SANUWAVE Health, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. Unless stated otherwise, amounts are U.S. dollars. SANUWAVE develops acoustic shock-wave medical devices, including dermaPACE, FDA-cleared for diabetic foot ulcers, and markets products in the U.S. and internationally.
Financial results and liquidity
| Metric | Q1 2019 | Comparable period |
|---|---|---|
| Revenue | $177,963 | $344,272 |
| Gross profit / margin | $84,110 / 47% | $178,806 / 52% |
| Operating loss | $1,860,432 | $1,121,260 |
| Net loss | $2,197,317 ($0.01 per share) | $5,856,655 ($0.04 per share) |
| Cash used in operations | $1,285,551 | $1,848,565 |
The comparable period is Q1 2018, as identified in MD&A and the cash-flow statement; the income-statement heading in the supplied filing text appears to contain an incorrect year reference. Revenue fell 48%, mainly from lower orthoPACE sales in Asia/Pacific and Europe and lower applicator sales. Gross margin declined, partly due to costs of new and refurbished dermaPACE applicators. Operating expenses rose to $1.945 million from $1.300 million, including higher selling and marketing and general and administrative costs. Net loss narrowed chiefly because other expense was substantially lower, including a $32,359 noncash warrant valuation gain versus a $2.974 million noncash loss in Q1 2018; operating loss increased.
Cash and cash equivalents were $98,946 at March 31, 2019, down from $364,549 at year-end 2018. Current assets were $766,430 against current liabilities of $16.654 million. Total liabilities were $17.013 million, and stockholders’ deficit was approximately $15.7 million. Major obligations included $5.373 million of related-party notes principal, $1.391 million of accrued related-party interest, $2.612 million of short-term notes, $2.756 million of convertible notes, and an $896,000 related-party line of credit. The company reported defaults on short-term notes and related-party notes; the related-party notes accrue default interest at 10% and are secured by company assets.
Changes, outlook, and risks
- Management said the company requires additional capital during 2019 and disclosed substantial doubt about its ability to continue as a going concern for at least twelve months from filing. Funding plans include strategic partners, licensing, warrant exercises, equity, convertible securities, or debt; these may cause significant dilution. Failure to secure financing could force major operating curtailments or bankruptcy.
- Management estimated operating cash use of $225,000–$300,000 per month in the first half of 2019 and $275,000–$350,000 per month in the second half. These are cash-use estimates, not revenue or earnings guidance.
- A $400,000 fee expected from Southeast Asia distributor FKS in April had not been received as of filing; the company was negotiating payments and operations under the agreement.
- Commercialization spending increased, including hiring and training sales staff. A dosage study in Poland and a U.S. post-market pilot study began in April 2019. The filing describes prior clinical findings, including no statistically significant 12-week primary endpoint; wound-closure differences were statistically significant at 20 and 24 weeks in reported analyses.
- After quarter-end, the company reported multiple warrant exercises and share issuances, including 13.7 million shares upon exercises of Series A, Class L, and Class O warrants. It also reported a cybersecurity-related email-spoofing incident in which $200,000 associated with an exercise was wired to an incorrect account; shares were issued instead of receiving the funds.
- Disclosure controls were not effective. Management identified three material weaknesses involving complex accounting, equity components of service agreements, and IT/cybersecurity. Remediation efforts include outside accounting support and planned cybersecurity training and control changes.
- The company disclosed potential Securities Act registration deficiencies involving prior offerings. Eligible investors could seek rescission and refunds if a violation is established, potentially materially harming liquidity. Ordinary-course litigation was described as not expected to have a material adverse effect, though ultimate liability could not always be estimated.
- Adoption of lease accounting ASC 842 added a $437,363 right-of-use asset and $480,251 lease liability at quarter-end; the company said adoption did not materially affect operations or cash flows.
Investor verification priorities
- Confirm near-term financing, cash runway, and status of defaulted debt and related-party creditor arrangements.
- Verify collection or resolution of the overdue $400,000 FKS fee and the terms of the distribution relationship.
- Review actual cash burn against management’s monthly estimates and distinguish operating performance from noncash warrant valuation effects.
- Assess dilution from outstanding warrants, convertible notes, and post-quarter share issuances; the filing reported 177,063,147 shares outstanding as of May 16, 2019.
- Check the status and financial exposure of the securities-registration issue and the cybersecurity incident, including any recovery of misdirected funds.
- Reconcile filing inconsistencies: the income-statement period heading appears to say 2018 and 2017 despite other sections identifying Q1 2019 and Q1 2018; the cash-flow net-loss figure is also garbled in the supplied text. Verify the filed statements for the precise figures.