You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited condensed consolidated
financial statements and the related notes appearing elsewhere in this report,
and together with our audited consolidated financial statements, related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" as of and for the year ended December 31, 2020 included in our
Annual Report on Form 10-K, filed with the SEC on October 21, 2021 (the "2020
Annual Report").
Overview
We are a shock wave technology company using a patented system of noninvasive,
high-energy, acoustic shock waves for regenerative medicine and other
applications. Our initial focus is regenerative medicine utilizing noninvasive,
acoustic shock waves to produce a biological response resulting in the body
healing itself through the repair and regeneration of tissue, musculoskeletal,
and vascular structures.
Our lead regenerative product in the United States is the dermaPACE® device,
used for treating diabetic foot ulcers ("DFU"), which was subject to two
double-blinded, randomized Phase III clinical studies. On December 28, 2017, the
U.S. Food and Drug Administration ("FDA") granted the Company's request to
classify the dermaPACE® System as a Class II device via the de novo process. As
a result of this decision, the Company was able to immediately market the
product for the treatment of DFU as described in the de novo request, subject to
the general control provisions of the Food, Drug and Cosmetic Act and the
special controls identified in this order.
On August 6, 2020, we entered into an asset purchase agreement (the "Asset
Purchase Agreement" or "Acquisition") with Celularity Inc. ("Celularity")
pursuant to which we acquired Celularity's UltraMIST assets ("UltraMIST" or the
"Assets"). The UltraMIST® System provides through a fluid mist a low-frequency,
non-contact, and pain free ultrasound energy deep inside the wound bed that
promotes healing from within. The ultrasound acoustic waves promote healing by
reducing inflammation and bacteria in the wound bed, while also increasing the
growth of new blood vessels to the area. The UltraMIST® System treatment must be
administered by a healthcare professional. This proprietary technology has been
cleared by the FDA for the promotion of wound healing through wound cleansing
and maintenance debridement combined with ultrasound energy deposited inside the
wound that stimulated tissue regeneration.
In connection with the Asset Purchase Agreement, on August 6, 2020, we entered
into a license and marketing agreement with Celularity pursuant to which
Celularity granted to the Company a license to the Celularity wound care
biologic products, Biovance® and Interfyl® (the "License Agreement"). The
License Agreement provides the Company with an exclusive license to use, market,
distribute and sell Biovance® in the "Field" and "Territory" (each as defined in
the License Agreement), and a non-exclusive license to use, market, distribute
and sell Interfyl® in the Field and in the Territory. The License Agreement has
an initial five-year term, after which it automatically renews for additional
one-year periods, unless either party gives written notice at least 180 days
prior to the expiration of the current term. In May 2021, the Company received
notification alleging that it is not in compliance the License Agreement with
Celularity. See further discussion in Note 15 - Contingencies in the
accompanying Condensed Consolidated Financial Statements.
23
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our Condensed Consolidated Financial Statements, which
have been prepared in accordance with U.S. GAAP. The preparation of our
Condensed Consolidated Financial Statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those
related to the recording of the allowances for doubtful accounts, net realizable
value of inventory, useful lives of long-lived assets, fair value of goodwill
and other intangible assets, the determination of the valuation allowance for
deferred taxes, the estimated fair value of the warrants, and the estimated fair
value of stock-based compensation. We base our estimates on authoritative
literature and pronouncements, historical experience and on various other
assumptions that we believe are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Our actual
results may differ from these estimates under different assumptions or
conditions. The results of our operations for any historical period are not
necessarily indicative of the results of our operations for any future period.
Our significant accounting policies are more fully described in Note 3 to our
Consolidated Financial Statements filed with our 2020 Annual Report. For a
description of recent accounting policies and the impact on our financial
statements, refer to Note 3 in the accompanying Condensed Consolidated Financial
Statements.
Financial Overview
Since inception in 2005, our operations have primarily been funded from the sale
of capital stock, notes payable, and convertible debt securities. We have
devoted and expect to continue to devote substantial resources for the
commercialization of the dermaPACE® System and intend to continue to research
and develop the non-medical uses of the PACE technology, both of which will
require additional capital resources. We also expect to require additional
working capital as sales of our UltraMIST product continue to grow.
We incurred net losses of $30.9 million and $10.4 million for the years ended
December 31, 2020 and 2019, respectively, and additional losses of approximately
$13.6 million in the first six months of 2021. These factors and the events of
default on the promissory notes discussed above create substantial doubt about
the Company's ability to continue as a going concern for a period of at least
twelve months from the financial statement issuance date. See Note 17 -
Subsequent Events to the accompanying Condensed Consolidated Financial
Statements for a discussion of the various events of default.
Our operating losses create substantial doubt about our ability to continue as a
going concern. Although no assurances can be given, we believe that potential
additional issuances of equity, debt or other potential financing may provide
the necessary funding for us to continue as a going concern for the 12 months.
See "Liquidity and Capital Resources" for further information regarding our
financial condition.
The continuation of our business is dependent upon raising additional capital to
fund operations. Management's plans are to obtain additional capital in 2022
through investments by strategic partners for market opportunities, which may
include strategic partnerships or licensing arrangements, or raise capital
through the conversion of outstanding warrants, the issuance of common or
preferred stock, securities convertible into common stock, or secured or
unsecured debt. These possibilities, to the extent available, may be on terms
that result in significant dilution to our existing shareholders. In addition,
there can be no assurances that our plans to obtain additional capital will be
successful on the terms or timeline we expect, or at all. Although no assurances
can be given, management believes that potential additional issuances of equity
or other potential financing transactions as discussed above should provide the
necessary funding for us for the next 12 months. If these efforts are
unsuccessful, we may be required to significantly curtail or discontinue
operations or, if available, obtain funds through financing transactions with
unfavorable terms.
24
--------------------------------------------------------------------------------
Table of Contents
The accompanying Condensed Consolidated Financial Statements have been prepared
in conformity with U.S. GAAP, which contemplate continuation of the Company as a
going concern and the realization of assets and satisfaction of liabilities in
the normal course of business. The carrying amounts of assets and liabilities
presented in the financial statements do not necessarily purport to represent
realizable or settlement values. The Condensed Consolidated Financial Statements
do not include any adjustment that might result from the outcome of this
uncertainty. Our Condensed Consolidated Financial Statements do not include any
adjustments relating to the recoverability of assets and classification of
assets and liabilities that might be necessary should we be unable to continue
as a going concern.
Since our inception, we have incurred losses from operations each year. As of
December 31, 2020, we had an accumulated deficit of $156.7 million. Although the
size and timing of our future operating losses are subject to significant
uncertainty, we anticipate that our operating losses will continue over the next
few years as we continue to incur expenses related to commercialization of our
dermaPACE® system for the treatment of DFU in the United States. If we are able
to successfully commercialize, market and distribute the dermaPACE® system, then
we believe we may be able to partially or completely offset these losses in the
future with revenues from sales of our UltraMist systems and applicators.
Although no assurances can be given, we believe that potential additional
issuances of equity, debt or other potential financing, as discussed above, may
provide the necessary funding for us to continue as a going concern for the next
12 months. We cannot reasonably estimate the nature, timing and costs of the
efforts necessary to complete the development and approval of, or the period in
which material net cash flows are expected to be generated from, any of our
products, due to the numerous risks and uncertainties associated with developing
and marketing products, including the uncertainty of:
• the scope, rate of progress and cost of our clinical trials?
• future clinical trial results?
• the cost and timing of regulatory approvals?
• supplier and customer disputes?
• the establishment of successful marketing, sales and distribution channels and
partnerships, including our efforts to expand our marketing, sales and
distribution reach through joint ventures and other contractual arrangements?
• the cost and timing associated with establishing reimbursement for our
products?
• the effects of competing technologies and market developments? and
• the industry demand and patient wellness behavior.
Any failure to complete the development of our product candidates in a timely
manner, or any failure to successfully market and commercialize our product
candidates, would have a material adverse effect on our operations, financial
position and liquidity. A discussion of the risks and uncertainties associated
with us and our business are set forth under the section entitled "Risk Factors
- Risks Related to Our Business" in our 2020 Annual Report.
The worldwide spread of the COVID-19 virus has resulted and is expected to
continue to result in a global slowdown of economic activity which is likely to
continue to decrease demand for a broad variety of products, including from our
customers, while also disrupting supply channels and marketing activities for an
unknown period of time. Also, the pandemic may cause continued or additional
actions by hospitals and clinics such as limiting elective procedures and
treatments and limiting clinical trial activities and data monitoring. We expect
all of these factors to continue to have a negative impact on our sales and our
results of operations, the size and duration of which we are currently unable to
predict.
25
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Revenues and Gross Margin
Revenues for the three months ended June 30, 2021 were $2.9 million compared to
$83 thousand for the same period in 2020, an increase of $2.8 million. For the
first two quarters of 2021, revenues were $5.0 million compared with $232
thousand for the comparable period of 2020. The increases were primarily driven
by 2021 sales of UltraMIST devices and single-use accessories. The Company's
UltraMIST business began with the August 6, 2020 Acquisition. Please see Note 14
- Contingencies in the accompanying Condensed Consolidated Financial Statements
for a description of a supplier dispute relating to UltraMIST.
Gross margin as a percentage of revenue increased to 64% from 5% during the
second quarter of 2021 as compared with the second quarter of the prior year.
For the first six months of 2021 gross margin increased to 58% compared with 10%
for the first six months of 2020. The increase in gross margin percentages for
the both the quarter and year-to-date periods were driven by sales of UltraMIST
products and accessories, which have higher gross margin percentages than do
DuraPACE products and accessories.
Research and Development Expenses
Research and development expenses increased 3% to $272 thousand from $265
thousand during the second quarter of 2021 compared with the second quarter of
2020. For the first six months of 2021, research and development expenses
increased 14% to $626 thousand from $551 thousand for the same period of 2020.
Increases for both the quarter and six-month periods were driven by higher
employee compensation and benefits costs incurred by the larger,
post-Acquisition organization, though these costs were partially offset by lower
amounts paid to external parties for clinical studies and other research and
development.
Selling and Marketing Expenses
Selling and marketing expenses increased $2.1 million or 482% and $3.3 million
or 313% for the three and six-month periods ended June 30, 2021, respectively,
versus the same periods of 2020. The expense increases were primarily driven by
higher employee compensation, commissions, benefits, travel and marketing costs
incurred by the larger, post-Acquisition organization as well as higher levels
of revenues.
General and Administrative Expenses
General and administrative expenses increased $536 thousand or 21% and $1.9
million or 43% for the three and six-month periods ended June 30, 2021,
respectively, compared with the same periods of 2020. The primary drivers of
these increases for the quarter and year-to-date periods, respectively, consist
of approximately, $528 thousand and $1.3 million of expenses related to
Registration Statement penalty accruals as well as approximately $176 thousand
and $352 thousand of the increases for amortization of intangible assets related
to the Acquisition on August 6, 2020. Additionally, both the quarter and
year-to-date periods reflect increases in bad debt, insurance and public company
expenses as well as offsetting decreases in legal and other professional fees.
Liquidity and Capital Resources
We expect to devote substantial resources for the commercialization of the
dermaPACE® System and intend continue to research and develop the next
generation of our technology as well as the non-medical uses of the PACE
technology, both of which will require additional capital resources. We incurred
a net loss of $30.9 million and $10.4 million for the years ended December 31,
2020 and 2019, respectively, and incurred additional net losses in the six
months of 2021 of approximately $13.6 million. These factors and the events of
default on the notes payable create substantial doubt about the Company's
ability to continue as a going concern for a period of at least twelve months
from the financial issuance date. Historically, our operations have primarily
been funded from the sale of capital stock, notes payable, and convertible debt
securities. The continuation of our business is dependent upon raising
additional capital to fund operations; we may not be able to do so, and/or the
terms of any financings may not be advantageous to us.
26
--------------------------------------------------------------------------------
Table of Contents
During the six months ended June 30, 2021, cash used by operating activities
totaled approximately $5.2 million, which was driven largely by the net loss for
the same period and was partially offset by increases in accounts payable and
accrued expenses as well as decreases in accounts receivable and inventory. Cash
used by investing activities during the first six months of 2021 consisted of
purchases of property and equipment of $277 thousand. Cash provided by financing
activities for the period consisted primarily of $1.3 million of proceeds from
convertible note issuances, $1.0 million in proceeds from a factoring accounts
receivable, $1.0 million of proceeds from SBA Loan #2 as well as $125 thousand
in proceeds from deposits from related parties and were offset by $94 thousand
of principal payments on financing leases.
Cash used in operations averaged $1.1 million per month for the first quarter of
2021 and approximately $700 thousand for the second quarter. Management
anticipates cash usage for operations to be approximately $250 thousand to $500
thousand per month for the second half of 2021 as resources are devoted to the
commercialization of the dermaPACE and UltraMIST products including hiring of
new employees, expansion of our international business and continued research
and development of the next generation of our technology as well as non-medical
uses of our technology. Management's plans are to obtain additional capital in
2022 through investments by strategic partners for market opportunities, which
may include strategic partnerships or licensing arrangements, or raise capital
through the conversion of outstanding warrants, issuance of common or preferred
stock, securities convertible into common stock, or secured or unsecured debt.
These possibilities, to the extent available, may be on terms that result in
significant dilution to our existing shareholders. Although no assurances can be
given, management believes that potential additional issuances of equity or
other potential financing transactions as discussed above should provide the
necessary funding for us for the next 12 months. If these efforts are
unsuccessful, we may be required to significantly curtail or discontinue
operations or, if available, obtain funds through financing transactions with
unfavorable terms.
Segment and Geographic Information
We have determined that we have one operating segment. Our revenues are
generated from sales in United States, Europe, Canada, Middle East, Central
America, South America, Asia and Asia/Pacific. All significant expenses are
generated in the United States and all significant assets are located in the
United States.
Contractual Obligations
Our major outstanding contractual obligations relate to our financing leases for
rental equipment, operating leases for our facilities and office equipment,
purchase and supplier obligations for product component materials and equipment,
and our outstanding debt. Please see our 2020 Annual Report for additional
discussions of these obligations.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities,
including the use of structured finance, special purpose entities or variable
interest entities.
Effects of Inflation
Due to the fact that our assets are, to an extent, liquid in nature, they are
not significantly affected by inflation. However, the rate of inflation, which
has been increasing, affects expenses such as employee compensation, office
space leasing costs and research and development charges, which may not be
readily recoverable during the period of time that we are bringing the product
candidates to market. To the extent inflation results in rising interest rates
and has other adverse effects on the market, it may adversely affect our
consolidated financial condition and results of operations.
27
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source Glimpses
SANUWAVE HEALTH, INC. 
