SANUWAVE Health, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. SANUWAVE develops acoustic shock-wave medical technology. It had no U.S. commercial product sales; reported revenue came primarily from orthoPACE devices and accessories sold internationally.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $161,585 | $255,652 | $422,199 | $728,382 |
| Gross margin | 62% | 61% | 66% | 66% |
| Operating loss | $647,778 | $833,605 | $2,577,842 | $2,541,245 |
| Net loss | $851,325 | $1,139,810 | $2,760,794 | $3,986,509 |
| Net loss per share | $0.01 | $0.01 | $0.02 | $0.04 |
For the nine months, operating cash use was $944,831, versus $2,708,973 in 2016. Financing provided $844,683, chiefly $751,616 in advances from related parties and accredited investors and $93,067 from warrant exercises. Cash fell $93,345 to $40,226. At September 30, current assets were $491,993 against current liabilities of $9,588,573; total liabilities were $9,588,573 and stockholders’ deficit was $9,023,263.
Material changes and key balance-sheet items
- Nine-month revenue fell 42%, attributed to lower international orthoPACE device sales and fewer applicator sales and refurbishments. Q3 revenue fell 37% year over year.
- Q3 net loss narrowed 25%, mainly from lower general and administrative expense and no amortization expense. Nine-month net loss narrowed 31%, largely due to a favorable warrant valuation adjustment and lower operating expenses. The nine-month operating loss increased slightly.
- Accounts payable rose to $1,435,431 from $712,964 at year-end 2016. Related-party notes payable, net, were $5,183,310; accrued related-party interest was $535,125. The notes were in default for missed interest payments and accruing interest at 10% following the defaults. Their maturity was extended to December 31, 2018 under an August 2017 amendment.
- The company had received $751,616 in advances toward a proposed 10% convertible-note offering. After quarter-end, on November 3, it issued $1,124,440 of such notes and 10,222,180 warrants, including a $330,000 purchase by a director-affiliated company. The notes are convertible at $0.11 per share and include warrants exercisable at that price.
- Common shares outstanding were 139,099,843 at September 30, versus 137,219,968 at December 31, 2016; 139,249,926 were reported outstanding November 10. Outstanding warrants totaled 77,794,837 at September 30.
Outlook, risks and unusual items
- Going concern: Management said additional capital was required in Q4 2017 to fund operations. It cited accumulated losses, minimal cash and defaults on related-party notes as substantial uncertainty about the company’s ability to continue. Financing, strategic partnerships or licensing were possible sources, but were not assured and could significantly dilute shareholders; failure to obtain funding could lead to bankruptcy. Management stated its financing plans should provide funding, but gave no assurance.
- Regulatory and clinical: Management anticipated a possible FDA decision on dermaPACE in late 2017 or Q1 2018. The 12-week wound-closure result was not statistically significant; secondary results were significant at 20 and 24 weeks. Approval and commercialization remain uncertain.
- Partnership: A binding term sheet for a Brazil dermaPACE joint venture was signed September 27. MundiMed was to pay an initial fee and monthly fees for 18 months; the initial fee was received October 6. Profits are allocated 45% each to SANUWAVE and MundiMed, and 5% each to two transaction advisers.
- Receivables: The South Korean distributor represented 78% of outstanding accounts receivable. The company reserved 48% of that distributor’s balance as doubtful and was pursuing payment by December 31, 2017.
- Controls: Disclosure controls were ineffective due to a material weakness: insufficient expertise and resources to account for complex financial instruments and derivatives. Management was developing remediation steps, including possible external assistance.
- Other risks include continued operating losses, dependence on clinical and regulatory outcomes, commercialization and reimbursement challenges, competition, potential ownership-change limits on tax-loss carryforwards, and possible penalties for missing registration-statement deadlines. Management said ordinary-course litigation was not expected to materially adversely affect the company.
Most important facts for investors to verify
- Whether the company obtained sufficient post-quarter financing to meet near-term obligations and avoid bankruptcy, and the resulting dilution and debt terms.
- Status of the related-party note defaults, accrued interest, and any required prepayments or creditor remedies.
- FDA’s decision and timing for dermaPACE, including how regulators assess the nonsignificant 12-week endpoint and significant later results.
- Whether the Brazil joint venture’s promised fees and commercial activity materialize, and whether the South Korean distributor pays its overdue receivable.
- Progress in remediating the material weakness and accuracy of accounting for warrants and other complex financing instruments.