SANUWAVE Health, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 15, 2017. Financial statements are unaudited. SANUWAVE develops acoustic shock-wave technology for regenerative medicine. It had no commercial products for sale in the United States; revenue came primarily from device and accessory sales in Europe, Canada, Asia and Asia/Pacific.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $149,569 | $269,324 |
| Gross profit margin | 63% | 73% |
| Operating loss | $620,639 | $689,469 |
| Net loss | $493,532 | $1,724,576 |
| Net cash used in operating activities | $114,884 | $1,011,542 |
- Revenue fell 44%, mainly because of lower sales of new orthoPACE devices and applicators, refurbishments and wound kits. Gross margin declined partly because Q1 2017 included sales of two lower-margin clinical devices.
- Operating expenses were $715,064, down from $885,612. R&D expense declined 16% to $260,338, largely due to lower FDA-submission consulting costs; G&A declined 10% to $448,606, reflecting reduced personnel, rent and travel costs.
- Net loss improved 71%, primarily due to a $323,223 warrant-valuation gain and lower operating expenses. The warrant gain was a noncash fair-value item; interest expense remained $192,738.
- Cash decreased $36,033 during the quarter, ending at $97,538. Financing provided $77,066 from warrant exercises; there was no investing cash flow. Management attributed the lower operating cash use versus 2016 partly to increased payables.
Financial position and liquidity
- At March 31, 2017, current assets were $867,163, including cash of $97,538; current liabilities were $8,220,731. Total liabilities exceeded total assets of $951,822, leaving a stockholders’ deficit of $7,268,909.
- Related-party notes payable were $5,367,912, net of discount, and accrued related-party interest was $246,264. The notes bear 8% interest and are due January 31, 2018; they are secured by a first lien on company assets. A $100,000 short-term loan was also reported as a current liability.
- Accumulated deficit was $99,926,980. Management stated the company would need additional capital during Q2 2017 to fund operations and disclosed substantial doubt about its ability to continue as a going concern. Potential financing could materially dilute shareholders; if financing efforts fail, the company may seek bankruptcy relief.
Business outlook, risks and notable items
- The company submitted a de novo petition for dermaPACE to the FDA in July 2016 and was seeking a decision, which it said might come in the second half of 2017. FDA approval had not been obtained as of this filing. Management expected operating losses to continue while awaiting a decision and pursuing commercialization.
- In the diabetic-foot-ulcer studies, the 12-week primary endpoint was not statistically significant. At 20 weeks, wound closure was 35.47% for dermaPACE versus 24.39% for control (p=0.027); at 24 weeks, it was 37.8% versus 26.2% (p=0.023). The company reported no meaningful difference in adverse-event rates.
- Management’s financing possibilities included strategic partnerships or licensing, warrant exercises, equity or debt. These sources were not assured and could involve dilution, restrictive debt terms, or concessions of intellectual-property rights.
- There were 76,120,083 warrants outstanding at quarter-end, including 64,398,339 Class L warrants with a $0.08 exercise price. Common shares outstanding were 138,815,329 at March 31 and 139,015,329 as of May 10, 2017.
- Operating lease commitments totaled $666,956 through 2021. The company reported ordinary-course litigation and said its resolution was not expected to materially adversely affect financial position or results.
- Management stated disclosure controls and procedures were effective as of March 31, 2017; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether SANUWAVE secured sufficient financing after the filing to meet near-term operating needs, and on what terms.
- The FDA’s decision and timing on the dermaPACE de novo petition, and the implications of the nonsignificant 12-week primary endpoint versus later secondary results.
- Near-term cash requirements and the ability to pay current liabilities, related-party debt and accrued interest.
- Potential dilution from outstanding warrants, future financing, and any limitations on the use of tax-loss carryforwards.
- Whether reported cash-use improvements are sustainable, given the contribution of increased payables and continuing operating losses.