SANUWAVE Health, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The interim financial statements are unaudited. SANUWAVE develops PACE regenerative medicine devices; it had no commercial products in the United States, and reported revenue from CE-marked products and accessories sold in Europe.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $161,678 | $278,212 | $577,180 | $538,540 |
| Gross profit / margin | $113,203 / 70% | $168,411 / 61% | $388,174 / 67% | $340,159 / 63% |
| Operating expenses | $2,194,941 | $2,625,978 | $6,797,792 | $8,237,676 |
| Operating loss | $(2,081,738) | $(2,457,567) | $(6,409,618) | $(7,897,517) |
| Net loss | $(2,071,539) | $(2,663,191) | $(7,827,072) | $(8,385,096) |
| Basic and diluted loss per share | $(0.10) | $(0.21) | $(0.41) | $(0.67) |
Q3 revenue declined 42%, reflecting a prior-year one-time sale of $98,143 of orthoPACE demonstration devices. Nine-month revenue rose 7%, attributed to European orthoPACE sales. Gross margins improved in both comparisons, partly because the 2010 demonstration-device sales had lower margins. R&D expense fell as the diabetic-foot-ulcer trial moved from enrollment and follow-up to results analysis. Nine-month G&A excluding stock compensation increased 24%, with higher sales and marketing, investor-relations, and patent-related legal costs.
Cash, liquidity, and debt
- Cash and cash equivalents were $5,784,482 at September 30, 2011, versus $417,457 at December 31, 2010. Current assets were $6,583,274 and current liabilities $2,552,315, for working capital of approximately $4.03 million.
- Operating cash use was $6,994,179 for the first nine months, compared with $4,133,549 in the 2010 period. Investing activities used $36,667; financing provided $12,367,455. Financing included $8,467,121 of net private-placement proceeds and $3,900,334 from option exercises.
- Total liabilities were $7,925,058. Related-party notes payable were $5,372,743, unsecured and bearing 6% interest, with principal and remaining accrued interest due August 1, 2015. Current related-party notes of $4,247,290 at year-end were exchanged for stock and warrants in April; the exchange generated a $1,318,781 loss.
- The April financing and option exercises increased shares outstanding; 20,907,536 common shares were issued and outstanding at September 30. The filing also reports substantial outstanding options and warrants, creating potential dilution.
Outlook, risks, and unusual items
- Management expects operating losses to continue for several years and says additional capital will be required. The company disclosed substantial doubt about its ability to continue as a going concern; management believed further equity or other financing could provide needed funds, but gave no assurance. The statements include no adjustments for a possible inability to continue as a going concern.
- SANUWAVE completed its 206-patient, 24-site dermaPACE diabetic-foot-ulcer study and submitted the final PMA module to the FDA. At 12 weeks, the primary endpoint was not statistically significant in the intent-to-treat population: closure was 21% for dermaPACE versus 15% for sham (p=0.363). Secondary analyses reported statistical significance at 20 weeks, while 24-week results varied by analysis population. The company reported no statistical difference in adverse-event rates. A U.S. launch in 2012 was conditional on a favorable FDA response.
- Pulse Veterinary Technologies notified the company it intended to terminate the production-services agreement effective October 31, 2011. SANUWAVE reported $337,500 of related service income in the first nine months of 2011.
- Federal net operating loss carryforwards were approximately $40.9 million, beginning to expire in 2025; their use may be limited, including by ownership changes. A full valuation allowance was recorded against the net deferred tax asset.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The company reported effective disclosure controls at quarter-end, while continuing remediation of a previously identified material weakness involving accounting for complex financial instruments, derivatives, and stock compensation.
Investor verification priorities
- Check subsequent FDA correspondence, PMA status, and the statistical interpretation of the dermaPACE trial endpoints before relying on the projected U.S. launch.
- Assess cash burn against available cash and confirm the timing and terms of any additional financing needed to address the going-concern uncertainty.
- Verify the status of Pulse Vet’s termination and the resulting effect on service income after October 2011.
- Review related-party debt terms and the potential dilution from outstanding shares, options, and warrants.
- Track remediation of the reported internal-control weakness and any changes in litigation or contingent obligations.