SANUWAVE Health, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited. SANUWAVE develops acoustic shockwave technology; it had no U.S. commercial product sales, and revenue came primarily from international sales of CE-marked devices and accessories.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $145,098 | $201,234; down 28% |
| Gross profit / margin | $126,761 / 87% | $145,423 / 72% |
| Operating expenses | $2.15 million | $1.28 million |
| Operating loss | $2.02 million | $1.13 million |
| Net loss / loss per share | $2.56 million / $0.06 | $5.37 million / $0.25 |
| Cash used in operations | $2.12 million | $1.04 million |
| Cash and cash equivalents, March 31 | $7.23 million | $182,315 at December 31, 2013 |
| Total liabilities | $6.85 million | $7.72 million at December 31, 2013 |
The smaller year-over-year net loss primarily reflects a $3.74 million non-cash loss on an embedded conversion feature recorded in Q1 2013; it does not indicate improved operating performance. Q1 2014 expenses included higher clinical-trial spending and $597,150 of non-cash expense for shares issued for consulting services. Current assets were $7.70 million and current liabilities $1.48 million at quarter end. Accumulated deficit was $84.77 million.
Material changes, financing and capital structure
- Revenue declined due to lower European device sales. Gross margin rose because applicators, which have higher margins, represented a larger share of sales.
- Research and development expense increased 122% to $764,845; $432,012 related to the dermaPACE clinical study. General and administrative expense rose 53% to $1.30 million.
- The March private placement raised $9.28 million gross and $8.56 million net, issuing 6.21 million common shares, 6,175 Series A preferred shares convertible into 12.35 million common shares, and warrants. Q1 financing cash inflows totaled $9.17 million.
- The $815,000 of 18% convertible notes automatically converted in March into 1.64 million common shares and additional warrants. The company also repaid three short-term convertible notes in March, including interest and prepayment charges.
- Outstanding related-party notes payable were $5.37 million, bearing 6% interest and due August 1, 2015. The balance was unchanged from year-end; $80,072 of related-party interest was payable at quarter end.
- At March 31, 52.8 million warrants were outstanding, including 25.95 million Series A warrants at $0.50 and 15.57 million Series B warrants at $1.50. The warrant and preferred conversion overhang creates substantial potential dilution. Common shares outstanding were 46.85 million at March 31 and 46.97 million as of May 11.
Outlook, risks and contingencies
- Management estimated monthly operating cash use of $550,000–$650,000 through July 2014 and $450,000–$550,000 thereafter. It believed available cash would fund operations into the third quarter of 2015, but expected to need additional capital in the second half of 2015 to commercialize dermaPACE, assuming positive clinical results and FDA approval.
- As of April 30, the supplemental Phase III diabetic-foot-ulcer trial had enrolled its minimum first-interim-analysis cohort of 90 patients. Management expected enrollment to finish in Q2 2014; an independent data monitoring committee would review results after the cohort completed 12-week efficacy visits. FDA approval was only a possibility for 2015 and depended on satisfactory results and regulatory review.
- The prior pivotal trial did not achieve statistical significance on its primary 12-week wound-closure endpoint (p=0.363), and the FDA issued a major deficiency letter. Although some later secondary analyses favored dermaPACE, the supplemental trial and approval remain material uncertainties.
- The company has no significant recurring revenue and expects operating losses to continue. Failure to obtain approval could require strategic alternatives and further financing; equity financing could materially dilute shareholders, while debt or collaboration terms could constrain the company or its intellectual property rights.
- A related-party subscription agreement had $900,000 of its purchase price outstanding at March 31, due by May 27, 2014, in exchange for 3.6 million additional shares. The filing also discloses ordinary-course litigation; management did not expect its resolution to materially harm financial position or results.
- Management reported disclosure controls and procedures were effective as of March 31, 2014. No material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Subsequent dermaPACE interim-analysis findings, final enrollment, trial completion, and FDA submission or approval timing.
- Actual cash burn and whether the reported cash runway and anticipated 2015 financing needs remain achievable.
- Receipt of the $900,000 outstanding subscription payment and payment of the $5.37 million related-party notes when due.
- Current share count, warrant exercise or expiration status, preferred conversions, and the resulting dilution; also verify the registration status of placement securities.
- International sales trends and whether higher applicator mix can offset declining device revenue and rising clinical and administrative costs.