SANUWAVE Health, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are with fiscal 2010. The filing was signed March 14, 2012. The company develops and commercializes noninvasive PACE acoustic-wave devices. It had no commercial products in the United States; reported product revenue came from device and accessory sales in Europe.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $802,572 | $728,446 |
| Gross profit / gross margin | $540,682 / 67% | $478,120 / 66% |
| Operating loss | $8,809,117 | $11,807,561 |
| Net loss | $10,238,797 | $14,922,441 |
| Net loss per share, basic and diluted | $0.52 | $1.15 |
| Cash used in operating activities | $8,831,699 | $5,867,276 |
Revenue increased 10%, primarily from European orthoPACE sales. Research and development expense fell 30% to $2.73 million as the pivotal U.S. study’s enrollment and follow-up ended in 2010. General and administrative expense declined 11% to $6.29 million, partly reflecting lower noncash stock compensation; excluding that compensation, it rose 27% to $5.17 million. Interest expense fell 51% to $472,155. The 2011 loss included a $1.32 million loss on extinguishment of related-party debt.
At year-end, cash and cash equivalents were $3.91 million, versus $417,457 a year earlier. Current assets were $4.58 million and current liabilities $2.32 million. Total liabilities were $7.70 million, including $5.37 million of related-party notes payable to HealthTronics, due in 2015, and $655,061 of liabilities related to discontinued operations. Stockholders’ deficit was $1.54 million; accumulated deficit was $64.51 million. No cash dividends have been paid or are anticipated in the foreseeable future.
Material developments and outlook
- FDA and clinical risk: The 206-patient dermaPACE Phase III trial did not meet its primary endpoint of complete wound closure at 12 weeks (21% treated versus 15% sham; p=0.363). Some later secondary analyses showed statistically significant results, including at 20 weeks, but results at 24 weeks varied by analysis population.
- The company filed the final PMA module in June 2011 and received an FDA major deficiency letter in December. The FDA cited, among other issues, the missed 12-week primary endpoint and recommended another clinical trial. In March 2012, the company submitted an IDE supplement for conditional approval. Management expected additional clinical work to take up to 24 months before completion and submission; FDA approval remained uncertain.
- dermaPACE and orthoPACE had European CE Marks. Two CPT Category III codes for wound-healing ESWT had been received, but the filing states that APC classification does not guarantee payment. U.S. commercialization depended on FDA approval and adequate reimbursement.
- Funding and going concern: The auditor’s report and management disclosed substantial doubt about the company’s ability to continue as a going concern. Management said additional financing was required and not assured. In 2011, financing activities provided $12.37 million, including $8.47 million net from an April private placement and $3.90 million from option exercises. Related-party notes totaling $4.41 million were exchanged for shares and warrants. The board formed a committee and retained Canaccord Genuity to explore fundraising and strategic options; the company also reported cost reductions in 2012.
- Management expected continued losses for several years. No specific revenue, earnings, or financing guidance was provided. The company reported two distributors accounted for 35% and 25% of 2011 revenue, respectively, and relied on single-source suppliers for most product components.
Contingencies and other notable items
- A former limited partner sought more than $3 million in a contract lawsuit. The company received summary judgment in December 2011; the plaintiff appealed in January 2012. HealthTronics was handling the defense. Management considered the claim unfounded, but the appeal remained pending.
- Patent challenges and other intellectual-property disputes were disclosed. Management stated that outcomes were uncertain and that the described patent matter was not expected to materially harm financial position or results.
- The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2011. It had redesigned certain procedures and added a control addressing complex transactions after a material weakness had been reported for 2010.
Important facts for investors to verify
- Availability, timing, terms, and dilution implications of financing needed to fund operations and the additional clinical work.
- FDA’s response to the IDE supplement, final trial requirements, study results, and any change to the expected timeline or costs.
- Current cash burn, liquidity, debt obligations, and whether the going-concern uncertainty has been resolved.
- European sales momentum, distributor concentration, customer collections, and the status of U.S. reimbursement and payment pathways.
- Outcome of the appeal in the lawsuit seeking more than $3 million, and status of material patent challenges.
- Potential dilution from outstanding options and warrants and the effect of future equity or debt financing.