SANUWAVE Health, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 30, 2020. This is an annual report, not a standalone fourth-quarter report. SANUWAVE develops and sells acoustic shock-wave medical devices, with dermaPACE its lead U.S. product for diabetic foot ulcers (DFUs). The FDA granted dermaPACE De Novo Class II clearance in 2017; the company also sells devices internationally.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $1.029 million | $1.850 million |
| Gross profit / margin | $0.490 million / 48% | $1.156 million / 63% |
| Operating loss | $8.794 million | $7.180 million |
| Net loss | $10.430 million | $11.631 million |
| Net loss per share, basic and diluted | $0.05 | $0.08 |
| Net cash used in operations | $6.411 million | $3.621 million |
| Cash and cash equivalents at year-end | $1.760 million | $0.365 million |
- Revenue fell 44%, primarily due to lower orthoPACE device, applicator and applicator-refurbishment sales in Europe and Asia/Pacific. Product revenue was $645,169; license fees were $315,557; other revenue was $68,004.
- Operating expenses rose to $9.284 million from $8.337 million. Selling and marketing expense increased 205% to $1.591 million as the company added sales and training personnel and expanded commercialization efforts. Research and development increased 20% to $1.182 million; general and administrative expense decreased 5% to $6.440 million.
- Net loss narrowed 10%, mainly because interest and debt-related expense declined from unusually high 2018 levels. Operating loss nevertheless widened, and gross margin fell 15 percentage points.
- Year-end current assets were $2.504 million versus current liabilities of $12.415 million, a $9.911 million working-capital deficit. Total liabilities were $13.446 million; stockholders’ deficit was $10.064 million and accumulated deficit was $125.753 million.
- Operating cash use increased 77%. Financing provided $7.860 million, including $2.800 million from a private stock placement, $2.055 million in related-party advances, $1.758 million from warrant exercises and $1.215 million from short-term notes. The filing’s MD&A gives a different financing cash-flow figure; see investor checks below.
Material changes and developments
- Common shares issued and outstanding rose from 155.7 million at year-end 2018 to 293.8 million at year-end 2019, reflecting warrant exercises, debt conversions and a private placement. The filing reports 297.3 million shares outstanding on March 25, 2020.
- In December 2019, SANUWAVE agreed to grant exclusive Brazil distribution rights through a joint venture for a $600,000 partnership fee. It received $500,000 in 2019; the remaining $100,000 depends on ANVISA regulatory approval. Agreements were executed in January 2020.
- The company terminated its Singapore/SEA joint venture with FKS in June 2019. A previously expected $400,000 fee was not received; a $50,000 termination fee was received.
- In January 2020, the company designated 90 shares of Series C convertible preferred stock. Subsequent to year-end, it reported receiving $2.25 million for their purchase, although no Series C shares had been issued as of the report date.
Outlook, risks and unusual items
- Going concern: The auditor issued an unqualified opinion on the financial statements but included a going-concern explanatory paragraph. Management said existing resources were expected to fund operations into the third quarter of 2020. Its estimated operating cash use was $250,000–$325,000 monthly in the first half of 2020 and $300,000–$375,000 monthly in the second half. Additional financing was considered necessary; failure to obtain it could require significant curtailment or discontinuation of operations.
- Defaults and secured debt: HealthTronics-related notes totaling $5.373 million were in default, with $1.860 million of accrued interest. HealthTronics holds a first-priority security interest in company assets; the company said it was negotiating with the creditor. Short-term notes were also in default, with default interest applying. The notes require mandatory prepayments to HealthTronics from specified equity or licensing proceeds; the company disclosed that required prepayments had not been made through year-end.
- COVID-19: Management warned that pandemic-related hospital restrictions could delay clinical treatments, impair trial monitoring and recruitment, and reduce dermaPACE and orthoPACE procedures and sales. The duration and financial impact were uncertain.
- Other significant risks: Limited recurring revenue; dependence on external financing and potentially dilutive securities; distributor and customer concentration; reliance on single-source suppliers; uncertain reimbursement and market adoption; regulatory and clinical-trial risks; and a limited OTCQB trading market. Management also disclosed potential rescission/refund exposure related to possible registration deficiencies in certain historical securities offerings.
- Controls: Management concluded disclosure controls were not effective at December 31, 2019 and reported material weaknesses involving complex accounting, equity components of vendor service agreements and cybersecurity/email spoofing. Remediation efforts included external consultants, added accounting and IT personnel, and revised controls; management said remediation was not assured.
Key facts investors should verify
- Liquidity runway and status, terms and dilution of financing raised after year-end, including the Series C proceeds and any further capital needs.
- Current status of HealthTronics and short-term note defaults, creditor negotiations, collateral rights and required prepayments.
- Cash-flow figures: the audited cash-flow statement reports $7.860 million of financing cash flow and $53,939 of investing cash use, while MD&A cites $7.895 million and $89,049, respectively.
- Accounting for the Brazil $500,000 partnership fee: the filing describes it as recognized revenue in one passage but as a contract liability in the joint-venture note; reconcile this with reported license-fee revenue.
- Progress of Brazil regulatory approvals and joint-venture commercialization, clinical studies, reimbursement, and the effect of COVID-19 on sales and trial timelines.
- Whether material weaknesses have been remediated, and any developments regarding the potential historical securities-registration liability.