SANUWAVE Health, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; filed November 14, 2012. Financial statements are unaudited.
Business context
SANUWAVE develops noninvasive PACE regenerative-medicine devices. It had no commercial products in the United States; reported revenue came from CE-marked devices and accessories sold in Europe, Canada, and Asia. Its lead U.S. wound-care candidate, dermaPACE, remained subject to FDA review and further clinical work.
Financial performance and liquidity
| Metric | Three months 2012 | Three months 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $178,256 | $161,678 | $627,153 | $577,180 |
| Gross profit | $134,291 | $113,203 | $429,255 | $388,174 |
| Gross margin | 75% | 70% | 68% | 67% |
| Operating loss | $(1,365,423) | $(2,081,738) | $(4,459,886) | $(6,409,618) |
| Net loss | $(1,447,271) | $(2,071,539) | $(4,707,212) | $(7,827,072) |
| Basic and diluted loss per share | $(0.07) | $(0.10) | $(0.23) | $(0.41) |
For the nine months, operating cash use was $3.55 million, versus $6.99 million in 2011. Investing cash use was $2,011; financing cash use was $3,399, compared with $12.37 million of financing inflows in 2011. Cash fell $3.55 million to $361,263 from $3.91 million at year-end 2011.
At September 30, current assets were $937,580 and current liabilities were $2.42 million (current ratio approximately 0.39). Total assets were $2.28 million, total liabilities $7.80 million, and stockholders’ deficit $5.52 million. Related-party notes payable were $5.37 million, unsecured and bearing 6% interest; principal and remaining accrued interest were due August 1, 2015. Accrued interest currently payable was $81,864.
Changes versus prior periods
- Third-quarter revenue rose 10%; nine-month revenue rose 9%, largely from demonstration devices and higher-margin refurbishment applicators.
- Gross margin improved modestly. R&D expense declined 29% for the quarter and 36% for the nine months, primarily reflecting lower clinical-related costs.
- G&A expense fell 35% for the quarter and 26% for the nine months. Excluding stock compensation, nine-month G&A fell 34%, mainly due to lower headcount, investor-relations costs, and patent-defense legal expenses.
- Net loss narrowed 30% for the quarter and 40% for the nine months. The prior-year nine-month comparison included a $1.32 million debt-extinguishment loss and $337,500 of transitional-services income; neither recurred in 2012.
Outlook, risks, and unusual items
- Going concern and financing: Management states that continued operations depend on raising additional capital; the filing says failure to secure funding could force a U.S. Bankruptcy Code filing. The company was seeking up to $1.25 million through a private placement of convertible notes and expected a larger funding to close by the first quarter of 2013. Potential financing, a strategic investment, or asset sale could dilute shareholders or otherwise be on unfavorable terms.
- Clinical and regulatory: The pivotal dermaPACE trial did not meet its primary 12-week endpoint at the 95% confidence level (p=0.363). Some later analyses showed statistical significance at 20 weeks, but the FDA had issued a major deficiency letter. FDA conditionally approved an IDE supplement for another trial; enrollment was expected to begin in Q1 2013, subject to IRB approvals and funding. The company estimated completion and submission could take as little as 20 months from trial initiation, contingent on successful results.
- Operating outlook: Management anticipated operating losses for several years while funding R&D, clinical trials, and FDA approval work. No specific revenue or earnings guidance was provided.
- Leadership change: After quarter-end, CEO and director Christopher M. Cashman resigned under a November 6, 2012 agreement. Terms included six months’ base salary, up to four $100,000 clinical-trial milestone payments, option grants, and vesting of his outstanding options; the company said it would record the effects in Q4.
- Contingency: A plaintiff seeking more than $3 million in a contract lawsuit appealed a December 2011 summary judgment in SANUWAVE’s favor. Management said resolution of ordinary-course legal matters was not expected to materially adversely affect the company.
- The company reported disclosure controls were effective as of September 30, 2012 and no material changes in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether the proposed financing and larger funding closed, on what terms, and whether they provided sufficient operating runway.
- Available cash, subsequent cash burn, and the company’s ability to meet obligations given the going-concern warning and working-capital shortfall.
- Funding, enrollment, interim results, and eventual outcomes of the additional dermaPACE trial, alongside the FDA’s remaining PMA requirements.
- The full cost and accounting impact of the CEO severance, option vesting, and milestone arrangements.
- Status and potential exposure from the appealed lawsuit and the $5.37 million related-party notes due in 2015.