SANUWAVE Health, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The financial statements are unaudited. The report was signed January 14, 2022, substantially after the reporting period.
Business context
SANUWAVE develops and commercializes shock-wave and ultrasound-based wound-care products, including dermaPACE and UltraMIST. UltraMIST was acquired in August 2020; its device and accessory sales drove most of the reported revenue increase.
Key financial results
Amounts below are in millions of dollars except per-share data. The filing presents financial statements in thousands.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.909 | $0.083 | $5.025 | $0.232 |
| Gross profit | $1.861 | $0.004 | $2.922 | $0.023 |
| Gross margin | 64% | 5% | 58% | 10% |
| Operating expenses | $5.907 | $3.277 | $11.362 | $6.091 |
| Operating loss | $(4.046) | $(3.273) | $(8.440) | $(6.068) |
| Net loss | $(8.615) | $(3.632) | $(13.552) | $(6.634) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.03) | $(0.02) |
For the six months, operating cash used was $5.249 million, investing cash used was $0.277 million, and financing cash provided was $3.365 million. Cash declined by $2.173 million to $0.264 million at June 30. Cash paid for interest was $1.434 million.
At June 30, current assets were $4.987 million and current liabilities were $43.534 million. Total liabilities were $44.993 million, against total assets of $19.741 million; stockholders’ deficit was $25.252 million. Notes payable, including amounts in default, had a reported carrying value of $21.333 million. A $7.434 million warrant liability was also recorded.
Changes and notable items
- Revenue growth primarily reflected UltraMIST sales following the 2020 acquisition. Accessories and parts revenue was $2.284 million for Q2 and $4.109 million for the six-month period.
- Management attributed the higher gross margin to the product mix, with UltraMIST products and accessories carrying higher margins than dermaPACE products and accessories.
- Operating costs rose materially: six-month selling and marketing expense increased to $4.300 million from $1.041 million, and general and administrative expense increased to $6.436 million from $4.499 million. The latter included registration-statement penalty accruals and acquisition-related intangible amortization.
- Six-month net loss included a $2.484 million loss on issuance of debt. Interest expense was $2.559 million, compared with $0.188 million in the prior-year period.
- Common shares outstanding rose from 470.7 million at year-end 2020 to 481.6 million at June 30, 2021. The reported weighted-average share count also includes nominal-price warrants.
Liquidity, outlook, risks and contingencies
- Going concern: The company said recurring losses and dependence on additional financing raised substantial doubt about its ability to continue as a going concern for at least 12 months. It said continued operations depend on raising capital; financing could be unavailable or significantly dilute shareholders, and failure could require curtailing or discontinuing operations.
- Defaults: The $15 million senior secured note was in default for failure to meet minimum-liquidity provisions. Convertible notes, including the $4 million seller note and related-party notes, were also reported in default. The company recorded substantial obligations as current liabilities.
- Liquidity outlook: Management estimated operating cash use of approximately $250,000–$500,000 per month in the second half of 2021 and planned to pursue financing in 2022 through strategic arrangements, warrants, equity, convertible securities, or debt. This was not a revenue or earnings forecast, and management gave no assurance financing would be successful.
- Factoring: In June 2021, the company entered a recourse factoring arrangement that paid 86.25% of eligible receivables’ value, at stated annualized rates of 15% initially and 14.4% thereafter. About $1.3 million of receivables had been transferred by June 30.
- Supplier and license disputes: Celularity alleged noncompliance with the UltraMIST-related license agreement; the company disputed the allegation. After period-end, Minnetronix cancelled an UltraMIST purchase order following production delays and claimed an additional $320,000 in fees. The company disputed aspects of the notice; resolution was uncertain.
- Other risks: Management said COVID-19 could continue to harm demand, supply channels, marketing, and clinical activity. The company also relied on single suppliers for most component materials and reported ineffective disclosure controls and internal controls, citing material weaknesses in technical accounting, service-agreement accounting, and control design and implementation.
- Subsequent events: The SBA forgave approximately $454,000 of principal and $6,000 of interest on one loan in August 2021. Later financing and director advances were also disclosed, including future-receipts financings with required weekly remittances and warrants; these occurred after June 30 and do not change the quarter-end cash balance.
Investor verification priorities
- Confirm the current status, terms, and consequences of each debt default, including accrued interest, registration penalties, and any creditor enforcement or conversion rights.
- Check the company’s subsequent cash position, financing proceeds, repayment obligations, and ability to fund operations; quarter-end cash was only $264,000.
- Verify the status and financial impact of the Celularity and Minnetronix disputes, including UltraMIST supply continuity and production resumption.
- Assess potential dilution from outstanding warrants, convertible notes, and subsequent financings; reconcile the filing’s issued-share count with its weighted-average share count.
- Review the effectiveness of the company’s control-remediation efforts and confirm its SEC reporting compliance. The filing’s cover page marked “No” for having filed all required reports during the preceding 12 months.