SANUWAVE Health, Inc. — Q2 2011 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010. SANUWAVE develops and commercializes noninvasive PACE regenerative-medicine devices. It had no commercial products in the United States; reported revenue came from CE-marked device and accessory sales in Europe.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $163,749 | $117,226 | $415,502 | $260,328 |
| Gross profit | $116,516 | $76,290 | $274,971 | $171,748 |
| Gross margin | 71% | 65% | 66% | 66% |
| Operating loss | $(2,271,925) | $(2,579,489) | $(4,327,880) | $(5,439,950) |
| Net loss | $(3,572,207) | $(2,727,150) | $(5,755,533) | $(5,721,905) |
| Basic and diluted loss per share | $(0.17) | $(0.22) | $(0.31) | $(0.46) |
For the six months, operating cash use was $5.00 million, versus $3.01 million in 2010; investing cash use was $21,425. Financing provided $12.37 million, including $8.47 million net proceeds from an April private placement and $3.90 million from option exercises. Cash rose by $7.36 million to $7.77 million.
At June 30, cash was $7.77 million, current assets were $8.57 million, and current liabilities were $2.80 million. Total liabilities were $8.17 million, including $5.37 million of related-party notes payable; total equity was $2.14 million, compared with a $10.52 million deficit at year-end 2010. The remaining related-party notes bear 6% interest and are due August 1, 2015. Accumulated deficit was $60.0 million.
Material changes and unusual items
- Revenue increased 40% in Q2 and 60% in the first half, principally from European sales of orthoPACE, introduced in July 2010. Q2 gross margin improved to 71%, attributed to higher-margin orthoPACE sales; first-half margin remained 66%, as demonstrator-device sales offset some margin gains.
- First-half R&D fell 22% to $1.54 million as dermaPACE trial enrollment and follow-up costs declined; G&A excluding stock compensation rose 20% to $2.59 million, mainly from marketing and patent-related legal costs.
- Q2 net loss increased year over year despite a smaller operating loss, primarily because the company recorded a $1.32 million loss on extinguishment of debt. The six-month net loss was broadly unchanged from 2010.
- In April, $4.41 million of related-party principal and interest was exchanged for 1,358,126 common shares and 679,064 warrants. The company also completed a private placement of 2,804,593 shares for $9.11 million gross and issued warrants for the same number of shares, with an additional 93,080 placement-agent warrants. The January option exercises generated $3.90 million and issued 1,950,167 shares and Class D warrants.
Outlook, risks and contingencies
- SANUWAVE completed its 206-patient dermaPACE diabetic-foot-ulcer study and submitted the final module of its PMA application to the FDA. The company reported statistically significant wound-closure findings at certain time points and no significant difference in adverse-event rates versus sham control. It expected, subject to a favorable FDA response, a U.S. launch in 2012; approval was not assured.
- Management expected continuing operating losses and significant R&D, clinical-trial, regulatory and commercialization costs over the next several years. It said additional capital would be required and might not be available on acceptable terms or at all. The filing identifies substantial doubt about the company’s ability to continue as a going concern; management expected potential further equity or other financing to provide needed funds, without assurance.
- Risks include clinical and regulatory outcomes, commercialization and reimbursement, competition, financing availability and potential dilution. Use of approximately $40.9 million in federal NOL carryforwards may be limited, including by ownership changes; a full valuation allowance was recorded for deferred tax assets related to future years.
- Related-party notes, operating leases and purchase/supplier obligations are contractual commitments. The SEC declared the resale registration statement effective June 28, 2011; the company reported no accrual for possible registration-rights damages. Management said ordinary-course legal matters were not expected to have a material adverse effect, and reported no material pending legal proceedings.
- Management concluded disclosure controls were effective as of June 30, 2011. Separately, a previously reported material weakness in internal control over financial reporting involving complex, non-routine transactions and stock-based compensation remained under remediation; the filing reported no material change in those controls during the quarter.
Investor verification priorities
- Check subsequent FDA correspondence, PMA review progress and any change to the conditional 2012 launch outlook.
- Assess cash burn against available cash, the need and terms of further financing, and the going-concern disclosure.
- Review dilution from shares and warrants issued or issuable, including the related-party debt exchange and private placement.
- Verify whether clinical results translate into commercial demand, reimbursement and sustainable European revenue and margins.
- Track remediation and independent testing of the disclosed internal-control material weakness.