SANUWAVE Health, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. The filing was signed August 15, 2016.
Business context
SANUWAVE develops acoustic pressure shock-wave technology for regenerative medicine. Its U.S. lead candidate, dermaPACE, is intended to treat diabetic foot ulcers; the company reported no U.S. commercial product sales. Revenue came primarily from sales of orthoPACE devices and related products in Europe, Canada, Asia and Asia/Pacific.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $203,406 | $239,983 | $472,730 | $450,435 |
| Gross profit | $125,418 | $164,204 | $321,561 | $315,838 |
| Operating loss | $(1,018,171) | $(1,006,769) | $(1,708,640) | $(2,133,664) |
| Net loss | $(1,122,123) | $(1,521,533) | $(2,846,699) | $(2,680,648) |
| Net loss per share, basic and diluted | $(0.01) | $(0.02) | $(0.03) | $(0.04) |
- Q2 revenue declined 15%, mainly reflecting fewer new devices sold. Six-month revenue increased 5%, with higher device, applicator-refurbishment and wound-kit sales.
- Gross margin was 62% in Q2 versus 68% a year earlier; for the six-month period it was approximately 68% versus 70%. The filing attributes pressure to demonstration-device sales and product mix.
- Six-month research and development expense fell 28% to $786,122; general and administrative expense fell 9% to $1,089,028. Q2 R&D expense increased 4% year over year.
- Q2 net loss improved chiefly because warrant revaluation produced a $28,250 gain, compared with a $429,311 loss in Q2 2015. For the six months, warrant revaluation was a $769,447 loss, contributing to higher net loss year over year.
Cash, liquidity and debt
- Cash and cash equivalents were $122,948 at June 30, 2016, down from $152,930 at year-end 2015. Six-month operating cash use was $1,731,124, compared with $1,917,858 in 2015.
- Financing provided $1,702,855 in the first half: $1,596,855 net from the 2016 equity offering and $106,000 from convertible promissory notes.
- Current assets were $548,831 and current liabilities were $1,507,096, a working-capital deficit of approximately $958,000. Total liabilities were $6,841,330, including $5,334,234 of related-party notes payable and $115,933 of promissory notes payable.
- The related-party notes bear 8% interest and are secured by a first lien on company assets. Their maturity was extended to January 31, 2018. The company also owes accrued related-party interest of $108,224.
- Management estimated operating cash use of $175,000–$225,000 per month for the next two quarters of 2016.
Developments, outlook and risks
- The company submitted a de novo petition to the FDA on July 23, 2016 for dermaPACE classification as a Class II device. Management said approval might occur in late 2016 or early 2017; this is not assured. The first pivotal study missed its 12-week primary endpoint, though wound closure differences were statistically significant at later time points; the supplemental study did not meet its monitoring success criterion at 12 weeks and enrollment was stopped.
- Management stated that additional capital was required during 2016 to continue operations. The filing warns that financing may significantly dilute shareholders and that failure to raise capital could force a bankruptcy filing. The financial statements are prepared on a going-concern basis without adjustments for a possible inability to continue operations.
- After quarter-end, the company entered a convertible debenture financing with up to $500,000 principal; it received $175,000 from the first tranche after stated discounts and fees. Conversion pricing is based on a discount to recent market prices, creating potential dilution. The company also reported repaying its $58,300 convertible note in August with accrued interest and a 140% prepayment amount.
- An August private placement was opened at $0.06 per unit, each unit comprising one common share and a warrant; $130,000 had been collected as of the filing. The filing also reports 51,888,481 warrants outstanding at June 30 and 104,178,421 common shares outstanding then; 105,013,421 shares were outstanding August 10.
- Management expects operating losses to continue for the next few years, with possible improvement dependent on FDA approval and successful commercialization. No quantified full-year financial guidance was provided.
- Management expected ordinary-course litigation not to have a material adverse effect. Disclosure controls were deemed effective; the filing also describes a previously reported material weakness involving accounting for complex financial instruments and a control added to use outside consultants when needed.
Investor verification priorities
- Confirm the status, timing and regulatory pathway for the dermaPACE FDA de novo petition, including whether the agency requests additional analysis or data.
- Verify cash runway, actual monthly cash burn and the availability and terms of additional financing, including the debenture and private placement.
- Assess dilution from outstanding warrants, convertible securities and any further equity issuance, and confirm the share count after subsequent transactions.
- Review the related-party debt maturity, security interest, interest obligations and any required prepayments or defaults.
- Track revenue growth, product mix and gross margins in the company’s non-U.S. markets, which were its reported commercial revenue base.