SANUWAVE Health, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited. The company develops and commercializes noninvasive regenerative medicine devices using its PACE technology. It had no commercial products in the United States; reported sales came from CE-marked devices and accessories in Europe, Canada and Asia.
Financial results and liquidity
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Revenue | $210,357 | $448,897 |
| Gross profit (margin) | $128,196 (61%) | $294,964 (66%) |
| Operating loss | $1,337,995 | $3,094,463 |
| Net loss | $1,424,626 ($0.07 per share) | $3,259,941 ($0.16 per share) |
| Cash used in operations | Not provided for the quarter | $2,504,284 |
- At June 30, cash and cash equivalents were $1.40 million; current assets were $1.98 million and current liabilities were $2.32 million. Total liabilities were $7.70 million, including $5.37 million of related-party notes payable. Those notes bear 6% interest; principal and remaining accrued interest are due August 1, 2015. The notes’ estimated fair value was $4.28 million.
- Stockholders’ deficit was $4.30 million and accumulated deficit was $67.77 million. Common shares issued and outstanding were 20,907,536.
- For the six months, cash decreased $2.51 million, from $3.91 million to $1.40 million. Investing used $945 and financing used $2,245; there were no financing proceeds in the period.
Changes versus prior comparable periods
- Q2 revenue rose 28% from $163,749; first-half revenue rose 8% from $415,502. Management attributed the increases mainly to demonstration-device and refurbished-applicator sales to European distributors.
- Gross margin fell to 61% from 71% in Q2, reflecting more lower-margin demonstration-device sales. First-half gross margin was 66% in both years.
- First-half research and development expense fell 38% to $951,441; general and administrative expense fell 21% to $2.27 million. Management cited lower clinical-analysis and clinical costs, reduced headcount (18 employees versus 28 a year earlier), and lower investor-relations and patent-defense costs. Stock-based compensation increased to $502,046 from $300,210.
- First-half net loss narrowed 43% from $5.76 million. Comparisons benefit from 2011 items: a $1.32 million debt-extinguishment loss and $225,000 of transitional-services income, neither present in first-half 2012. First-half interest expense also decreased to $159,302 from $316,074, partly because certain notes had been exchanged for stock and warrants in 2011.
- First-half operating cash use declined from $5.00 million to $2.50 million. The company attributed this mainly to lower headcount, operating and clinical expenses, as well as changes in liabilities.
Outlook, risks and unusual items
- Going concern and funding: Management stated that continued operations depend on raising additional capital and that failure to secure funding could force a bankruptcy filing. The filing describes possible equity, convertible or debt financing, a strategic investment, or an asset sale; financing could be unavailable or materially dilute shareholders. Management was working with Canaccord Genuity and other parties, targeting a capital raise in Q3 2012 to begin the new clinical work in Q4 2012. No assurance of funding was given.
- dermaPACE regulatory path: The pivotal U.S. diabetic-foot-ulcer trial did not meet its primary endpoint of complete wound closure at 12 weeks at the 95% confidence level (21% treated versus 15% sham; p=0.363). Later analyses showed statistically significant results at some 20- and 24-week measures. The FDA issued a major deficiency letter in December 2011 and recommended additional clinical work. The company reported conditional FDA approval of an IDE supplement for another trial; enrollment depended on IRB approvals and funding. Management estimated completion and submission could occur as early as 20 months after trial initiation, contingent on successful results.
- Management expected operating losses to continue for several years and identified clinical-trial outcomes, regulatory approval, commercialization, reimbursement, competition and access to capital as uncertainties. Federal NOL carryforwards were $48.92 million, but a full valuation allowance was recorded; future use may be limited, including by ownership changes.
- Litigation: A former limited partner seeks more than $3 million in a breach-of-contract case. The company received summary judgment in December 2011; the plaintiff appealed in January 2012. Management said resolution of the company’s legal matters was not expected to materially adversely affect financial position or results, but the appeal remained pending as described in the filing.
- The company discontinued its 401(k) matching contribution effective February 1, 2012. Management reported disclosure controls were effective as of June 30, 2012 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the planned capital raise was completed, on what terms, and whether it funded operations and the additional dermaPACE trial.
- Trial initiation, enrollment, interim monitoring and final results, and the FDA’s subsequent PMA decision; the original 12-week primary endpoint was not met.
- Cash burn and liquidity after June 30, including the timing and availability of additional financing.
- Status and potential outcome of the appeal in the lawsuit seeking more than $3 million.
- Terms, related-party nature and repayment arrangements of the $5.37 million notes due in 2015, along with potential dilution from future financing and outstanding equity awards.