 million working-capital deficit, including a $3.409 million noncash derivative liability.
- Total liabilities were $13.37 million, including $5.37 million of related-party notes payable bearing 6% interest and due August 2015, $1.77 million carrying value of senior secured notes, and $305,688 of short-term promissory notes. Stockholders’ deficit was $11.75 million.
- First-half operating cash use was $1.98 million, compared with $2.50 million in 2012. Financing provided $1.98 million, including proceeds from the senior secured notes and short-term notes; cash increased only $375 over the period.
- The company reported recurring losses, a $77.10 million accumulated deficit, and substantial doubt about its ability to continue as a going concern. Management said additional capital was required in 2013 and warned that failure to raise it could force a bankruptcy filing.
Outlook, risks, and material developments
- The supplemental dermaPACE Phase III trial began enrolling in June; 30 patients were enrolled as of August 12, 2013. Management expected second-half 2013 monthly cash use of approximately $575,000–$625,000 and estimated direct trial costs of about $3.8 million through 2014. Management anticipated available cash and identified financing sources would support operations only into Q4 2013; additional funding was not assured.
- The trial includes interim monitoring and a possible first assessment after 90 patients complete the 12-week evaluation. FDA approval remains contingent on satisfactory study results. The prior pivotal trial did not meet its primary 12-week wound-closure endpoint at statistical significance; a later 20-week analysis showed statistical significance. The FDA had requested additional clinical work before completing PMA review.
- After quarter-end, the July 25 public offering raised $1.65 million gross and approximately $1.5 million net by selling 3,006,818 units, each including a share and a warrant for half a share. Warrants cover up to 1,503,409 shares at $0.80.
- On July 31, holders converted $2.187 million of senior secured note principal and interest into 10,934,533 shares at $0.20 and received warrants for 1,988,095 shares at $0.80. This removed the notes’ principal and interest obligation but materially diluted existing shareholders; the company said it was evaluating the accounting treatment.
- Short-term promissory notes carried 18% interest, rising to 25% after a specified late-payment period; they were repaid on August 1 for $310,381 including interest. A related-party shareholder subscription agreement provides for up to $900,000 more, subject to its terms; $100,000 had been paid by June 30.
- Management identified potential dilution or restrictive financing terms, regulatory and clinical uncertainty, commercialization and reimbursement risks, and the possibility of needing to sell assets or seek bankruptcy protection. Ordinary-course litigation was not expected by management to have a material adverse effect. Disclosure controls were reported effective as of June 30.
Important facts for investors to verify
- Whether SANUWAVE secured sufficient additional financing to fund operations and the dermaPACE trial beyond Q4 2013.
- Trial enrollment, interim monitoring outcomes, total costs, and timing and requirements for any PMA submission or FDA decision.
- The final accounting and balance-sheet effects of the July note conversion and associated warrants, and the resulting fully diluted share count.
- Actual cash burn versus management’s estimate, and repayment or other terms of remaining debt and related-party obligations.
- Whether declining international device sales stabilize and whether the company can generate meaningful revenue or licensing proceeds.