Waiting for the Dough

The CFO of a start-up maker of medical devices is prepared for years of intense capital-raising efforts and tough cost-allocation decisions on the way to profitability.

How did you find Rub Music Enterprises, the shell company you merged with?

One of the third-party investors we were working with had done deals like this in the past and was aware of this particular company.

Is one shell better than another? Or do you just need a warm body?

The key factor with a shell is how clean it is. Once you merge with it, you’re taking on any liabilities. You want a company that ceased operations very cleanly, has been doing the SEC reporting, and knows its shareholders, so it can get all the shareholder transactions taken care of cleanly so there are no issues down the road.

The second thing is that the shell has registered, tradable securities. Under SEC Rule 144, unregistered shares don’t become tradable until a year after the merger. Rub Music had 1.5 million registered shares among its total 12.5 million shares outstanding.

Did the shell’s shareholders get any money, or just stock in the new company?

Primarily stock. There was a slight buyback, of $180,000, primarily to reimburse the SEC reporting costs [incurred by the shell's shareholders] in the two years since the company became inactive.

A company like this obviously won’t be profitable for a few years. You’re prepared to hang in for that long not knowing what the outcome will be?

Oh yes. The long-term potential here is great. There aren’t any competitors using the shock-wave spectrum for what we’re doing. There is a tremendous unmet need right now for this health-care system. And there will be a number of inflection points that will really increase the company’s value. In late 2010, we’ll get the data on how the first clinical study has gone. We anticipate getting our first FDA approval in 2011, and there are a lot of people who will invest in a company that has an approved product. We expect to be out in the market by the end of 2011.

Exactly what are the devices you’re developing going to be used for?

We’re targeting four verticals: wound care, orthopedics, cosmetic, and cardiac. We’re starting with wound care. Our first clinical trial is for treating diabetic foot ulcers, which by itself is a $2 billion market, out of the total $10 billion wound-care market. The FDA provides an investigational device exemption that allows you to do the study. You have to get a separate one for each indication, which is something specific — a diabetic foot ulcer, for example, not just any wound. After that we’ll move on to pressure sores and then burns.

Why not start with orthopedics, since Sanuwave was born out of the orthopedics division of HealthTronics?

We had two FDA approvals for a device called the OssaTron that treated plantar fasciitis and tennis elbow. It was a great technology — there was an 85% long-term cure rate with just one treatment. But there were a couple of problems with the business. One had to do with patient reimbursement. Those conditions are pain indications. If you wait long enough, it will heal itself, even if it takes two years. And knowing that, insurance companies over time pulled back on that reimbursement. The second thing was that the units were huge, 600-pound boxes, and very expensive to purchase, so we operated mobile vans that brought the devices to hospitals and surgical centers as needed.


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