SANUWAVE Health, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated statements; filed November 14, 2019. SANUWAVE develops acoustic shock-wave products, led by dermaPACE, FDA-cleared for diabetic foot ulcers and marketed in the U.S. and internationally.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $197,640 | $595,789 | $692,579 | $1,393,271 |
| Gross margin | $74,717 (38%) | $412,195 (69%) | $289,922 (42%) | $877,568 (63%) |
| Operating loss | $(2,385,655) | $(2,670,356) | $(6,265,603) | $(5,913,363) |
| Net loss | $(2,748,018) | $(825,142) | $(7,679,766) | $(9,570,056) |
| Loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.04) | $(0.06) |
- Q3 revenue fell 67%; management attributed the decline mainly to returns after termination of the FKS distribution arrangement, lower refurbished-applicator sales, and lower upfront international distribution fees. Nine-month revenue fell 50%, reflecting weaker orthoPACE and dermaPACE sales and lower distribution fees.
- Nine-month operating loss increased despite lower overall operating expenses: selling and marketing rose 236% to $901,031, while R&D decreased 35% to $867,825 and G&A decreased 8% to $4,746,519. Q3 net loss rose substantially year over year, in part because the prior-year quarter included a $2.24 million noncash warrant-valuation gain.
- Nine-month net loss improved 20% year over year, primarily because debt-related interest and discount expense was lower; operating loss was higher.
- Net cash used in operations was $4.68 million for the first nine months, versus $2.27 million in 2018. Financing provided $4.74 million, and cash increased $38,107 to $402,656.
Financial position and capital
- At September 30, current assets were $958,018 and current liabilities were $14.54 million; total liabilities were $14.96 million versus assets of $1.64 million. Stockholders’ deficit was $13.32 million. Cash was $402,656 and accumulated deficit was $123.00 million.
- Debt and related obligations included $5.37 million of related-party notes, $1.68 million of accrued related-party interest, $1.06 million of short-term notes, and $1.01 million of convertible notes pending issuance of conversion shares. Several obligations were in default; related-party notes carry a 10% default rate and are secured by a first security interest in Company assets.
- Common shares outstanding increased from 155.7 million at December 31, 2018 to 245.8 million at September 30, 2019; 268.9 million were reported outstanding November 11. Conversions, warrant exercises, and other issuances contributed to the increase. Potentially dilutive options, warrants, shares issuable and convertible notes were excluded from diluted loss per share as anti-dilutive.
Outlook, risks and unusual items
- Going concern: Management and the auditor’s financial-statement disclosures identify substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from filing. Management says additional capital is required and may pursue strategic partners, licensing, warrant exercises, equity or debt financing. Financing may not be available on acceptable terms and could substantially dilute shareholders; failure could force curtailed operations or bankruptcy.
- Management estimated operating cash use of approximately $275,000–$350,000 per month for the remainder of 2019. No revenue or profitability guidance was provided. Commercialization, reimbursement, market acceptance, competing technologies and funding are significant uncertainties.
- Short-term notes, convertible notes and related-party notes were in default. Equity issuance or licensing proceeds may trigger mandatory prepayments equal to 20% of proceeds on the related-party notes.
- The FKS/HWA joint venture was terminated in June 2019. SANUWAVE received a $50,000 early-termination fee; returned equipment led to reversal of $63,275 of equipment-related revenue. The anticipated $400,000 FKS fee had not been received.
- The filing describes potential Securities Act registration deficiencies that could expose the Company to rescission claims and repayment of securities proceeds. No eligible securityholder claim had been filed, but future claims could materially affect finances.
- Disclosure controls and internal control over financial reporting were ineffective. Management identified three material weaknesses: accounting expertise for complex instruments and distribution agreements, accounting for equity components of vendor service agreements, and IT/cybersecurity weaknesses following email-spoofing breaches. Remediation efforts were underway, including outside accounting support and planned cybersecurity training.
- Management reported ordinary-course litigation claims but believed adverse outcomes would not materially affect the business. A Poland dosage study and two U.S. post-market pilot studies were underway, with completion expected in Q1 2020.
Important facts for investors to verify
- Current cash, actual monthly cash burn, financing availability and the status of management’s going-concern plans.
- Amounts, maturity terms, default status and creditor remedies for notes and related-party obligations, including the secured HealthTronics debt and any required prepayments.
- Revenue trends after FKS termination, distributor concentration, product returns and the progress of dermaPACE commercialization and reimbursement.
- Shares issued or pending issuance after period-end, warrant and option overhang, and the resulting dilution to existing holders.
- Exposure and potential cost from the registration-statement issues, and progress in remediating the identified control and cybersecurity weaknesses.