EDGAR 10-K Filing

Company CIK: 1417663
Filing Year: 2021
Filename: 1417663_10-K_2021_0001140361-21-035116.json

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ITEM 1. BUSINESS
Item 1.
BUSINESS
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, which was subject to two double-blinded, randomized Phase III clinical studies. On December 28, 2017, the U.S. 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 Diabetic Foot Ulcers (DFU) as described in the de novo request, subject to the general control provisions of the FD&C Act and the special controls identified in this order.
On August 6, 2020, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) 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 U.S. Food and Drug Administration (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 us a license to the Celularity wound care biologic products, Biovance® and Interfyl® (the “License Agreement”). The License Agreement provides us 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 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.
Our portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE®) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. The Company is marketing its dermaPACE® System for treatment usage in the United States and will continue to generate revenue from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia,,Brazil , Mexico, and Asia/Pacific. The Company generates revenue streams from dermaPACE® treatments, product sales, licensing transactions and other activities, and with its recent acquisition of the UltraMIST® assets, SANUWAVE now combines two highly complementary and market-cleared energy transfer technologies used in the dermaPACE® and UltraMIST® Systems and two human tissue biologic products (Biovance® and Interfyl®), creating a platform of scale with an end-to-end product offering in the advanced wound care market.
Our lead product candidate for the global wound care market, dermaPACE®, has received FDA clearance for commercial use to treat diabetic foot ulcers in the United States and the CE Mark allowing for commercial use on acute and chronic defects of the skin and subcutaneous soft tissue. We believe we have demonstrated that our patented technology is safe and effective in stimulating healing in chronic conditions of the foot and the elbow through our United States FDA Class III Premarket Approvals (“PMAs”) approved OssaTron® device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our OssaTron, Evotron®, and orthoPACE® devices in Europe and Asia.
We are focused on developing our Pulsed Acoustic Cellular Expression (PACE) technology to activate healing in:
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wound conditions, including diabetic foot ulcers, venous and arterial ulcers, pressure sores, burns and other skin eruption conditions;
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orthopedic applications, such as eliminating chronic pain in joints from trauma, arthritis or tendons/ligaments inflammation, speeding the healing of fractures (including nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones in the extremities and spine, and other potential sports injury applications;
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plastic/cosmetic applications such as cellulite smoothing, graft and transplant acceptance, skin tightening, scarring and other potential aesthetic uses; and
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cardiac applications for removing plaque due to atherosclerosis improving heart muscle performance.
In addition to healthcare uses, our high-energy, acoustic pressure shock waves, due to their powerful pressure gradients and localized cavitational effects, may have applications in secondary and tertiary oil exploitation, for cleaning industrial waters and food liquids and finally for maintenance of industrial installations by disrupting biofilms formation. Our business approach will be through licensing and/or partnership opportunities.
The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely 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 until the disease is contained. 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 have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict.
We were formed as a Nevada corporation in 2004. We maintain a public internet site at www.sanuwave.com. The information on our websites is not part of this Annual Report on Form 10-K and are not incorporated by reference.
Pulsed Acoustic Cellular Expression (PACE) Technology for Regenerative Medicine
Our PACE product candidates, including our lead product candidate, dermaPACE®, deliver high-energy acoustic pressure waves in the shock wave spectrum to produce compressive and tensile stresses on cells and tissue structures. These mechanical stresses at the cellular level have been shown in pre-clinical work to promote angiogenic and positive inflammatory responses, and quickly initiate the healing cascade. This has been shown in pre-clinical work to result in microcirculatory improvement, including increased perfusion and blood vessel widening (arteriogenesis), the production of angiogenic growth factors, enhanced new blood vessel formation (angiogenesis) and the subsequent regeneration of tissue such as skin, musculoskeletal and vascular structures. PACE procedures trigger the initiation of an accelerated inflammatory response that speeds wounds into proliferation phases of healing and subsequently returns a chronic condition to an acute condition to help reinitiate the body’s own healing response. We believe that our PACE technology is well suited for various applications due to its activation of a broad spectrum of cellular events critical for the initiation and progression of healing.
High-energy, acoustic pressure shock waves are the primary component of our previously developed product, OssaTron, which was approved by the FDA and marketed in the United States for use in chronic plantar fasciitis of the foot in 2000 and for elbow tendonitis in 2003. Previously, acoustic pressure shock waves have been used safely at much higher energy and pulse levels in the lithotripsy procedure (breaking up kidney stones) by urologists for over 25 years and has reached the care status of “golden standard” for the treatment of kidney stones.
We research, design, manufacture, market and service our products worldwide and believe we have already demonstrated that our technology is safe and effective in stimulating healing in chronic musculoskeletal conditions of the foot and the elbow through our United States FDA Class III PMA approved OssaTron device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our orthoPACE, Evotron and OssaTron devices in Europe, Asia and Asia/Pacific.
We believe our experience from our preclinical research and the clinical use of our predecessor legacy devices in Europe and Asia, as well as our OssaTron device in the United States, demonstrates the safety, clinical utility and efficacy of these products. In addition, we have preclinical programs focused on the development and better understanding of treatments specific to our target applications.
Currently, there are limited biological or mechanical therapies available to activate the healing and regeneration of skin, musculoskeletal tissue and vascular structures. As baby boomers age, the incidence of their targeted diseases and musculoskeletal injuries and ailments will be far more prevalent. We believe that our pre-clinical and clinical studies suggest that our PACE technology will be effective in targeted applications. We anticipate that future clinical studies should lead to regulatory approval of our regenerative product candidates in the Americas, Middle East and Africa. If approved by the appropriate regulatory authorities, we believe that our product candidates will offer new, effective and noninvasive (extracorporeal) treatment options in wound healing, orthopedic injuries, plastic/cosmetic uses and cardiovascular procedures, improving the quality of life for millions of patients suffering from injuries or deterioration of tissue, bones and vascular structures.
dermaPACE® - Our Lead Product Candidate
The FDA granted approval of our Investigational Device Exemption (IDE) to conduct two double-blinded, randomized clinical trials utilizing our lead device product for the global wound care market, the dermaPACE® device, in the treatment of diabetic foot ulcers.
The dermaPACE® system was evaluated using two studies under IDE G070103. The studies were designed as prospective, randomized, double-blind, parallel-group, sham-controlled, multi-center 24-week studies at 39 centers. A total of 336 subjects were enrolled and treated with either dermaPACE® plus conventional therapy or conventional therapy (a.k.a. standard of care) alone. Conventional therapy included, but was not limited to, debridement, saline-moistened gauze, and pressure reducing footwear. The objective of the studies was to compare the safety and efficacy of the dermaPACE® device to sham-control application. The prospectively defined primary efficacy endpoint for the dermaPACE® studies was the incidence of complete wound closure at 12 weeks post-initial application of the dermaPACE® system (active or sham). Complete wound closure was defined as skin re-epithelialization without drainage or dressing requirements, confirmed over two consecutive visits within 12-weeks. If the wound was considered closed for the first time at the 12-week visit, then the next visit was used to confirm closure. Investigators continued to follow subjects and evaluate wound closure through 24 weeks.
Between the two studies there were over 336 patients evaluated, with 172 patients treated with dermaPACE® and 164 control group subjects with use of a non-functional device (sham). Both treatment groups received wound care consistent with the standard of care in addition to device application. Study subjects were enrolled using pre-determined inclusion/exclusion criteria in order to obtain a homogenous study population with chronic diabetes and a diabetic foot ulcer that has persisted a minimum of 30 days and its area is between 1cm2 and 16cm2, inclusive. Subjects were enrolled at Visit 1 and followed for a run-in period of two weeks. At two weeks (Visit 2 - Day 0), the first treatment was applied (either dermaPACE® or Sham Control application). Applications with either dermaPACE® or Sham Control were then made at Day 3 (Visit 3), Day 6 (Visit 4), and Day 9 (Visit 5) with the potential for 4 additional treatments in Study 2. Subject progress including wound size was then observed on a bi-weekly basis for up to 24 weeks at a total of 12 visits (Weeks 2-24; Visits 6-17).
We retained Musculoskeletal Clinical Regulatory Advisers, LLC (MCRA) in January 2015 to lead the Company’s interactions and correspondence with the FDA for the dermaPACE®, which have already commenced. MCRA has successfully worked with the FDA on numerous Premarket Approvals (PMAs) for various musculoskeletal, restorative and general surgical devices since 2006.
Working with MCRA, we submitted to FDA a de novo petition on July 23, 2016. Due to the strong safety profile of our device and the efficacy of the data showing statistical significance for wound closure for dermaPACE® subjects at 20 weeks, we believe that the dermaPACE® device should be considered for classification into Class II as there is no legally marketed predicate device and there is not an existing Class III classification regulation or one or more approved PMAs (which would have required a reclassification under Section 513(e) or (f)(3) of the FD&C Act). On December 28, 2017, the FDA determined that the criteria at section 513(a)(1)(A) of (B) of the FD&C Act were met and granted the de novo clearance classifying dermaPACE® as Class II and available to be marketed immediately.
Finally, our dermaPACE® device has received the European CE Mark approval to treat acute and chronic defects of the skin and subcutaneous soft tissue, such as in the treatment of pressure ulcers, diabetic foot ulcers, burns, and traumatic and surgical wounds. The dermaPACE® is also licensed for sale in Canada, Australia, New Zealand and South Korea. Additionally our joint venture partner in Brazil, Diversa SA, received approval from the Brazilian Agência Nacional de Vigilância Sanitária (“National Health Surveillance Agency” or “ANVISA”) to market dermaPACE® to treat diabetic foot ulcers (DFUs) in Brazil.
We are actively marketing the dermaPACE® to the European Community, Canada, Brazil, Mexico, and Asia/Pacific, utilizing distributors in select countries.
Clinical Studies
A post-market pilot study to evaluate the effects of high energy focused, acoustic shock wave therapy on local skin perfusion and healing of DFUs was changed to a 15 patient case study with the same primary objective of determining the effects of high-energy focused, acoustic shock wave therapy on oxygen saturation levels was completed. A near-infrared spectroscopy device was used to measure the oxygen saturation levels prior to treatment and after the full treatment regimen. Treatment with the dermaPACE® System resulted in all patients demonstrating a statistically significant increase in tissue oxygen saturation within the wound bed, a key component of wound healing. Additionally, the results showed all 15 wounds demonstrated a decrease in wound area and seven of the wounds healed. The results of this case study are another indication that treatment of Diabetic Foot Ulcers with the dermaPACE® System prepares the wound bed via oxygenation and neo-vascularization, facilitating accelerated wound resolution via the body’s natural healing process or preparing the wound to more readily respond to other advanced healing modalities.
UltraMIST - Ultra sound healing Therapy
UltraMIST is an FDA approved powerful, non-contact and non-thermal ultrasound therapy device used to promote wound healing. UltraMIST is FDA approved to treat malaises such as diabetic foot ulcers, pressure ulcers, venous leg ulcers, deep tissue pressure injuries, and surgical wounds. Currently, the Company’s dermaPACE® is only approved to treat diabetic foot ulcer.
UltraMIST currently has over 900 customers in 46 states providing the Company with a robust product offering in the advanced wound care market and an end-to-end advanced wound care product portfolio that addresses the entire care pathway.
Biologic Products
BIOVANCE is a graft skin substitute product that provides a natural foundation for wound healing. The product is an allograft that is prepared from the amnion, the part of the amniotic sac closest to the developing embryo. Key cells and proteins move into the BIOVANCE material so that tissues can regenerate and wounds can continue to heal. The product is adaptable and flexible, it can conform to irregular surfaces. It is also adaptable in that it can be sutured or glued if determined by the clinician to be a better option. The product also has a 5-year shelf life at room temperature conditions and is available in multiple sizes for application flexibility.
Interfyl is a liquid product that replaces damaged integumental soft tissue and augments / supplements inadequate connective tissues. Interfyl is comprised of allogenic decellularized particulate human placental connective tissue matrix that is placed on a wound. The product repairs small surgical defects resulting from either medical or surgical conditions, including patients with exposed vital structures such as bone, tendon, ligament, or nerves. Interfyl is able to fill irregular spaces or soft tissue deficits resulting from trauma or surgery. The filler also allows for cell adherence and growth during tissue repair and affords structural support and elasticity in the tissue. The product is offered in a 1.5mL flowable format in a 3-mL syringe. 50mg and 100mg particulates are in each vial.
Growth Opportunity in Wound Care Treatment
We are focused on the development of products that treat unmet medical needs in large market opportunities. Our FDA approval in the United States for our lead product candidate, dermaPACE®, is the first step in providing an option to a currently unmet need in the treatment of diabetic foot ulcers. Diabetes is common, disabling and deadly. In the United States, diabetes has reached epidemic proportions. Based on our research, foot ulcerations are one of the leading causes of hospitalization in diabetic patients and lead to billions of dollars in health care expenditures annually. According to a 2020 report by the Centers for Disease Control and Prevention based on estimated 2018 data, approximately 34.1 million people aged 18 years or older (diagnosed and undiagnosed), roughly 13.0% of the United States population, have diabetes and 1.5 million new cases of diabetes were diagnosed in people aged 18 years or older. In 2016, there were 7.8 million hospital discharges with diabetes as a listed diagnosis. The estimated total direct and indirect costs of diagnosed diabetes in the United States in 2017 was $327 billion. Between 2012 and 2017, medical costs per person associated with diabetes increased from $8,417 to $9,601. Approximately 2 - 7% of diabetics will develop a DFU each year. Foot ulcers are a significant complication of diabetes mellitus and often precede lower-extremity amputation. The most frequent underlying etiologies are neuropathy, trauma, deformity, high plantar pressures, and peripheral arterial disease. Over 50% of DFUs will become infected, resulting in high rates of hospitalization, increased morbidity and potential lower extremity amputation and up to 80% of DFUs that have healed will re-ulcerate within 12 months. According to the International Diabetes Federation 2019 Global Fact Sheet, approximately 463 million people has diabetes and 10% of global health expenditure is spent on diabetes (approximately $760 billion).
A majority of challenging wounds are non-healing chronic wounds and in addition, chronic diabetic foot ulcers and pressure ulcers are often slow-to-heal wounds, which often fail to heal for many months, and sometimes, for several years. These wounds often involve physiologic, complex and multiple complications such as reduced blood supply, compromised lymphatic systems or immune deficiencies that interfere with the body’s normal wound healing processes. These wounds often develop due to a patient’s impaired vascular and tissue repair capabilities. Wounds that are difficult to treat do not always respond to traditional therapies, which include hydrocolloids, hydrogels and alginates, among other treatments. We believe that physicians and hospitals need a therapy that addresses the special needs of these chronic wounds with high levels of both clinical and cost effectiveness.
We believe we are developing a safe and advanced technology in the wound healing and tissue regeneration market with PACE. dermaPACE® is noninvasive and does not require anesthesia, making it a cost-effective, time-efficient and painless approach to wound care. Physicians and nurses look for therapies that can accelerate the healing process and overcome the obstacles of patients’ compromised conditions, and prefer therapies that are easy to administer. In addition, since many of these patients are not confined to bed, healthcare providers want therapies that are minimally disruptive to the patient’s or the caregiver’s daily routines. dermaPACE’s noninvasive treatments are designed to elicit the body’s own healing response and, followed by simple standard of care dressing changes, are designed to allow for limited disruption to the patients’ normal lives and have no effect on mobility while their wounds heal.
Developing Product Opportunities - Orthopedic
The orthoPACE System, which is intended for use in orthopedic, trauma and sports medicine indications, continues to be a viable and effective treatment solution in Europe and South Korea. The device features four types of applicators including a unique applicator that is less painful for some indications and may reduce or completely eliminate anesthesia for some patients. In the orthopedic setting, the orthoPACE System is being used to treat tendinopathies and acute and nonunion fractures, including the soft tissue surrounding the fracture to accelerate healing and prevent secondary complications and their associated treatment costs
We believe there are significant opportunities in the worldwide orthopedic market, driven by aging baby boomers and their desire for active lifestyles well into retirement and the growth in the incidence of osteoporosis, osteoarthritis, obesity, diabetes and other diseases that cause injury to musculoskeletal tissues and/or impair the ability of the body to heal injuries.
We have experience in the sports medicine field (which generally refers to the non-surgical and surgical management of cartilage, ligament and tendon injuries) through our legacy devices, OssaTron and Evotron. Common examples of these injuries include extremity joint pain, torn rotator cuffs (shoulder), tennis elbow, Achilles’ tendon tears and torn meniscus cartilage in the knee. Injuries to these structures are very difficult to treat because the body has a limited natural ability to regenerate these kinds of tissues. Cartilage, ligament and tendons seldom return to a pre-injury state of function. Due to a lack of therapies that can activate healing and regenerate these tissues, many of these injuries will result in a degree of permanent impairment and chronic pain. Prior investigations and pre-clinical work indicate that PACE can positively affect the body’s inflammatory process and activate various cell types and may be an important adjunct to the management of sports medicine injuries. We plan to submit to U.S. FDA a 510(k) seeking clearance for general indications to address this growing field.
Additionally, we have developed and introduced Profile by SANUWAVE as an immediately available solution for pain management in sports medicine and physical therapy in the U.S. market. Profile by SANUWAVE is a therapeutic massager intended for the relief of minor muscle aches and pains via SANUWAVE’s Diffused Acoustic Pressure (DAP®) technology. DAP® delivers the beneficial, therapeutic field of the acoustic pressure waves without the impact and potential pain of a focused pulse. There is a significant need in the U.S. for pain management products and the non-invasive delivery of therapeutic shockwaves for its treatment can help to serve this market.
Non-Medical Uses for Our Shockwave Technology
We believe there are significant license/partnership opportunities for our acoustic pressure shockwave technology in non-medical uses, including in the energy, water, food, and industrial markets.
Due to their powerful pressure gradients and localized cavitational effects, we believe that high-energy, acoustic pressure shockwaves can be used to clean, in an energy efficient manner, contaminated fluids from impurities, bacteria, viruses, and other harmful micro-organisms, which provides opportunities for our technology in cleaning industrial and domestic/municipal waters. Based on the same principles of action of the acoustic pressure shockwaves against bacteria, viruses, and harmful micro-organisms, we believe our technology can be applied for cleaning or sterilization of various foods such as milk, natural juices, and meats.
In the energy sector, we believe that the acoustic pressure shockwaves can be used to improve oil recovery (IOR), as a supplement to or in conjunction with existing fracking technology, which utilizes high pressurized water/gases to crack the rocks that trapped oil in the underground reservoir. Through the use of our high-energy, acoustic pressure shockwaves the efficiency can be improved and in the same time the environmental impact of the fracking process can be reduced. Furthermore, we believe our technology can be used for enhanced oil recovery (EOR) based on the changes in oil flow characteristics resulting from acoustic pressure shockwave stimulation, as a tertiary method of oil recovery from older oil fields.
Additionally, we demonstrated through three studies performed at Montana State University that high-energy, acoustic pressure shockwaves are disrupting biofilms and thus can be used for surface cleaning monuments, ship hulls, and underwater structure cleaning, or to unclog pipes in the energy industry (shore or off-shore installations), food industry, and water management industry, which will reduce or eliminate down times with significant financial benefits for maintenance of existing infrastructure. Also, our technology should have a significant environmental impact by eliminating or reducing the use of harmful chemicals, which are the preferred biofilm cleaning method at this time.
Market Trends
We are focused on the development of regenerative medicine products that have the potential to address substantial unmet clinical needs across broad market indications. We believe there are limited therapeutic treatments currently available that directly and reproducibly activate healing processes in the areas in which we are focusing, particularly for wound care and repair of certain types of musculoskeletal conditions.
According to AdvaMed and Centers for Medicare & Medicaid Services data from 2006 and our internal projections, the United States advanced wound healing market for the dermaPACE® is estimated at $20 billion, which includes diabetic foot ulcers, pressure sores, burns and traumatic wounds, and chronic mixed leg ulcers. We also believe there are significant opportunities in the worldwide orthopedic and spine markets, driven by aging baby boomers and their desire for active lifestyles well into retirement and the growth in the incidence of osteoporosis, osteoarthritis, obesity, diabetes and other diseases that cause injury to orthopedic tissues and/or impair the ability of the body to heal injuries.
With the success of negative pressure wound therapy devices in the wound care market over the last decade and the recognition of the global epidemic associated with certain types of wounds, as well as deteriorating musculoskeletal conditions attributed to obesity, diabetes, vascular and heart disease, as well as sports injuries, we believe that Medicare and private insurers have become aware of the high costs and expenditures associated with the adjunctive therapies being utilized for wound healing and orthopedic conditions that have limited efficacies in full skin closure, or bone and tissue regeneration. We believe the wound healing and orthopedic markets are undergoing a transition, and market participants are interested in biological response activating devices that are applied noninvasively and seek to activate the body’s own capabilities for regeneration of tissue at injury sites in a cost-effective manner.
Strategy
Our strategy is focused on the research, development, and commercialization of our patented, non-invasive and biological response-activating medical systems for the repair and regeneration of skin, musculoskeletal tissue, and vascular structures. Our end-to-end wound care portfolio of regenerative medicine products and product candidates help restore the body’s normal healing processes. SANUWAVE applies and researches its patented energy transfer technologies in wound healing, orthopedic, plastic/cosmetic, and cardiac/endovascular conditions.
Through our August 2020 acquisition of the UltraMIST® System, we now combine two highly complementary and market-cleared energy transfer technologies used in the dermaPACE® and UltraMIST medical device Systems, which creates a platform of scale in the advanced wound care market.
Our the dermaPACE® device for treating diabetic foot ulcers, which was subject to two double-blinded, randomized Phase III clinical studies. On December 28, 2017, the U.S. 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 Diabetic Foot Ulcers (DFU) as described in the de novo request, subject to the general control provisions of the FD&C Act and the special controls identified in this order.
Our portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions.
Our immediate goal for our regenerative medicine technology involves leveraging the knowledge we gained from our existing human heel and elbow indications to enter the advanced wound care market with innovative treatments.
The key elements of our strategy include the following:
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Commercialize and support the domestic distribution of our dermaPACE® device to treat diabetic foot ulcers.
We initially focused on obtaining FDA approval in the United States for our lead product candidate, dermaPACE®, for the treatment of diabetic foot ulcers, which we believe represents a large, unmet need.
On December 28, 2017, the U.S. 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 Diabetic Foot Ulcers (DFU) as described in the de novo request, subject to the general control provisions of the FD&C Act and the special controls identified in this order.
We began the commercialization of dermaPACE® in the United States in 2018 through strategic partnership and have continued commercialization in 2019 through placement of devices in doctors’ offices, wound care centers and hospitals by our internal sales team. For example, in February 2018, we entered into an agreement with Premier Shockwave Wound Care, Inc. (“PSWC”) and Premier Shockwave, Inc. (“PS”) for the purchase by PSWC and PS of dermaPACE® Systems and related equipment sold by us and granting PSWC and PS limited but exclusive distribution rights to provide dermaPACE® Systems to certain government healthcare facilities in exchange for the payment of certain royalties to us. PSWC is a related party since it is owned by A. Michael Stolarski, a member of the Company’s board of directors and an existing shareholder of the Company.
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Develop and commercialize our noninvasive biological response activating devices in the regenerative medicine area for the treatment of skin, musculoskeletal tissue and vascular structures.
We intend to use our proprietary technologies and know-how in the use of high-energy, acoustic pressure shock waves to address unmet medical needs in wound care, orthopedic, plastic/cosmetic and cardiac indications, possibly through potential license and/or partnership arrangements.
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License and seek partnership opportunities for our non-medical acoustic pressure shock wave technology platform, know-how and extensive patent portfolio.
We intend to use our acoustic pressure shock wave technology and know-how for non-medical uses, including energy, food, water cleaning and other industrial markets, through license/partnership opportunities.
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Support the global distribution of our products.
Our portfolio of products, the dermaPACE® and orthoPACE, are CE Marked and sold through select distributors in certain countries in Europe, Canada, Asia and Asia/Pacific. Our revenues will continue from sales of the devices and related applicators in these markets. We intend to continue to add additional distribution partners in the Americas, Middle East, Africa, Europe and Asia/Pacific.
Scientific Advisors
We have established a network of scientific advisors that brings expertise in wound healing, orthopedics, cosmetics, clinical and scientific research, and FDA experience. We consult our scientific advisors on an as-needed basis on clinical and pre-clinical study design, product development, and clinical indications.
We pay consulting fees to certain members of our scientific advisory board for the services they provide to us, in addition to reimbursing them for incurred expenses. The amounts vary depending on the nature of the services.
Sales, Marketing and Distribution
Following FDA approval in December 2017, we sought a development and/or commercialization partnership, or to commercialize the product ourselves domestically, including the commercialization of the assets obtained in the Asset Purchase Agreement with our internal sales force. Outside the United States, we retain distributors to represent our products in selective international markets. These distributors have been selected based on their existing business relationships and the ability of their sales force and distribution capabilities to effectively penetrate the market with our PACE product line. We rely on these distributors to manage physical distribution, customer service and billing services for our international customers. Three distributors and partners accounted for 18%, 15% and 12% of revenues for the year ended December 31, 2019, and 0%, 0% and 22% of accounts receivable at December 31, 2019.
For a period of approximately three months following the August 6, 2020 Asset Purchase Agreement, we utilized the seller to fulfill certain customer orders and to collect related accounts receivable payments from customer orders that originated from the acquired business after August 6, 2020. For the year ended December 31, 2020, orders fulfilled by the seller comprised approximately 49% of the Company’s 2020 full year revenues. As of December 31, 2020, accounts receivable balances that originated from these seller-fulfilled orders constituted approximately 46% of accounts receivable balances, all of which were either reserved as of December 31, 2020 or subsequently collected during 2021. No other distributors or partners made up more than 10% of the Company’s revenues for the year ended December 31, 2020 or more than 10% of the Company’s accounts receivables as of December 31, 2020.
Manufacturing
We have developed a network of suppliers, manufacturers and contract service providers to provide sufficient quantities of our products.
We are party to a manufacturing supply agreement with Swisstronics Contract Manufacturing AG in Switzerland, a division of Cicor Technologies Ltd., covering the generator box component of our products. Our generator boxes are manufactured in accordance with applicable quality standards (EN ISO 13485) and applicable industry and regulatory standards. We produce the applicators and applicator kits for our products. In addition, we program and load software for both the generator boxes and applicators and perform the final product testing and certifications internally.
Our facility in Suwanee, Georgia consists of 10,177 square feet and provides office, research and development, quality control, production and warehouse space. It is a FDA registered facility and is ISO 13485:2016 and Medical Device Single Audit Program (“MDSAP”) certified (for meeting the requirements for a comprehensive management system for the design and manufacture of medical devices).
We are party to a manufacturing supply agreement with Minnetronix Medical in St. Paul, MN, covering the generator and treatment wand components of our products. Our generators and treatment wands are manufactured in accordance with applicable quality standards (EN ISO 13485) and applicable industry and regulatory standards. In addition, we perform the final product testing for generators and treatment wands internally. Please see further information regarding a dispute with this supplier in Note 24, Subsequent Events.
We are party to a manufacturing supply agreement with Dynamic Group in Ramsey, MN, covering the applicator component of our products. Our applicators are manufactured in accordance with applicable quality standards (EN ISO 13485) and applicable industry and regulatory standards. We produce the applicators and applicator kits for our products.
Our facility in Eden Prairie, MN consists of 8,199 square feet and provides office, product development, quality control, and warehouse space. It is an FDA registered facility and is ISO 13485:2016.
Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for our products, product candidates, technology, and know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing upon our proprietary rights. We seek to protect our proprietary position by, among other methods, filing United States and selected foreign patent applications and United States and selected foreign trademark applications related to our proprietary technology, inventions, products, and improvements that are important to the development of our business. Effective trademark, service mark, copyright, patent, and trade secret protection may not be available in every country in which our products are made available. The protection of our intellectual property may require the expenditure of significant financial and managerial resources.
Patents
We consider the protection afforded by patents important to our business. We intend to seek and maintain patent protection in the United States and select foreign countries, where deemed appropriate for products that we develop. There are no assurances that any patents will result from our patent applications, or that any patents that may be issued will protect our intellectual property, or that any issued patents or pending applications will not be successfully challenged, including as to ownership and/or validity, by third parties. In addition, if we do not avoid infringement of the intellectual property rights of others, we may have to seek a license to sell our products, defend an infringement action or challenge the validity of intellectual property in court. Any current or future challenges to our patent rights, or challenges by us to the patent rights of others, could be expensive and time consuming.
We derive our patent rights, including as to both issued patents and “patent pending” applications, from three sources: (1) assignee of patent rights in technology we developed; (2) assignee of patent rights purchased from HealthTronics, Inc. (“HealthTronics”); and (3) as licensee of certain patent rights assigned to HealthTronics. In August 2005, we purchased a significant number of patents and patent applications from HealthTronics, to whom we granted back perpetual and royalty-free field-of-use license rights in the purchased patent portfolio primarily for urological uses. We believe that our owned and licensed patent rights provide a competitive advantage with respect to others that might seek to utilize certain of our apparatuses and methods incorporating extracorporeal acoustic pressure shockwave technologies that we have patented. However, we do not hold patent rights that cover all of our products, product components, or methods that utilize our products. We also have not conducted a competitive analysis or valuation with respect to our issued and pending patent portfolio in relation to our current products and/or competitor products.
We are the assignee of thirty-one issued United States patents and thirty-eight issued foreign patents that are not expired, which on average have remaining useful lives of ten years with the longest useful life extending to 2039. Our current issued United States and foreign patents include patent claims directed to particular electrode configurations, piezoelectric fiber shockwave devices, chemical components for shockwave generation, reflector geometries, medical systems general construction, and software architecture for licensing processes. Our United States patents also include patent claims directed to methods and devices such as our products for using acoustic pressure shockwaves to treat ischemic conditions, spinal cord scar tissue and spinal injuries, bone fractures and osteoporosis, blood sterilization, stem cell stimulation, tissue cleaning, and within particular treatment parameters using personalized medical treatments for diabetic foot ulcers or pressure sores or venous ulcers or arterial ulcers or acute skin conditions. Also, we have a significant number of US and international patents related to the extracorporeal or intracorporeal use of shockwaves or pressure waves for cardiovascular field (plaque removal, elimination of occlusions, treatment of heart tissue ischemia, to name a few). While such patented method and device claims may provide patent protection against certain indirect infringing promotion and sales activities of competing manufacturers and distributors, certain medical methods performed by medical practitioners or related health care entities or methods executed by industrial operators may be subject to exemption from potential infringement claims under 35 U.S.C. § 287(c) and, therefore, may limit enforcement of claims of our medical and non-medical method patents as compared to device construction patents.
We also currently maintain fourteen United States non-provisional patent applications and nineteen foreign patent applications. Our patent-pending rights include inventions directed to certain shockwave devices and systems, ancillary products, and components for acoustic pressure shockwave treatment devices, and various methods of using acoustic pressure shockwaves in both medical and non-medical applications. The medical patent-pending methods include, for example, using acoustic pressure shockwaves to treat soft tissue disorders, bones, joints, wounds, skin, blood vessels, lymphatic disorders, cardiac tissue, fat and cellulite, lung tissue, or to facilitate vaccination, and for the use of shockwaves in combination with other energy medical technologies. In the non-medical field, the use of acoustic pressure shockwaves for blood and fluids sterilization, to destroy different pathogens from installation and different devices, to process fluids, meat and dairy products and to clean transport pipes. All of our United States and foreign pending applications either have yet to be examined or require response to an examiner’s office action rejections and, therefore, remain subject to further prosecution, the possibility of further rejections and appeals, and/or the possibility we may elect to abandon prosecution, without assurance that a patent may issue from any pending application.
Under our license to HealthTronics, we reserve exclusive rights in our purchased portfolio as to orthopedic, tendonopathy, skin wounds, cardiac, dental, neural medical conditions and to all conditions in animals (Ortho Field). HealthTronics receives field-exclusive and sublicensable rights under the purchased portfolio as to (1) certain HealthTronics lithotripsy devices in all fields other than the Ortho Field, and (2) all products in the treatment of renal, ureteral, gall stones and other urological conditions (Litho Field). HealthTronics also receives non-exclusive and non-sublicensable rights in the purchased portfolio as to any products in all fields other than the Ortho Field and Litho Field. Refer to section “Contractual Obligations” for information on the default of our loan with HealthTronics.
Pursuant to mutual amendment and other assignment-back rights under the patent license agreement with HealthTronics, we are also a licensee of certain patents and patent applications that have been assigned to HealthTronics. We received a perpetual, non-exclusive and royalty-free license to nine issued foreign patents. Our non-exclusive license is subject to HealthTronics’ sole discretion to further maintain any of the patents and pending applications assigned back to HealthTronics.
As part of the sale of the veterinary business in June 2009, we have also granted certain exclusive and non-exclusive patent license rights to Pulse Veterinary Technologies, LLC for most of our patent portfolio issued before 2009 to utilize acoustic pressure shockwave technologies in the field of non-human mammals.
Given our international patent portfolio, there are growing risks of challenges to our existing and future patent rights. Such challenges may result in invalidation or modification of some or all of our patent rights in a particular patent territory and reduce our competitive advantage with respect to third party products and services. Such challenges may also require the expenditure of significant financial and managerial resources.
If we become involved in future litigation or any other adverse intellectual property proceeding, for example, as a result of an alleged infringement, or a third party alleging an earlier date of invention, we may have to spend significant amounts of money and time and, in the event of an adverse ruling, we could be subject to liability for damages, including treble damages, invalidation of our intellectual property and injunctive relief that could prevent us from using technologies or developing products, any of which could have a significant adverse effect on our business, financial condition and results of operation. In addition, any claims relating to the infringement of third party proprietary rights, or earlier date of invention, even if not meritorious, could result in costly litigation or lengthy governmental proceedings and could divert management’s attention and resources and require us to enter into royalty or license agreements which are not advantageous, if available at all.
Trademarks
Since other products on the market compete with our products, we believe that our product brand names are an important factor in establishing and maintaining brand recognition.
We have the following trademark registrations: SANUWAVE® (United States, European Community, Canada, Japan, Switzerland, Taiwan and under the Madrid Protocol), dermaPACE® (United States, European Community, Japan, South Korea, Switzerland, Taiwan, Canada, Brazil and under the Madrid Protocol), angioPACE® (Australia, European Community and Switzerland), PACE® - Pulsed Acoustic Cellular Expression (United States, European Community, China, Hong Kong, Singapore, Switzerland, Taiwan, and Canada), orthoPACE® (United States and European Community), DAP® - Diffused Acoustic Pressure (United States and European Community), and Profile® (United States, European Community and Switzerland). Our newest trademark is Energy First™ (United States), Healing Today, Curing Tomorrow™ (United States), and UltraMIST™ (United States).
Through the acquisition of UltraMIST/MIST assets from Celularity, now SANUWAVE is the owner of the Celleration® (United States, Australia, Europe, and Japan), Proven Healing® (Madrid Protocol), MIST Ultrasound Healing Therapy & Design (United States), MIST® (United States), MIST Therapy® (United States), and MIST & Design (United States) registered trademarks.
We also maintain trademark registrations for: OssaTron® (United States and Germany), Evotron® (Germany and Switzerland), Evotrode® (Germany and Switzerland), Orthotripsy® (United States). We phased out the Reflectron® (Germany and Switzerland) and Reflectrode® (Germany and Switzerland), evoPACE® (Australia, European Community and Switzerland) trademarks, due to the fact that Reflectron® and Reflectrode® products are no longer available for sale in any market and evoPACE® is a product that was never commercialized.
Potential Intellectual Property Issues
Although we believe that the patents and patent applications, including those that we license, provide a competitive advantage, the patent positions of biotechnology and medical device companies are highly complex and uncertain. The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Our success will depend in part on us not infringing on patents issued to others, including our competitors and potential competitors, as well as our ability to enforce our patent rights. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.
Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products and product candidates, or to obtain and use information that we regard as proprietary. In enforcement proceedings in Switzerland, we assisted HealthTronics as an informer of misappropriation by a Swiss company called SwiTech and related third parties of intellectual property rights in legacy proprietary software and devices relating to assets we purchased from HealthTronics in August 2005. As a result of this action, SwiTech was forced into bankruptcy. We also pursued the alleged misappropriation by another Swiss company called SwiTalis and related third parties of intellectual property rights in legacy proprietary software and devices relating to assets we purchased from HealthTronics in August 2005. In 2016, SwiTalis claimed copyright rights on the High Voltage Modules that were used in our devices and the old line of Pulse Vet devices during the manufacturing process at Swisstronics in Switzerland. At this time, however, no such court action against Swisstronics is pending in Switzerland and we believe that it is unlikely that SwiTalis will pursue their earlier allegations against Swisstronics and, indirectly, us. In 2017, we abandoned our action against SwiTalis. There can be no assurance, however, that future claims or lawsuits against us may not be brought, and such present or future actions against violations of our intellectual property rights may result in us incurring material expense and divert the attention of management.
Third parties that license our proprietary rights, such as trademarks, patented technology or copyrighted material, may also take actions that diminish the value of our proprietary rights or reputation. In addition, the steps we take to protect our proprietary rights may not be adequate and third parties may infringe or misappropriate our copyrights, trademarks, trade dress, patents, and similar proprietary rights.
We collaborate with other persons and entities on research, development, and commercialization activities and expect to do so in the future. Disputes may arise about inventorship and corresponding rights in know-how and inventions resulting from the joint creation or use of intellectual property by us and our collaborators, researchers, licensors, licensees and consultants. In addition, other parties may circumvent any proprietary protection that we do have. As a result, we may not be able to maintain our proprietary position.
Competition
We believe the advanced wound care market can benefit from our technology which up-regulates the biological factors that promote wound healing. Current medical technologies developed by Acelity (formerly Kinetic Concepts, Inc.), Organogenesis, Inc., Smith & Nephew plc, Derma Sciences, Inc., MiMedx Group, Inc., Osiris Therapeutics, Inc., Molnlycke Health Care, and Systagenix Wound Management (US), Inc. (now owned by Acelity) manage wounds, but, in our opinion, do not provide the value proposition to the patients and care givers like our PACE technology has the potential to do. The leading medical device serving this market is the Vacuum Assisted Closure (“V.A.C.”) System marketed by KCI. The V.A.C. is a negative pressure wound therapy device that applies suction to debride and manage wounds.
There are also several companies that market extracorporeal shockwave device products targeting lithotripsy and orthopedic markets, including Dornier MedTech, Storz Medical AG, Electro Medical Systems (EMS) S.A., and CellSonic Medical which could ultimately pursue the wound care market. Nevertheless, we believe that the dermaPACE® System has a competitive advantage over all of these existing technologies by achieving wound closure by means of a minimally invasive process through innate biological response to PACE technology.
Developing and commercializing new products is highly competitive. The market is characterized by extensive research and clinical efforts and rapid technological change. We face intense competition worldwide from medical device, biomedical technology and medical products and combination products companies, including major pharmaceutical companies. We may be unable to respond to technological advances through the development and introduction of new products. Most of our existing and potential competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources. These competitors may also be in the process of seeking FDA or other regulatory approvals, or patent protection, for new products. Our competitors may commercialize new products in advance of our products. Our products also face competition from numerous existing products and procedures, which currently are considered part of the standard of care. In order to compete effectively, our products will have to achieve widespread market acceptance.
Regulatory Matters
FDA Regulation
Each of our products must be approved or cleared by the FDA before it is marketed in the United States. Before and after approval or clearance in the United States, our product candidates are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act and/or the Public Health Service Act, as well as by other regulatory bodies. FDA regulations govern, among other things, the development, testing, manufacturing, labeling, safety, storage, record-keeping, market clearance or approval, advertising and promotion, import and export, marketing and sales, and distribution of medical devices and pharmaceutical products.
In the United States, the FDA subjects medical products to rigorous review. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or to allow us to manufacture or market our products, and we may be criminally prosecuted. Failure to comply with the law could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product candidate, product recall, product seizure, interruption of production, operating restrictions, suspension or withdrawal of product approval, injunctions, or criminal prosecution.
The FDA has determined that our technology and product candidates constitute “medical devices.” The FDA determines what center or centers within the FDA will review the product and its indication for use, and also determines under what legal authority the product will be reviewed. For the current indications, our products are being reviewed by the Center for Devices and Radiological Health. However, we cannot be sure that the FDA will not select a different center and/or legal authority for one or more of our other product candidates, in which case the governmental review requirements could vary in some respects.
FDA Approval or Clearance of Medical Devices
In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the extent of controls the FDA determines are necessary to reasonably ensure their safety and efficacy:
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Class I: general controls, such as labeling and adherence to quality system regulations;
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Class II: special controls, pre-market notification (510(k)), specific controls such as performance standards, patient registries, and post market surveillance, and additional controls such as labeling and adherence to quality system regulations; and
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Class III: special controls and approval of a pre-market approval (PMA) application.
Each of our product candidates require FDA authorization prior to marketing, by means of either a 510(k) clearance or a PMA approval.
To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to another legally marketed medical device, has the same intended use, and is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness than does a legally marketed device. 510(k) submissions generally include, among other things, a description of the device and its manufacturing, device labeling, medical devices to which the device is substantially equivalent, safety and biocompatibility information, and the results of performance testing. In some cases, a 510(k) submission must include data from human clinical studies. Marketing may commence only when the FDA issues a clearance letter finding substantial equivalence. After a device receives 510(k) clearance, any product modification that could significantly affect the safety or effectiveness of the product, or that would constitute a significant change in intended use, requires a new 510(k) clearance or, if the device would no longer be substantially equivalent, would require a PMA. If the FDA determines that the product does not qualify for 510(k) clearance, then a company must submit and the FDA must approve a PMA before marketing can begin.
In the past, the 510(k) pathway for product marketing required only the proof of significant equivalence in technology for a given indication with a previously cleared device. Currently, there has been a trend of the FDA requiring additional clinical work to prove efficacy in addition to technological equivalence. Thus, no matter which regulatory pathway we may take in the future towards marketing products in the United States, we will be required to provide clinical proof of device effectiveness.
Within the past few years, the FDA has released guidelines for the FDA’s reviewers to use during a product’s submission review process. This guidance provides the FDA reviewers with a uniform method of evaluating the benefits verses the risks of a device when used for a proposed specific indication. Such a benefit/risk evaluation is very useful when applied to a novel device or to a novel indication and provides the FDA with a consistent tool to document their decision process. While intended as a guide for internal FDA use, the public availability of this guidance allows medical device manufacturers to use the review matrix to develop sound scientific and clinical backup to support proposed clinical claims and to help guide the FDA, through the decision process, to look at the relevant data. We intend to use this benefit/risk tool in our FDA submissions.
A PMA application must provide a demonstration of safety and effectiveness, which generally requires extensive pre-clinical and clinical trial data. Information about the device and its components, device design, manufacturing and labeling, among other information, must also be included in the PMA. As part of the PMA review, the FDA will inspect the manufacturer’s facilities for compliance with Quality System Regulation requirements, which govern testing, control, documentation and other aspects of quality assurance with respect to manufacturing. If the FDA determines the application or manufacturing facilities are not acceptable, the FDA may outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. During the review period, an FDA advisory committee, typically a panel of clinicians and statisticians, is likely to be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. The FDA is not bound by the advisory panel decision. While the FDA often follows the panel’s recommendation, there have been instances where the FDA has not. If the FDA finds the information satisfactory, it will approve the PMA. The PMA approval can include post-approval conditions, including, among other things, restrictions on labeling, promotion, sale and distribution, or requirements to do additional clinical studies post-approval. Even after approval of a PMA, a new PMA or PMA supplement is required to authorize certain modifications to the device, its labeling or its manufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.
During the review of either a PMA application or 510(k) submission, the FDA may request more information or additional studies and may decide that the indications for which we seek approval or clearance should be limited. We cannot be sure that our product candidates will be approved or cleared in a timely fashion or at all. In addition, laws and regulations and the interpretation of those laws and regulations by the FDA may change in the future. We cannot foresee what effect, if any, such changes may have on us.
Obtaining medical device clearance, approval, or licensing in the United States or abroad can be an expensive process. The fees for submitting an original PMA to the FDA for consideration of device approval are substantial. Fees for supplement PMA’s are less costly but still can be substantial. International fee structures vary from minimal to substantial, depending on the country. In addition, we are subject to annual establishment registration fees in the United States and abroad. Device licenses require periodic renewal with associated fees as well. In the United States, there is an annual requirement for submitting device reports for Class III/PMA devices, along with an associated fee. Currently, we are registered as a Small Business Manufacturer with the FDA and as such are subject to reduced fees. If, in the future, our revenues exceed a certain annual threshold limit, we may not qualify for the Small Business Manufacturer reduced fee amounts and will be required to pay full fee amounts.
Clinical Trials of Medical Devices
One or more clinical trials are almost always required to support a PMA application and more recently are becoming necessary to support a 510(k) submission. Clinical studies of unapproved or un-cleared medical devices or devices being studied for uses for which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA requirements. If an investigational device could pose a significant risk to patients, the sponsor company must submit an IDE application to the FDA prior to initiation of the clinical study. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device on humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. Clinical studies of investigational devices may not begin until an institutional review board (IRB) has approved the study.
During the study, the sponsor must comply with the FDA’s IDE requirements. These requirements include investigator selection, trial monitoring, adverse event reporting, and record keeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with reporting and record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical trial is being conducted, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable risk. During the approval or clearance process, the FDA typically inspects the records relating to the conduct of one or more investigational sites participating in the study supporting the application.
However, the COVID-19 pandemic has impacted our ability to enroll and treat patients in clinical trials and to monitor data at our clinical trial sites.
Post-Approval Regulation of Medical Devices
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
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the FDA Quality Systems Regulation (QSR), which governs, among other things, how manufacturers design, test, manufacture, exercise quality control over, and document manufacturing of their products;
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labeling and claims regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling;
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the Medical Device Reporting regulation, which requires reporting to the FDA of certain adverse experiences associated with use of the product; and
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post market surveillance, including documentation of clinical experience and also follow-on, confirmatory studies.
We continue to be subject to inspection by the FDA to determine our compliance with regulatory requirements, as are our suppliers, contract manufacturers, and contract testing laboratories.
International sales of medical devices manufactured in the United States that are not approved or cleared by the FDA are subject to FDA export requirements. Exported devices are subject to the regulatory requirements of each country to which the device is exported. Exported devices may also fall under the jurisdiction of the United States Department of Commerce/Bureau of Industry and Security and compliance with export regulations may be required for certain countries.
Manufacturing cGMP Requirements
Manufacturers of medical devices are required to comply with FDA manufacturing requirements contained in the FDA’s current Good Manufacturing Practices (cGMP) set forth in the quality system regulations promulgated under section 520 of the Food, Drug and Cosmetic Act. cGMP regulations require, among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation. The manufacturing facility for our products must meet cGMP requirements to the satisfaction of the FDA pursuant to a pre-PMA approval inspection before we can use it. We and some of our third party service providers are also subject to periodic inspections of facilities by the FDA and other authorities, including procedures and operations used in the testing and manufacture of our products to assess our compliance with applicable regulations. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations, and civil and criminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of marketing restrictions through labeling changes or in product withdrawal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following the approval.
International Regulation
We are subject to regulations and product registration requirements in many foreign countries in which we may sell our products, including in the areas of product standards, packaging requirements, labeling requirements, import and export restrictions and tariff regulations, duties and tax requirements. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.
The primary regulatory environment in Europe is the European Union, which consists of 27 member states encompassing most of the major countries in Europe. In the European Union, the European Medicines Agency (EMA) and the European Union Commission have determined that dermaPACE®, orthoPACE, OssaTron and Evotron will be regulated as medical device products. These devices have been determined to be Class IIb devices. These devices are CE Marked and as such can be marketed and distributed within the European Economic Area.
The primary regulatory body in Canada is Health Canada. In addition to needing appropriate data to obtain market licensing in Canada, we must have an ISO 13485 certification, as well as meet additional requirements of Canadian laws. We currently maintain this certification. We maintain a device license for dermaPACE® with Health Canada for the indication of “devices for application of shock waves (pulsed acoustic waves) on acute and chronic defects of the skin and subcutaneous soft tissue”.
The primary regulatory bodies and paths in Asia and Australia are determined by the requisite country authority. In most cases, establishment registration and device licensing are applied for at the applicable Ministry of Health through a local intermediary. The requirements placed on the manufacturer are typically the same as those contained in ISO 9001 or ISO 13485.
The primary regulatory body in Brazil is ANVISA, all medical devices imported into or distributed within Brazil must first undergo registration with ANVISA. Once ANVISA makes its final decision on registration applications, the result is published in Brazil’s Official Diary. In addition to ANVISA, our products require additional certification via INMETRO. We currently hold a Class II device licenses in BRAZIL for dermaPACE® and is in the process of registering our UltraMIST product line
European Good Manufacturing Practices
In the European Union, the manufacture of medical devices is subject to current good manufacturing practice (cGMP), as set forth in the relevant laws and guidelines of the European Union and its member states. Compliance with cGMP is generally assessed by the competent regulatory authorities. Typically, quality system evaluation is performed by a Notified Body, which also recommends to the relevant competent authority for the European Community CE Marking of a device. The Competent Authority may conduct inspections of relevant facilities, and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each device manufacturing facility must be audited on a periodic basis by the Notified Body. Further inspections may occur over the life of the product.
United States Anti-Kickback and False Claims Laws
In the United States, there are Federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in Federal healthcare programs. These laws are potentially applicable to manufacturers of products regulated by the FDA as medical devices, such as us, and hospitals, physicians and other potential purchasers of such products. Other provisions of Federal and state laws provide civil and criminal penalties for presenting, or causing to be presented, to third-party payers for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed. In addition, certain states have implemented regulations requiring medical device and pharmaceutical companies to report all gifts and payments over $50 to medical practitioners. This does not apply to instances involving clinical trials. Although we intend to structure our future business relationships with clinical investigators and purchasers of our products to comply with these and other applicable laws, it is possible that some of our business practices in the future could be subject to scrutiny and challenge by Federal or state enforcement officials under these laws.
Third Party Reimbursement
We anticipate that sales volumes and prices of the products we commercialize will depend in large part on the availability of coverage and reimbursement from third party payers. Third party payers include governmental programs such as Medicare and Medicaid, private insurance plans, and workers’ compensation plans. These third party payers may deny coverage and reimbursement for a product or therapy, in whole or in part, if they determine that the product or therapy was not medically appropriate or necessary. The third party payers also may place limitations on the types of physicians or clinicians that can perform specific types of procedures. In addition, third party payers are increasingly challenging the prices charged for medical products and services. Some third party payers must also pre-approve coverage for new or innovative devices or therapies before they will reimburse healthcare providers who use the products or therapies. Even though a new product may have been approved or cleared by the FDA for commercial distribution, we may find limited demand for the device until adequate reimbursement has been obtained from governmental and private third party payers.
In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific product lines and procedures. There can be no assurance that procedures using our products will be considered medically reasonable and necessary for a specific indication, that our products will be considered cost-effective by third party payers, that an adequate level of reimbursement will be available or that the third party payers’ reimbursement policies will not adversely affect our ability to sell our products profitably.
In the United States, some insured individuals are receiving their medical care through managed care programs, which monitor and often require pre-approval of the services that a member will receive. Some managed care programs are paying their providers on a per capita basis, which puts the providers at financial risk for the services provided to their patients by paying these providers a predetermined payment per member per month, and consequently, may limit the willingness of these providers to use products, including ours.
One of the components in the reimbursement decision by most private insurers and governmental payers, including the Centers for Medicare & Medicaid Services, which administers Medicare, is the assignment of a billing code. Billing codes are used to identify the procedures performed when providers submit claims to third party payers for reimbursement for medical services. They also generally form the basis for payment amounts. We will seek new billing codes for the wound care indications of our products as part of our efforts to commercialize such products.
The initial phase of establishing a professional billing code for a medical service typically includes applying for a CPT Category III code for both hospital and in-office procedures. This is a tracking code without relative value assigned that allows third party payers to identify and monitor the service as well as establish value if deemed medically necessary. The process includes CPT application submission, clinical discussion with Medical Professional Society CPT advisors as well as American Medical Association (AMA) CPT Editorial Panel review. A new CPT Category III code will be assigned if the AMA CPT Editorial Panel committee deems it meets the applicable criteria and is appropriate. In 2017, we applied for two, new CPT Category III codes for extracorporeal shock wave therapy (ESWT) in wound healing. These codes were published by AMA/CPT for use beginning January 1, 2019.
The secondary phase in the CPT billing code process includes the establishment of a permanent CPT Category I code in which relative value is analyzed and established by the AMA. The approval of this code, is based on, among other criteria, widespread usage and established clinical efficacy of the medical service.
There are also billing codes that facilities, rather than health care professionals, utilize for the reimbursement of operating costs for a particular medical service. For the hospital outpatient setting, the Centers for Medicare & Medicaid Services automatically classified the new ESWT wound healing CPT Category III codes into interim APC groups. The APC groups are services grouped together based on clinical characteristics and similar costs. An APC classification does not guarantee payment.
We believe that the overall escalating costs of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. In addition, recent healthcare reform measures, as well as legislative and regulatory initiatives at the Federal and state levels, create significant additional uncertainties. There can be no assurance that third party coverage and reimbursement will be available or adequate, or that future legislation, regulation, or reimbursement policies of third party payers will not adversely affect the demand for our products or our ability to sell these products on a profitable basis. The unavailability or inadequacy of third party payer coverage or reimbursement would have a material adverse effect on our business, operating results and financial condition.
Confidentiality and Security of Personal Health Information
The Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”), contains provisions that protect individually identifiable health information from unauthorized use or disclosure by covered entities and their business associates. The Office for Civil Rights of HHS, the agency responsible for enforcing HIPAA, has published regulations to address the privacy (the “Privacy Rule”) and security (the “Security Rule”) of protected health information (“PHI”). HIPAA also requires that all providers who transmit claims for health care goods or services electronically utilize standard transaction and data sets and to standardize national provider identification codes. In addition, the American Recovery and Reinvestment Act (“ARRA”) enacted the HITECH Act, which extends the scope of HIPAA to permit enforcement against business associates for a violation, establishes new requirements to notify the Office for Civil Rights of HHS of a breach of HIPAA, and allows the Attorneys General of the states to bring actions to enforce violations of HIPAA. Rules implementing various aspects of HIPAA are continuing to be promulgated.
We anticipate that, as we expand our dermaPACE® business, we will in the future be a covered entity under HIPAA. We intend to adopt policies and procedures to comply with the Privacy Rule, the Security Rule and the HIPAA statute as such regulations become applicable to our business and as such regulations are in effect at such time.
In addition to the HIPAA Privacy Rule and Security Rule described above, we may become subject to state laws regarding the handling and disclosure of patient records and patient health information. These laws vary widely. Penalties for violation include sanctions against a laboratory’s licensure as well as civil or criminal penalties. Additionally, private individuals may have a right of action against us for a violation of a state’s privacy laws. We intend to adopt policies and procedures to ensure material compliance with state laws regarding the confidentiality of health information as such laws become applicable to us and to monitor and comply with new or changing state laws on an ongoing basis.
Environmental and Occupational Safety and Health Regulations
Our operations are subject to extensive Federal, state, provincial and municipal environmental statutes, regulations and policies, including those promulgated by the Occupational Safety and Health Administration, the United States Environmental Protection Agency, Environment Canada, Alberta Environment, the Department of Health Services, and the Air Quality Management District, that govern activities and operations that may have adverse environmental effects such as discharges into air and water, as well as handling and disposal practices for solid and hazardous wastes. Some of these statutes and regulations impose strict liability for the costs of cleaning up, and for damages resulting from, sites of spills, disposals, or other releases of contaminants, hazardous substances and other materials and for the investigation and remediation of environmental contamination at properties leased or operated by us and at off-site locations where we have arranged for the disposal of hazardous substances. In addition, we may be subject to claims and lawsuits brought by private parties seeking damages and other remedies with respect to similar matters. We have not to date needed to make material expenditures to comply with current environmental statutes, regulations and policies. However, we cannot predict the impact and costs those possible future statutes, regulations and policies will have on our business.
Employees
As of October 11, 2021, we had a total of 43 full time employees in the United States. Of these, eight were engaged in research and development which includes clinical, regulatory and quality. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We believe our relationship with our employees is good.

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ITEM 1A. RISK FACTORS
Item 1A.
RISK FACTORS
Investing in our Common Stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this form 10-K, including the consolidated financial statements and the related notes, before purchasing our Common Stock. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In any such event, the market price of our Common Stock could decline and you could lose all or part of your investment.
Risks Related to our Business
Our recurring losses from operations and dependency upon future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern. We will be required to raise additional funds to finance our operations and remain a going concern; we may not be able to do so, and/or the terms of any financings may not be advantageous to us.
The continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources for the commercialization of the dermaPACE® and will continue to research and develop 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. The operating losses and the events of default on the Company’s notes payable indicate substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-K.
As of December 31, 2020, we had an accumulated deficit of $156.7 million and cash and cash equivalents of $2.4 million. For the years ended December 31, 2020 and 2019, the net cash used by operating activities was $12.7 million and $6.4 million, respectively. Cash used in operations for the Company were approximately $500,000 to $1,000,000 per month for the first half of 2021 and management anticipates cash used for operations of up to $100,000 per month for the second half of 2021 and plan to achieve break even in the first half of 2022 as resources are devoted to the commercialization of the dermaPACE® product including hiring of new employees, expansion of our international business and continued research and development of next generation of our technology as well as non-medical uses of our technology.
The continuation of our business is dependent upon raising additional capital to fund operations. Management’s plans are to obtain additional capital in 2021 and 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. 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. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, 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 consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our 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.
We have a history of losses and we may continue to incur losses and may not achieve or maintain profitability.
For the year ended December 31, 2020, we had a net loss of $30.9 million and used $12.7 million of cash in operations. For the year ended December 31, 2019, we had a net loss of $10.4 million and used $6.4 million of cash in operations. As of December 31, 2020, we had an accumulated deficit of $156.7 million and a total stockholders’ deficit of $13.7 million. As a result of our significant research, clinical development, regulatory compliance and general and administrative expenses, we expect to incur losses as we continue to incur expenses related to commercialization of the dermaPACE® System and research and development of the non-medical uses of the PACE technology. Even if we succeed in developing and commercializing the dermaPACE® System or any other product candidates, we may not be able to generate sufficient revenues and we may never achieve or be able to maintain profitability.
If we are unable to successfully raise additional capital, our viability may be threatened; however, if we do raise additional capital, your percentage ownership as a stockholder could decrease and constraints could be placed on the operations of our business.
We have experienced negative operating cash flows since our inception and have funded our operations primarily from proceeds received from sales of our capital stock, the issuance of convertible promissory notes, the issuance of notes payable to related parties, the issuance of promissory notes, the sale of our veterinary division in June 2009 and product sales. We will seek to obtain additional funds in the future through equity or debt financings, or strategic alliances with third parties, either alone or in combination with equity financings. These financings could result in substantial dilution to the holders of our common stock, or require contractual or other restrictions on our operations or on alternatives that may be available to us. If we raise additional funds by issuing debt securities, these debt securities could impose significant restrictions on our operations. Any such required financing may not be available in amounts or on terms acceptable to us, and the failure to procure such required financing could have a material adverse effect on our business, financial condition and results of operations, or threaten our ability to continue as a going concern.
A variety of factors could impact our need to raise additional capital, the timing of any required financings and the amount of such financings. Factors that may cause our future capital requirements to be greater than anticipated or could accelerate our need for funds include, without limitation:
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unanticipated expenditures in research and development or manufacturing activities;
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delayed market acceptance of any approved product;
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unanticipated expenditures in the acquisition and defense of intellectual property rights;
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the failure to develop strategic alliances for the marketing of some of our product candidates;
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additional inventory builds to adequately support the launch of new products;
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unforeseen changes in healthcare reimbursement for procedures using any of our approved products;
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inability to train a sufficient number of physicians to create a demand for any of our approved products;
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lack of financial resources to adequately support our operations;
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difficulties in maintaining commercial scale manufacturing capacity and capability;
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unforeseen problems with our third party manufacturers, service providers or specialty suppliers of certain raw materials;
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unanticipated difficulties in operating in international markets;
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unanticipated financial resources needed to respond to technological changes and increased competition;
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unforeseen problems in attracting and retaining qualified personnel;
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the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively the PPACA) on our operations;
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the impact of changes in U.S. health care law and policy on our operations;
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enactment of new legislation or administrative regulations;
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the application to our business of new court decisions and regulatory interpretations;
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claims that might be brought in excess of our insurance coverage;
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delays in timing of receipt of required regulatory approvals;
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the failure to comply with regulatory guidelines; and
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the uncertainty in industry demand and patient wellness behavior.
In addition, although we have no present commitments or understandings to do so, we may seek to expand our operations and product line through acquisitions. Any acquisition would likely increase our capital requirements.
The coronavirus, or COVID-19, pandemic has materially and adversely affected our clinical trial operations and may materially and adversely affect our financial results.
The COVID-19 pandemic has affected many countries, including the United States and several European countries, where we are currently conducting clinical trials. In response to the pandemic, hospitals participating in the trials in affected countries have taken a number of actions, including restricting elective and other procedures that are not deemed to be life-threatening, suspending clinical trial activities and limiting access to data monitoring. As a result, patients enrolled in our clinical trials have had the start of their treatments postponed and ongoing treatment regimens may be delayed. In addition, we do not have sufficient access to monitor trial data on a timely basis. These restrictions have had a materially adverse impact on our clinical operations. The extent to which the COVID-19 pandemic may impact our clinical trial operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, the spread and severity of COVID-19, and the effectiveness of governmental actions in response to the pandemic. Furthermore, the spread of COVID-19 may materially impact our ability to recruit and retain patients.
We expect that actions taken in response to the COVID-19 pandemic will also negatively impact sales of dermaPACE®, UltraMist, Biologics, and orthoPACE. As noted above, some hospitals are restricting procedures that are not deemed to be life-threatening at this time. Because dermaPACE®, UltraMist, Biologics, and orthoPACE are not deemed to be life-threatening procedures, we expect that the number of procedures performed will decline. A decrease in the number of procedures performed will adversely affect our expected revenues and our financial results.
These consequences of the COVID-19 pandemic will delay and could adversely affect our ability to obtain regulatory approval for and to commercialize our products, increase our operating expenses, and could have a material adverse effect on our financial results.
Our product candidates may not be developed or commercialized successfully.
Our product candidates are based on a technology that has not been used previously in the manner we propose and must compete with more established treatments currently accepted as the standards of care. Market acceptance of our products will largely depend on our ability to demonstrate their relative safety, efficacy, cost-effectiveness and ease of use.
We are subject to risks that:
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the FDA or a foreign regulatory authority finds our product candidates ineffective or unsafe;
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we do not receive necessary regulatory approvals;
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the regulatory review and approval process may take much longer than anticipated, requiring additional time, effort and expense to respond to regulatory comments and/or directives;
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the reimbursement for our products is difficult to obtain or is too low, which can hinder the introduction and acceptance of our products in the market;
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we are unable to get our product candidates in commercial quantities at reasonable costs; and
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the patient and physician community does not accept our product candidates.
In addition, our product development program may be curtailed, redirected, eliminated or delayed at any time for many reasons, including:
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adverse or ambiguous results;
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undesirable side effects that delay or extend the trials;
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the inability to locate, recruit, qualify and retain a sufficient number of clinical investigators or patients for our trials; and
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regulatory delays or other regulatory actions.
We cannot predict whether we will successfully develop and commercialize our product candidates. If we fail to do so, we will not be able to generate substantial revenues, if any.
The medical device/therapeutic product industries are highly competitive and subject to rapid technological change. If our competitors are better able to develop and market products that are safer and more effective than any products we may develop, our commercial opportunities will be reduced or eliminated.
Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products. We face competition from established medical device, pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies, and private and public research institutions in the United States and abroad. Many of our principal competitors have significantly greater financial resources and expertise than we do in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements, or mergers with, or acquisitions by, large and established companies, or through the development of novel products and technologies.
In 2019, Tissue Regeneration Technologies (TRT), LLC obtained clearance from the FDA for treatment of diabetic foot ulcers using non-focused shockwaves, as a 510(k) submission based on our dermaPACE® System de novo clearance. We take issue with the FDA’s decision regarding substantial equivalence of the unfocused shockwave technology with the focused shockwave technology that we are marketing. The so-called unfocused shockwaves, which in reality are pressure waves and not shockwaves, produce much lower energy compared to focused shockwaves, which makes the two technologies non-equivalent in energy output in the treatment zone.
The industry in which we operate has undergone, and we expect it to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technological advances are made. Our competitors may develop and commercialize pharmaceutical, biotechnology or medical devices that are safer or more effective, have fewer side effects or are less expensive than any products that we may develop. We also compete with our competitors in recruiting and retaining qualified scientific and management personnel, in establishing clinical trial sites and patient registration for clinical trials, and in acquiring technologies complementary to our programs or advantageous to our business.
If our products and product candidates do not gain market acceptance among physicians, patients and the medical community, we may be unable to generate significant revenues, if any.
Even if we obtain regulatory approval for our product candidates, they may not gain market acceptance among physicians, healthcare payers, patients and the medical community. Market acceptance will depend on our ability to demonstrate the benefits of our approved products in terms of safety, efficacy, convenience, ease of administration and cost effectiveness. In addition, we believe market acceptance depends on the effectiveness of our marketing strategy, the pricing of our approved products and the reimbursement policies of government and third party payers. Physicians may not utilize our approved products for a variety of reasons and patients may determine for any reason that our product is not useful to them. If any of our approved products fail to achieve market acceptance, our ability to generate revenues will be limited.
In addition, a significant health epidemic could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect the market for our products, which could have a material adverse effect on our business, operating results and financial condition.
We may not successfully establish and maintain licensing and/or partnership arrangements for our technology for non-medical uses, which could adversely affect our ability to develop and commercialize our non-medical technology.
Our strategy for the development, testing, manufacturing, and commercialization of our technology for non-medical uses generally relies on establishing and maintaining collaborations with licensors and other third parties. We may not be able to obtain, maintain or expand these or other licenses and collaborations or establish additional licensing and collaboration arrangements necessary to develop and commercialize our product candidates. Even if we are able to obtain, maintain or establish licensing or collaboration arrangements, these arrangements may not be on favorable terms and may contain provisions that will restrict our ability to develop, test and market our product candidates. Furthermore, our licensing and collaboration agreements are subject to counterparty risk, and to the extent the licensors or other third parties that we enter into licensing, joint venture or other collaboration arrangements with face operational, regulatory or financial difficulties, and to the extent we are unable to find suitable alternative counterparties in a timely manner, if at all, our business and results of operations could be materially adversely affected. Any failure to obtain, maintain or establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize our technology for non-medical uses.
We expect to rely at least in part on third party collaborators to perform a number of activities relating to the development and commercialization of our technology for non-medical uses, including possibly the design and manufacture of product materials, potentially the obtaining of regulatory or environmental approvals and the marketing and distribution of any successfully developed products. Our collaborators also may have or acquire rights to control aspects of our product development programs. As a result, we may not be able to conduct these programs in the manner or on the time schedule we may contemplate. In addition, if any of these collaborators withdraw support for our programs or product candidates or otherwise impair their development, our business could be negatively affected. To the extent we undertake any of these activities internally, our expenses may increase.
Many of our product component materials are only produced by a single supplier for such product component. If we are unable to obtain product component materials and other products from our suppliers that we depend on for our operations, or find suitable replacement suppliers, our ability to deliver our products to market will likely be impeded, which could have a material adverse effect on us.
We depend on suppliers for product component materials and other components that are subject to stringent regulatory requirements. Many of our product component materials are only produced by a single supplier for such product component, and the loss of any of these suppliers could result in a disruption in our production. If this were to occur, it may be difficult to arrange a replacement supplier because certain of these materials may only be available from one or a limited number of sources. Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors. In addition, our suppliers could be disrupted by conditions related to COVID-19, or other epidemics. Establishing additional or replacement suppliers for these materials may take a substantial period of time, as certain of these suppliers must be approved by regulatory authorities.
If we are unable to secure, on a timely basis, sufficient quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find replacement suppliers at an acceptable cost, then the manufacturing of our products may be disrupted, which could increase our costs and have a material adverse effect on our business and results of operations.
We currently sell our products through distributors and partners. Our business and results of operations could be adversely affected by any business disruptions or credit or other financial difficulties experienced by such distributors or partners.
Historically, the majority of our revenues, and a majority of our accounts receivable, are from distributors and partners. Three distributors accounted for 18%, 15 and 12% of revenues for the year ended December 31, 2019 and 0%, 0% and 22% of accounts receivable at December 31, 2019.
For a period of approximately three months following the August 6, 2020 Asset Purchase Agreement, we utilized the seller to fulfill certain customer orders and to collect related accounts receivable payments from customer orders that originated from the acquired business after August 6, 2020. For the year ended December 31, 2020, orders fulfilled by the seller comprised approximately 49% of the Company’s 2020 full year revenues. As of December 31, 2020, accounts receivable balances that originated from these seller-fulfilled owners constituted approximately 46% of accounts receivable balances, all of which were either reserved as of December 31, 2020 or subsequently collected during 2021. No other distributors or partners made up more than 10% of the Company’s revenues for the year ended December 31, 2020 or more than 10% of the Company’s accounts receivables as of December 31, 2020.
To the extent that our distributors or partners experience any business disruptions or credit or other financial difficulties, our revenues and the collectability of our accounts receivable could be negatively impacted. If we are unable to establish, on a timely basis, relationships with new distributors or partners, our business and results of operations could be negatively impacted.
We have entered into an agreement with companies owned by a current board member and stockholder that could delay or prevent an acquisition of our company and could result in the dilution of our stockholders in the event of our change of control.
On February 13, 2018, the Company entered into an Agreement for Purchase and Sale, Limited Exclusive Distribution and Royalties, and Servicing and Repairs with Premier Shockwave Wound Care, Inc. (“PSWC”) and Premier Shockwave, Inc. (“PS”), each of which is owned by A. Michael Stolarski, a member of the Company’s board of directors and an existing stockholder of the Company. Among other terms, the agreement contains provisions whereby in the event of a change of control of the Company (as defined in the agreement), the stockholders of PSWC have the right and option to cause the Company to purchase all of the stock of PSWC, and whereby the Company has the right and option to purchase all issued and outstanding shares of PSWC, in each case based upon certain defined purchase price provisions and other terms. Such provision may have the effect of delaying or deterring a change in control of us, and as a result could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. In addition, in the event we do experience a change of control, such provision may cause dilution of our existing stockholder in the event that PSWC exercises its option to require the Company to purchase all issued and outstanding shares of PSWC and the Company finances some or all of such purchase price through equity issuances.
The loss of our key management would likely hinder our ability to execute our business plan.
As a small company with less than 50 employees, our success depends on the continuing contributions of our management team and qualified personnel. Turnover, transitions or other disruptions in our management team and personnel could make it more difficult to successfully operate our business and achieve our business goals and could adversely affect our results of operation and financial condition. Our success depends in large part on our ability to attract and retain highly qualified personnel. We face intense competition in our hiring efforts from other pharmaceutical, biotechnology and medical device companies, as well as from universities and nonprofit research organizations, and we may have to pay higher salaries to attract and retain qualified personnel. The loss of one or more of these individuals, or our inability to attract additional qualified personnel, could substantially impair our ability to implement our business plan.
We face an inherent risk of liability in the event that the use or misuse of our product candidates results in personal injury or death.
The use of our product candidates in clinical trials and the sale of any approved products may expose us to product liability claims which could result in financial loss. Our clinical and commercial product liability insurance coverage may not be sufficient to cover claims that may be made against us. In addition, we may not be able to maintain insurance coverage at a reasonable cost, or in sufficient amounts or scope, to protect us against losses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management team and other resources, and adversely impact or eliminate the prospects for commercialization of the product candidate, or sale of the product, which is the subject of any such claim. Although we do not promote any off-label use, off-label uses of products are common and the FDA does not regulate a physician’s choice of treatment. Off-label uses of any product for which we obtain approval may subject us to additional liability.
We are dependent on information technology and our systems and infrastructure face certain risks, including from cybersecurity breaches and data leakage.
We rely to a large extent upon sophisticated information technology systems to operate our businesses, some of which are managed, hosted, provided and/or used by third parties or their vendors. We collect, store and transmit large amounts of confidential information, and we deploy and operate an array of technical and procedural controls to maintain the confidentiality and integrity of such confidential information. A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems or infrastructure, by our workforce, others with authorized access to our systems or unauthorized persons could negatively impact our operations. The ever-increasing use and evolution of technology, including cloud-based computing, creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our or our third-party providers’ systems, portable media or storage devices. We could also experience, and in some cases have experienced in the past, a business interruption, theft of confidential information, financial theft, or reputational damage from industrial espionage attacks, malware, spoofing or other cyber-attacks, which may compromise our system infrastructure, lead to data leakage, either internally or at our third-party providers, or materially adversely impact our financial condition. We have previously disclosed that we have experienced cybersecurity breaches from email spoofing. While we have invested in the protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions or security breaches. Any such interruption or breach of our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial, legal, business and reputational harm to us.
We generate a portion of our revenue internationally and are subject to various risks relating to our international activities which could adversely affect our operating results.
A portion of our revenue comes from international sources, and we anticipate that we will continue to expand our overseas operations. Engaging in international business involves a number of difficulties and risks, including:
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required compliance with existing and changing foreign healthcare and other regulatory requirements and laws, such as those relating to patient privacy or handling of bio-hazardous waste;
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required compliance with anti-bribery laws, data privacy requirements, labor laws and anti-competition regulations;
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export or import restrictions;
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various reimbursement and insurance regimes;
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laws and business practices favoring local companies;
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political and economic instability;
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potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers;
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foreign exchange controls; and
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difficulties protecting or procuring intellectual property rights.
As we expand internationally, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our expenses are generally denominated in the currencies in which our operations are located, which is in the United States. If the value of the U.S. dollar increases relative to foreign currencies in the future, in the absence of a corresponding change in local currency prices, our future revenue could be adversely affected as we convert future revenue from local currencies to U.S. dollars.
Provisions in our Articles of Incorporation, Bylaws and Nevada law might decrease the chances of an acquisition.
Provisions of our Articles of Incorporation and Bylaws and applicable provisions of Nevada law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Some of the following provisions in our Articles of Incorporation and Bylaws that implement these are:
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stockholders may not vote by written consent;
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advance notice of business to be brought is required for a meeting of the Company’s stockholders;
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no cumulative voting rights for the holders of common stock in the election of directors; and
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vacancies in the board of directors may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
In addition, Section 78.438 of the Nevada Revised Statutes prohibits a publicly-held Nevada corporation from engaging in a business combination with an interested stockholder (generally defined as a person which together with its affiliates owns, or within the last three years has owned, 10% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder) unless the business combination is approved in a prescribed manner. The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Regulatory Risks
The results of our clinical trials may be insufficient to obtain regulatory approval for our product candidates.
We will only receive regulatory approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA or the applicable foreign regulatory agency, in well designed and conducted clinical trials, that the product candidate is safe and effective. If we are unable to demonstrate that a product candidate is safe and effective in advanced clinical trials involving large numbers of patients, we will be unable to submit the necessary application to receive regulatory approval to commercialize the product candidate. We face risks that:
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the product candidate may not prove to be safe or effective;
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the product candidate’s benefits may not outweigh its risks;
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the results from advanced clinical trials may not confirm the positive results from pre-clinical studies and early clinical trials;
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the FDA or comparable foreign regulatory authorities may interpret data from pre-clinical and clinical testing in different ways than us; and
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the FDA or other regulatory agencies may require additional or expanded trials and data.
We are subject to extensive governmental regulation, including the requirement of FDA approval or clearance, before our product candidates may be marketed.
The process of obtaining FDA approval is lengthy, expensive and uncertain, and we cannot be sure that our product candidates will be approved in a timely fashion, or at all. If the FDA does not approve or clear our product candidates in a timely fashion, or at all, our business and financial condition would likely be adversely affected. The FDA has determined that our technology and product candidates constitute “medical devices”, and are thus subject to review by the Center for Devices and Radiological Health. However, we cannot be sure that the FDA will not select a different center and/or legal authority for one or more of our other product candidates, in which case applicable governmental review requirements could vary in some respects and be more lengthy and costly.
Both before and after approval or clearance of our product candidates, we and our product candidates, our suppliers and our contract manufacturers are subject to extensive regulation by governmental authorities in the United States and other countries. Failure to comply with applicable requirements could result in, among other things, any of the following actions:
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warning letters;
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fines and other monetary penalties;
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unanticipated expenditures;
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delays in FDA approval and clearance, or FDA refusal to approve or clear a product candidate;
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product recall or seizure;
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interruption of manufacturing or clinical trials;
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operating restrictions;
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injunctions; and
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criminal prosecutions.
In addition to the approval and clearance requirements, numerous other regulatory requirements apply, both before and after approval or clearance, to us and our products and product candidates, our suppliers and contract manufacturers. These include requirements related to the following:
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testing;
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manufacturing;
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quality control;
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labeling;
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advertising;
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promotion;
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distribution;
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export;
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reporting to the FDA certain adverse experiences associated with the use of the products; and
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obtaining additional approvals or clearances for certain modifications to the products or their labeling or claims.
We are also subject to inspection by the FDA and other international regulatory bodies to determine our compliance with regulatory requirements, as are our suppliers and contract manufacturers, and we cannot be sure that the FDA and other international regulatory bodies will not identify compliance issues that may disrupt production or distribution or require substantial resources to correct.
The FDA’s requirements and international regulatory body requirements may change and additional regulations may be promulgated that could affect us, our product candidates, and our suppliers and contract manufacturers. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon our business.
Patients may discontinue their participation in our clinical studies, which may negatively impact the results of these studies and extend the timeline for completion of our development programs.
Clinical trials for our product candidates require sufficient patient enrollment. We may not be able to enroll a sufficient number of patients in a timely or cost-effective manner. Patients enrolled in our clinical studies may discontinue their participation at any time during the study as a result of a number of factors, including withdrawing their consent or experiencing adverse clinical events, which may or may not be judged to be related to our product candidates under evaluation. If a large number of patients in a study discontinue their participation in the study, the results from that study may not be positive or may not support a filing for regulatory approval of the product candidate.
In addition, the time required to complete clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the following:
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the size of the patient population;
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the nature of the clinical protocol requirements;
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the availability of other treatments or marketed therapies (whether approved or experimental);
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our ability to recruit and manage clinical centers and associated trials;
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the proximity of patients to clinical sites; and
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the patient eligibility criteria for the study.
We rely on third parties to conduct our clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our device.
We engage a clinical research organization (CRO) and other third party vendors to assist in the conduct of our clinical trials. There are numerous sources that are capable of providing these services. However, we may face delays outside of our control if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers. Any third party that we hire to conduct clinical trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If we experience significant delays in the progress of our clinical trials, the commercial prospects for the product could be harmed and our ability to generate product revenues would be delayed or prevented. Any failure of the CRO and other third party vendors to successfully accomplish clinical trial monitoring, data collection, safety monitoring and data management and the other services they provide for us in a timely manner and in compliance with regulatory requirements could have a material adverse effect on our ability to complete clinical development of our product and obtain regulatory approval. Problems with the timeliness or quality of the work of the CRO may lead us to seek to terminate the relationship and use an alternate service provider. However, making such changes may be costly and may delay our clinical trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be difficult to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.
We may be required to suspend or discontinue clinical trials due to unexpected side effects or other safety risks that could preclude approval of our product candidates.
Our clinical trials may be suspended at any time for a number of reasons. For example, we may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to the clinical trial patients. In addition, the FDA or other regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the clinical trial patients.
Administering any product candidate to humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying further development or approval of our product candidates for any or all targeted indications. Ultimately, some or all of our product candidates may prove to be unsafe for human use. Moreover, we could be subject to significant liability if any patient suffers, or appears to suffer, adverse health effects as a result of participating in our clinical trials.
Regulatory approval of our product candidates may be withdrawn at any time.
After regulatory approval has been obtained for medical device products, the product and the manufacturer are subject to continual review, including the review of adverse experiences and clinical results that are reported after our products are made available to patients, and there can be no assurance that such approval will not be withdrawn or restricted. Regulators may also subject approvals to restrictions or conditions or impose post-approval obligations on the holders of these approvals, and the regulatory status of such products may be jeopardized if such obligations are not fulfilled. If post-approval studies are required, such studies may involve significant time and expense.
The manufacturing facilities we use to make any of our products will also be subject to periodic review and inspection by the FDA or other regulatory authorities, as applicable. The discovery of any new or previously unknown problems with the product or facility may result in restrictions on the product or facility, including withdrawal of the product from the market. We will continue to be subject to the FDA or other regulatory authority requirements, as applicable, governing the labeling, packaging, storage, advertising, promotion, recordkeeping, and submission of safety and other post-market information for all of our product candidates, even those that the FDA or other regulatory authority, as applicable, had approved. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.
Federal regulatory reforms may adversely affect our ability to sell our products profitably.
From time to time, legislation is drafted and introduced in the United States Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a medical device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes on us, if any, may be.
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.
International sales of our products and any of our product candidates that we commercialize are subject to the regulatory requirements of each country in which the products are sold. Accordingly, the introduction of our product candidates in markets outside the United States will be subject to regulatory approvals in those jurisdictions. The regulatory review process varies from country to country. Many countries impose product standards, packaging and labeling requirements, and import restrictions on medical devices. In addition, each country has its own tariff regulations, duties and tax requirements. The approval by foreign government authorities is unpredictable and uncertain and can be expensive. Our ability to market our approved products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances.
Prior to marketing our products in any country outside the United States, we must obtain marketing approval in that country. Approval and other regulatory requirements vary by jurisdiction and differ from the United States’ requirements. We may be required to perform additional pre-clinical or clinical studies even if FDA approval has been obtained.
If we fail to obtain an adequate level of reimbursement for our approved products by third party payers, there may be no commercially viable markets for our approved products or the markets may be much smaller than expected.
The availability and levels of reimbursement by governmental and other third party payers affect the market for our approved products. The efficacy, safety, performance and cost-effectiveness of our product and product candidates, and of any competing products, will determine the availability and level of reimbursement. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government sponsored healthcare and private insurance. To obtain reimbursement or pricing approval in some countries, we may be required to produce clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our approved products to other available therapies. We may not obtain international reimbursement or pricing approvals in a timely manner, if at all. Our failure to receive international reimbursement or pricing approvals would negatively impact market acceptance of our approved products in the international markets in which those pricing approvals are sought.
We believe that, in the future, reimbursement for any of our products or product candidates may be subject to increased restrictions both in the United States and in international markets. Future legislation, regulation or reimbursement policies of third party payers may adversely affect the demand for our products currently under development and limit our ability to sell our products on a profitable basis. In addition, third party payers continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for healthcare products and services. If reimbursement for our approved products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, market acceptance of our approved products would be impaired and our future revenues, if any, would be adversely affected.
Uncertainty surrounding and future changes to healthcare law in the United States may have a material adverse effect on us.
The healthcare regulatory environment in the United States is currently subject to significant uncertainty and the industry may in the future continue to experience fundamental change as a result of regulatory reform. In March 2010, the former U.S. President signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively the PPACA), which substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services, and significantly impacts the biotechnology and medical device industries. The PPACA, as amended, includes, among other things, the following measures:
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities and conduct comparative clinical effectiveness research;
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payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models;
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an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate; and
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a new abbreviated pathway for the licensure of biological products that are demonstrated to be biosimilar or interchangeable with a licensed biological product.
However, some of the provisions of the PPACA have yet to be fully implemented and certain provisions have been subject to judicial, Presidential and Congressional challenges. In addition, the U.S. Congress has made several attempts to repeal or modify the healthcare reform law. In the coming years, there may continue to be additional proposals relating to the reform of the United States healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of some or all of these proposals could have a material adverse effect on our business, results of operations and financial condition.
Additionally, initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation and competitive pricing, are ongoing in the United States and other markets. We could experience an adverse impact on our operating results due to increased pricing pressure these markets. Governments, hospitals and other third party payors could reduce the amount of approved reimbursement for our products or deny coverage altogether. Reductions in reimbursement levels or coverage or other cost-containment measures could adversely affect our future operating results.
If we fail to comply with the United States Federal Anti-Kickback Statute, False Claims Act and similar state laws, we could be subject to criminal and civil penalties and exclusion from the Medicare and Medicaid programs, which would have a material adverse effect on our business and results of operations.
A provision of the Social Security Act, commonly referred to as the Federal Anti-Kickback Statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for, or recommending the ordering, purchasing or leasing of, items or services payable by Medicare, Medicaid or any other Federal healthcare program. The Federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states have adopted laws similar to the Federal Anti-Kickback Statute, and some of these laws are even broader than the Federal Anti-Kickback Statute in that their prohibitions are not limited to items or services paid for by Federal healthcare programs, but instead apply regardless of the source of payment. Violations of the Federal Anti-Kickback Statute may result in substantial civil or criminal penalties and exclusion from participation in Federal healthcare programs.
Our operations may also implicate the False Claims Act. If we fail to comply with federal and state documentation, coding and billing rules, we could be subject to liability under the federal False Claims Act, including criminal and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs. The False Claims Act prohibits individuals and companies from knowingly submitting false claims for payments to, or improperly retaining overpayments from, the government.
All of our financial relationships with healthcare providers and others who provide products or services to Federal healthcare program beneficiaries are potentially governed by the Federal Anti-Kickback Statute, False Claims Act and similar state laws. We believe our operations are in compliance with the Federal Anti-Kickback Statute, False Claims Act and similar state laws. However, we cannot be certain that we will not be subject to investigations or litigation alleging violations of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business, which in turn could have a material adverse effect on our business. In addition, if our arrangements were found to violate the Federal Anti-Kickback Statute, False Claims Act or similar state laws, the consequences of such violations would likely have a material adverse effect on our business, results of operations and financial condition.
Failure to comply with the HIPAA Privacy, Security and Breach Notification Regulations, as such rules become applicable to our business, may increase our operational costs.
The HIPAA privacy and security regulations establish comprehensive federal standards with respect to the uses and disclosures of PHI by certain entities including health plans and health care providers, and set standards to protect the confidentiality, integrity and availability of electronic PHI. The regulations establish a complex regulatory framework on a variety of subjects, including, for example: the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient; a patient’s right to access, amend and receive an accounting of certain disclosures of PHI; the content of notices of privacy practices describing how PHI is used and disclosed and individuals’ rights with respect to their PHI; and implementation of administrative, technical and physical safeguards to protect privacy and security of PHI. We anticipate that, as we expand our dermaPACE® business, we will in the future be a covered entity under HIPAA. We intend to adopt policies and procedures to comply with the Privacy Rule, the Security Rule and the HIPAA statute as such regulations become applicable to our business and as such regulations are in effect at such time; however, there can be no assurance that our policies and procedures will be adequate or will prevent all incidents of non-compliance with such regulations.
The privacy regulations establish a uniform federal standard but do not supersede state laws that may be more stringent. Therefore, as we expand our deramPACE business, we may also be required to comply with both federal privacy and security regulations and varying state privacy and security laws and regulations. The federal privacy regulations restrict the ability to use or disclose certain individually identifiable patient health information, without patient authorization, for purposes other than payment, treatment or health care operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations.
The HITECH Act and its implementing regulations also require healthcare providers to notify affected individuals, the Secretary of the U.S. Department of Health and Human Services, and in some cases, the media, when PHI has been breached as defined under and following the requirements of HIPAA. Many states have similar breach notification laws. In the event of a breach, to the extent such regulations are applicable to our business, we could incur operational and financial costs related to remediation as well as preparation and delivery of the notices, which costs could be substantial. Additionally, HIPAA, the HITECH Act, and their implementing regulations provide for significant civil fines, criminal penalties, and other sanctions for failure to comply with the privacy, security, and breach notification rules, including for wrongful or impermissible use or disclosure of PHI. Although the HIPAA statute and regulations do not expressly provide for a private right of action for damages, private parties may also seek damages under state laws for the wrongful or impermissible use or disclosure of confidential health information or other private personal information. Additionally, amendments to HIPAA provide that the state Attorneys General may bring an action against a covered entity for a violation of HIPAA. As we expand our business such that federal and state laws regarding PHI and privacy apply to our operations, any noncompliance with such regulations could have a material adverse effect on our business, results of operations and financial condition.
We face periodic reviews and billing audits from governmental and private payors and these audits could have adverse results that may negatively impact our business.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental reviews and audits to verify our compliance with these programs and applicable laws and regulations. We also are subject to audits under various government programs in which third-party firms engaged by the Centers for Medicare & Medicaid Services conduct extensive reviews of claims data and medical and other records to identify potential improper payments under the Medicare program. Private pay sources also reserve the right to conduct audits. If billing errors are identified in the sample of reviewed claims, the billing error can be extrapolated to all claims filed which could result in a larger overpayment than originally identified in the sample of reviewed claims. Our costs to respond to and defend reviews and audits may be significant and could have a material adverse effect on our business, financial condition, results of operations and cash flows. Moreover, an adverse review or audit could result in:
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required refunding or retroactive adjustment of amounts we have been paid by governmental or private payors;
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state or Federal agencies imposing fines, penalties and other sanctions on us;
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loss of our right to participate in the Medicare program, state programs, or one or more private payor networks; or
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damage to our business and reputation in various markets.
Any one of these results could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Product quality or performance issues may be discovered through ongoing regulation by the FDA and by comparable international agencies, as well as through our internal standard quality process.
The medical device industry is subject to substantial regulation by the FDA and by comparable international agencies. In addition to requiring clearance or approval to market new or improved devices, we are subject to ongoing regulation as a device manufacturer. Governmental regulations cover many aspects of our operations, including quality systems, marketing and device reporting. As a result, we continually collect and analyze information about our product quality and product performance through field observations, customer feedback and other quality metrics. If we fail to comply with applicable regulations or if post market safety issues arise, we could be subject to enforcement sanctions, our promotional practices may be restricted, and our marketed products could be subject to recall or otherwise impacted. Each of these potential actions could result in a material adverse effect on our business, operating results and financial condition.
The use of hazardous materials in our operations may subject us to environmental claims or liability.
We conduct research and development and manufacturing operations in our facility. Our research and development process may, at times, involve the controlled use of hazardous materials and chemicals. We may conduct experiments in which we may use small quantities of chemicals, including those that are corrosive, toxic and flammable. The risk of accidental injury or contamination from these materials cannot be eliminated. We do not maintain a separate insurance policy for these types of risks. In the event of an accident or environmental discharge or contamination, we may be held liable for any resulting damages, and any liability could exceed our resources. We are subject to Federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant.
Risks Related to Intellectual Property
The protection of our intellectual property is critical to our success and any failure on our part to adequately protect those rights could materially adversely affect our business.
Our commercial success depends to a significant degree on our ability to:
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obtain and/or maintain protection for our product candidates under the patent laws of the United States and other countries;
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defend and enforce our patents once obtained;
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obtain and/or maintain appropriate licenses to patents, patent applications or other proprietary rights held by others with respect to our technology, both in the United States and other countries;
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maintain trade secrets and other intellectual property rights relating to our product candidates; and
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operate without infringing upon the patents, trademarks, copyrights and proprietary rights of third parties.
The degree of intellectual property protection for our technology is uncertain, and only limited intellectual property protection may be available for our product candidates, which may prevent us from gaining or keeping any competitive advantage against our competitors. Although we believe the patents that we own or license, and the patent applications that we own, generally provide us a competitive advantage, the patent positions of biotechnology, biopharmaceutical and medical device companies are generally highly uncertain, involve complex legal and factual questions and have been the subject of much litigation. Neither the United States Patent & Trademark Office nor the courts have a consistent policy regarding the breadth of claims allowed or the degree of protection afforded under many biotechnology patents. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Further, a court or other government agency could interpret our patents in a way such that the patents do not adequately cover our current or future product candidates. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.
We also rely upon trade secrets and unpatented proprietary know-how and continuing technological innovation in developing our products, especially where we do not believe patent protection is appropriate or obtainable. We seek to protect this intellectual property, in part, by generally requiring our employees, consultants, and current and prospective business partners to enter into confidentiality agreements in connection with their employment, consulting or advisory relationships with us, where appropriate. We also require our employees, consultants, researchers, and advisors who we expect to work on our products and product candidates to agree to disclose and assign to us all inventions conceived during the work day, developed using our property or which relate to our business. We may lack the financial or other resources to successfully monitor and detect, or to enforce our rights in respect of, infringement of our rights or breaches of these confidentiality agreements. In the case of any such undetected or unchallenged infringements or breaches, these confidentiality agreements may not provide us with meaningful protection of our trade secrets and unpatented proprietary know-how or adequate remedies. In addition, others may independently develop technology that is similar or equivalent to our trade secrets or know-how. If any of our trade secrets, unpatented know-how or other confidential or proprietary information is divulged to third parties, including our competitors, our competitive position in the marketplace could be harmed and our ability to sell our products successfully could be severely compromised. Enforcing a claim that a party illegally obtained and is using trade secrets that have been licensed to us or that we own is also difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could have a material adverse effect on our business. Moreover, some of our academic institution licensees, evaluators, collaborators and scientific advisors have rights to publish data and information to which we have rights. If we cannot maintain the confidentiality of our technologies and other confidential information in connection with our collaborations, our ability to protect our proprietary information or obtain patent protection in the future may be impaired, which could have a material adverse effect on our business.
In particular, we cannot assure you that:
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we or the owners or other inventors of the patents that we own or that have been licensed to us, or that may be issued or licensed to us in the future, were the first to file patent applications or to invent the subject matter claimed in patent applications relating to the technologies upon which we rely;
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others will not independently develop similar or alternative technologies or duplicate any of our technologies;
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any of our patent applications will result in issued patents;
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the patents and patent applications that we own or that have been licensed to us, or that may be issued or licensed to us in the future, will provide a basis for commercially viable products or will provide us with any competitive advantages, or will not be challenged by third parties;
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the patents and patent applications that have been licensed to us are valid and enforceable;
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we will develop additional proprietary technologies that are patentable;
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we will be successful in enforcing the patents that we own or license and any patents that may be issued or licensed to us in the future against third parties;
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the patents of third parties will not have an adverse effect on our ability to do business; or
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our trade secrets and proprietary rights will remain confidential.
Accordingly, we may fail to secure meaningful patent protection relating to any of our existing or future product candidates or discoveries despite the expenditure of considerable resources. Further, there may be widespread patent infringement in countries in which we may seek patent protection, including countries in Europe and Asia, which may instigate expensive and time-consuming litigation that could adversely affect the scope of our patent protection. In addition, others may attempt to commercialize products similar to our product candidates in countries where we do not have adequate patent protection. Failure to obtain adequate patent protection for our product candidates, or the failure by particular countries to enforce patent laws or allow prosecution for alleged patent infringement, may impair our ability to be competitive. The availability of infringing products in markets where we have patent protection, or the availability of competing products in markets where we do not have adequate patent protection, could erode the market for our product candidates, negatively impact the prices we can charge for our product candidates, and harm our reputation if infringing or competing products are manufactured to inferior standards.
Patent applications owned by us or licensed to us may not result in issued patents, and our competitors may commercialize the discoveries we attempt to patent.
The patent applications that we own and that have been licensed to us, and any future patent applications that we may own or that may be licensed to us, may not result in the issuance of any patents. The standards that the United States Patent & Trademark Office and foreign patent agencies use to grant patents are not always applied predictably or uniformly and can change. Consequently, we cannot be certain as to the type and scope of patent claims to which we may in the future be entitled under our license agreements or that may be issued to us in the future. These applications may not be sufficient to meet the statutory requirements for patentability and, therefore, may not result in enforceable patents covering the product candidates we want to commercialize. Further, patent applications in the United States that are not filed in other countries may not be published or generally are not published until at least 18 months after they are first filed, and patent applications in certain foreign countries generally are not published until many months after they are filed. Scientific and patent publication often occurs long after the date of the scientific developments disclosed in those publications. As a result, we cannot be certain that we will be the first creator of inventions covered by our patents or applications, or the first to file such patent applications. As a result, our issued patents and our patent applications could become subject to challenge by third parties that created such inventions or filed patent applications before us or our licensors, resulting in, among other things, interference proceedings in the United States Patent & Trademark Office to determine priority of discovery or invention. Interference proceedings, if resolved adversely to us, could result in the loss of or significant limitations on patent protection for our products or technologies. Even in the absence of interference proceedings, patent applications now pending or in the future filed by third parties may prevail over the patent applications that may be owned by us or licensed to us or that we may file in the future, or may result in patents that issue alongside patents issued to us or our licensors or that may be issued or licensed to us in the future, leading to uncertainty over the scope of the patents owned by us or licensed to us or that may in the future be owned by us or impede our freedom to practice the claimed inventions.
Our patents may not be valid or enforceable and may be challenged by third parties.
We cannot assure you that the patents that have been issued or licensed to us would be held valid by a court or administrative body or that we would be able to successfully enforce our patents against infringers, including our competitors. The issuance of a patent is not conclusive as to its validity or enforceability, and the validity and enforceability of a patent is susceptible to challenge on numerous legal grounds, including the possibility of reexamination proceedings brought by third parties in the United States Patent & Trademark Office against issued patents and similar validity challenges under foreign patent laws. Challenges raised in patent infringement litigation brought by us or against us may result in determinations that patents that have been issued to us or licensed to us or any patents that may be issued to us or our licensors in the future are invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in these patents without paying licensing fees or royalties to us, which could significantly diminish the value of our intellectual property and our competitive advantage. Even if our patents are held to be enforceable, others may be able to design around our patents or develop products similar to our products that are not within the scope of any of our patents.
In addition, enforcing the patents that we own or license and any patents that may be issued to us in the future against third parties may require significant expenditures regardless of the outcome of such efforts. Our inability to enforce our patents against infringers and competitors may impair our ability to be competitive and could have a material adverse effect on our business.
Issued patents and patent licenses may not provide us with any competitive advantage or provide meaningful protection against competitors.
The discoveries or technologies covered by issued patents we own or license may not have any value or provide us with a competitive advantage, and many of these discoveries or technologies may not be applicable to our product candidates at all. We have devoted limited resources to identifying competing technologies that may have a competitive advantage relative to ours, especially those competing technologies that are not perceived as infringing on our intellectual property rights. In addition, the standards that courts use to interpret and enforce patent rights are not always applied predictably or uniformly and can change, particularly as new technologies develop. Consequently, we cannot be certain as to how much protection, if any, will be afforded by these patents with respect to our products if we, our licensees or our licensors attempt to enforce these patent rights and those rights are challenged in court.
The existence of third party patent applications and patents could significantly limit our ability to obtain meaningful patent protection. If patents containing competitive or conflicting claims are issued to third parties, we may be enjoined from pursuing research, development or commercialization of product candidates or may be required to obtain licenses, if available, to these patents or to develop or obtain alternative technology. If another party controls patents or patent applications covering our product candidates, we may not be able to obtain the rights we need to those patents or patent applications in order to commercialize our product candidates or we may be required to pay royalties, which could be substantial, to obtain licenses to use those patents or patent applications.
In addition, issued patents may not provide commercially meaningful protection against competitors. Other parties may seek and/or be able to duplicate, design around or independently develop products having effects similar or identical to our patented product candidates that are not within the scope of our patents.
Limitations on patent protection in some countries outside the United States, and the differences in what constitutes patentable subject matter in these countries, may limit the protection we have under patents issued outside of the United States. We do not have patent protection for our product candidates in a number of our target markets. The failure to obtain adequate patent protection for our product candidates in any country would impair our ability to be commercially competitive in that country.
The ability to market the products we develop is subject to the intellectual property rights of third parties.
The biotechnology, biopharmaceutical and medical device industries are characterized by a large number of patents and patent filings and frequent litigation based on allegations of patent infringement. Competitors may have filed patent applications or have been issued patents and may obtain additional patents and proprietary rights related to products or processes that compete with or are similar to ours. We may not be aware of all of the patents potentially adverse to our interests that may have been issued to others. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or proprietary technologies may infringe. Third parties may claim that our products or related technologies infringe their patents or may claim that the products of our suppliers, manufacturers or contract service providers that produce our devices infringe on their intellectual property. Further, we, our licensees or our licensors, may need to participate in interference, opposition, protest, reexamination or other potentially adverse proceedings in the United States Patent & Trademark Office or in similar agencies of foreign governments with regards to our patents, patent applications, and intellectual property rights. In addition, we, our licensees or our licensors may need to initiate suits to protect our intellectual property rights.
Litigation or any other proceeding relating to intellectual property rights, even if resolved in our favor, may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, in certain cases, result in substantial additional expenses to license technologies from third parties. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. An unfavorable outcome in any patent infringement suit or other adverse intellectual property proceeding could require us to pay substantial damages, including possible treble damages and attorneys’ fees, cease using our technology or developing or marketing our products, or require us to seek licenses, if available, of the disputed rights from other parties and potentially make significant payments to those parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. Even if we are able to obtain rights to a third party’s patented intellectual property, those rights may be nonexclusive and, therefore, our competitors may obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our product candidates or may have to cease some of our business operations as a result of patent infringement claims, which could materially harm our business. We cannot guarantee that our products or technologies will not conflict with the intellectual property rights of others.
If we need to redesign our products to avoid third party patents, we may suffer significant regulatory delays associated with conducting additional clinical studies or submitting technical, clinical, manufacturing or other information related to any redesigned product and, ultimately, in obtaining regulatory approval. Further, any such redesigns may result in less effective and/or less commercially desirable products, if the redesigns are possible at all.
Additionally, any involvement in litigation in which we, our licensees or our licensors are accused of infringement may result in negative publicity about us or our products, injure our relations with any then-current or prospective customers and marketing partners, and cause delays in the commercialization of our products.
Risks Related to our Common Stock
Our stock price is volatile.
The market price of our common stock is volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including the following:
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our ability to obtain additional financing and, if available, the terms and conditions of the financing;
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changes in the timing of on-going clinical trial enrollment, the results of our clinical trials and regulatory approvals for our product candidates or failure to obtain such regulatory approvals;
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changes in our industry;
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additions or departures of key personnel;
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sales of our common stock;
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our ability to execute our business plan;
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operating results that fall below expectations;
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period-to-period fluctuations in our operating results;
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new regulatory requirements and changes in the existing regulatory environment; and
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general economic conditions and other external factors.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
There is currently a limited trading market for our common stock and we cannot predict how liquid the market might become.
To date, there has been a limited trading market for our common stock and we cannot predict how liquid the market for our common stock might become. Until September 28, 2021, our common stock was quoted on the OTC Pink Sheets, which is an inter-dealer market that provides significantly less liquidity than the New York Stock Exchange or the Nasdaq Stock Market. After such date, and unless the Company is listed again on the OTC Pink Sheets, shares of our common stock will trade on the OTC Expert Market, which provides significantly less liquidity than other exchanges and markets. The quotation of our common stock on the OTC Pink Sheets or the OTC Expert Market does not assure that a meaningful, consistent and liquid trading market exists. The market price for our common stock is subject to volatility and holders of our common stock may be unable to resell their shares at or near their original purchase price, or at any price. In the absence of an active trading market:
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investors may have difficulty buying and selling, or obtaining market quotations for our common stock;
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market visibility for our common stock may be limited; and
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a lack of visibility for our common stock may have a depressive effect on the market for our common stock.
Trading for our common stock is limited under the SEC’s penny stock regulations, which has an adverse effect on the liquidity of our common stock.
The trading price of our common stock is less than $5.00 per share and, as a result, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the Exchange Act). Under this rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. Generally, the broker-dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.
Regulations of the Securities and Exchange Commission (the “SEC”) also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because only a few brokers or dealers are likely to undertake these compliance activities. Compliance with these requirements may make it more difficult for holders of our Common Stock to resell their shares to third parties or to otherwise dispose of them in the market.
As an issuer of “penny stock”, the protection provided by the federal securities laws relating to forward looking statements does not apply to us.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our board of directors has the right, without stockholder approval, to issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock, which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying or preventing a change of control. The possible negative impact on takeover attempts could adversely affect the price of our common stock.
On January 31, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series C Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate 90 shares of our preferred stock as Series C Convertible Preferred Stock. Although we have no other shares of preferred stock currently outstanding and no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.
On January 12, 2016, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series B Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate 293 shares of our preferred stock as Series B Convertible Preferred Stock.
We have not sought an advisory stockholder vote to approve the compensation of our named executive officers.
Rule 14a-21 under the Exchange Act requires us to seek a separate stockholder advisory vote at our annual meeting at which directors are elected to approve the compensation of our named executive officers, not less frequently than once every three years (say-on-pay vote), and, at least once every six years, to seek a separate stockholder advisory vote on the frequency with which we will submit advisory say-on-pay votes to our stockholders (say-on-frequency vote). In 2013, the year in which Rule 14a-21 became applicable to smaller reporting companies, and in 2014, we did not submit to our stockholders a say-on-pay vote to approve an advisory resolution regarding our compensation program for our named executive officers, or a say-on-frequency vote. Consequently, the board of directors has not considered the outcome of our say-on-pay vote results when determining future compensation policies and pay levels for our named executive officers.
Because we did not comply with our SEC filing obligations, our stock may become subject to limitations or reduction in stock price, liquidity, or volume.
Rule 15c2-11 under the Securities Exchange Act of 1934 (“Exchange Act”) governs the publication of quotations in over-the-counter (“OTC”) markets. On September 16, 2020, the SEC adopted amendments to the Rule which prohibits broker-dealers from publishing or submitting for publication a quote for an issuer’s securities unless they are based on current publicly available information about the issuer. The amended Rule also limits the Rule’s “piggyback” exception, which allows broker-dealers to publish quotations for a security in reliance on the quotations of a broker-dealer that initially performed the information review required by the Rule, to issuers with current publicly available information or issuers that are up-to-date in their Exchange Act Reports.
The practical impact of these changes requires us to maintain a level of periodic disclosure. However, we did not timely file with the SEC this Annual Report on Form 10-K for the year ended December 31, 2020, and we have not yet filed our Quarterly Report on Form 10-Q for the quarters ended March 31, 2021 or June 30, 2021. As a result, our stock was removed from the OTC Bulletin Board on September 28, 2021, which will limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. The market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Additionally, as a result of our failure to comply with the SEC filing obligations, as noted above, our stock was delisted from the OTC Pink Market to the OTC Expert Market. The OTC Expert Market is an even more limited market where the stocks are more volatile and poses a greater risk to investors. Since our stock is downgraded, it may be designated with a “stop sign” indicating that current public information about our company is not available due to “delinquent SEC reporting.”
We will need to improve our internal controls and procedures in order to remain current with our securities-related requirements.
We are submitting this Annual Report 10-K for the year ended December 31, 2020 after the required SEC filing deadline. We also have not yet filed our Quarterly Report on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021. As a result, our failure to maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our stock.
Because we failed to remain current in our reporting requirements, our securities were removed from the OTC Pink Sheets, which may further limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
Item 2.
PROPERTIES
We have an operations, production and research and development office in a leased facility in Suwanee, Georgia, consisting of 10,177 square feet of space under a lease which expires on December 31, 2021. Under the terms of the lease, we pay monthly rent of $14,651, subject to a 3% adjustment on an annual basis.
We have another operations and research and development office in a leased facility in Eden Prairie, Minnesota, consisting of 8,199 square feet of space under a lease which expires on August 31, 2023. Under the terms of the lease, we pay monthly rent of $7,051, subject to a 2.45% adjustment on an annual basis.

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ITEM 3. LEGAL PROCEEDINGS
Item 3.
LEGAL PROCEEDINGS
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts and intellectual property matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined.
There are no material proceedings known to us to be contemplated by any governmental authority.
There are no material proceedings known to us, pending or contemplated, in which any of our directors, officers or affiliates or any of our principal security holders, or any associate of any of the foregoing, is a party or has an interest adverse to us.
In May 2021, the Company received notification that it is not in compliance with the Biovance portion of the License Agreement with Celularity as discussed in Notes 5 and 24. The Company has responded and asserted that the Company is not in breach and that the Supplier has breached various agreements. It is too early to determine the outcome of this matter. Any potential impact to the Company cannot be fully determined at this time.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
MINE SAFETY DISCLOSURE
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is traded on the OTC Expert Market under the symbol “SNWV”. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.
Holders of Common Stock
As of October 11, 2021, there were 481,619,621 shares of Common Stock outstanding and approximately 197 holders of record of the Company’s common stock.
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
Plan Category
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
Weighted
-average
exercise
price of outstanding options,
warrants
and rights
Number of
securities
remaining
available for
future issuance
under equity compensation
plans
(excluding
securities
reflected in
column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
-
$
0.00
-
Equity compensation plans not approved by security holders
31,588,685
$
0.28
3,061,615
Total
31,588,685
$
0.28
3,061,615
Stock Incentive Plans
On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Stock Incentive Plan”). The Stock Incentive Plan permits grants of awards to selected employees, directors and advisors of the Company in the form of restricted stock or options to purchase shares of common stock. Options granted may include non-statutory options as well as qualified incentive stock options. The Stock Incentive Plan is currently administered by the board of directors of the Company. The Stock Incentive Plan gives broad powers to the board of directors of the Company to administer and interpret the particular form and conditions of each option. The stock options granted under the Stock Incentive Plan are non-statutory options which vest over a period of up to three years and have a ten-year term. The options are granted at an exercise price equal to the fair market value of the common stock on the date of the grant which is approved by the board of directors of the Company.
HealthTronics
Please see Item 7, “Management Discussion and Analysis-Liquidity and Capital Resources-Convertible Notes Payable” for discussion of the transactions with HealthTronics, including the issuance of a convertible note and other various securities of the Company.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.
SELECTED FINANCIAL DATA
Not required under Regulation S-K for “smaller reporting companies”.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our business development plans, clinical trials, regulatory reviews, timing, strategies, expectations, anticipated expenses levels, projected profits, business prospects and positioning with respect to market, demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this Annual Report on Form 10-K. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
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, which was subject to two double-blinded, randomized Phase III clinical studies. On December 28, 2017, the U.S. 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 Diabetic Foot Ulcers (DFU) as described in the de novo request, subject to the general control provisions of the FD&C 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 “Acquistion”) 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 U.S. Food and Drug Administration (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 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 that it is not in compliance with the Biovance portion of the License Agreement with Celularity. See further discussion in Note 24, Subsequent Events.
Our portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE®) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. The Company is marketing its dermaPACE® System for treatment usage in the United States and will continue to generate revenue from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia, and Asia/Pacific. The Company generates revenue streams from product sales, licensing transactions dermaPACE® treatments, and other activities, and with its recent acquisition of the UltraMIST® assets, SANUWAVE now combines two highly complementary and market-cleared energy transfer technologies used in the dermaPACE® and UltraMIST® Systems and two human tissue biologic products (Biovance® and Interfyl®), which creates a platform of scale with an end-to-end product offering in the advanced wound care market.
Our lead product candidate for the global wound care market, dermaPACE®, has received FDA clearance for commercial use to treat diabetic foot ulcers in the United States and the CE Mark allowing for commercial use on acute and chronic defects of the skin and subcutaneous soft tissue. We believe we have demonstrated that our patented technology is safe and effective in stimulating healing in chronic conditions of the foot and the elbow through our United States FDA Class III Premarket Approvals (“PMAs”) approved OssaTron® device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our OssaTron, Evotron®, and orthoPACE® devices in Europe and Asia.
We are focused on developing our Pulsed Acoustic Cellular Expression (PACE) technology to activate healing in:
•
wound conditions, including diabetic foot ulcers, venous and arterial ulcers, pressure sores, burns and other skin eruption conditions;
•
orthopedic applications, such as eliminating chronic pain in joints from trauma, arthritis or tendons/ligaments inflammation, speeding the healing of fractures (including nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones in the extremities and spine, and other potential sports injury applications;
•
plastic/cosmetic applications such as cellulite smoothing, graft and transplant acceptance, skin tightening, scarring and other potential aesthetic uses; and
•
cardiac applications for removing plaque due to atherosclerosis improving heart muscle performance.
In addition to healthcare uses, our high-energy, acoustic pressure shock waves, due to their powerful pressure gradients and localized cavitational effects, may have applications in secondary and tertiary oil exploitation, for cleaning industrial waters, for sterilizing food liquids and finally for maintenance of industrial installations by disrupting biofilms formation. Our business approach will be through licensing and/or partnership opportunities.
The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely 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 until the disease is contained. 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 have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. The Company is closely monitoring the impact of the pandemic on all aspects of its business and operations. We have received funds for disaster relief loans through the SBA to help minimize the impact on our business.
Clinical Trials and Marketing
The FDA granted approval of our Investigational Device Exemption (IDE) to conduct two double-blinded, randomized clinical trials utilizing our lead device product for the global wound care market, the dermaPACE® device, in the treatment of diabetic foot ulcers. On December 28, 2017, the FDA determined that the criteria at section 513(a)(1)(A) of (B) of the FD&C Act were met and granted the de novo clearance classifying dermaPACE® as Class II and available to be marketed immediately.
Also, our dermaPACE® device has received the European CE Mark approval to treat acute and chronic defects of the skin and subcutaneous soft tissue, such as in the treatment of pressure ulcers, diabetic foot ulcers, burns, and traumatic and surgical wounds. The dermaPACE® is also licensed for sale in Canada, Australia, New Zealand, Brazil, Mexico, and South Korea.
We are actively marketing the dermaPACE® to the European Community, Canada, Brazil, Mexico, and Asia/Pacific, utilizing distributors in select countries.
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 expect to devote substantial resources for the commercialization of the dermaPACE® System and will continue to research and develop 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. 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 statement issuance date.
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 next year. 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 2021 and 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. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, 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 consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our 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 $156,689,989. 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 incur expenses related to commercialization of our dermaPACE® system for the treatment of diabetic foot ulcers in the United States. If we are able to successfully commercialize, market and distribute the dermaPACE® system, then we hope to partially or completely offset these losses in the future. 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 year.
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;
•
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”.
The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely 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 until the disease is contained. 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 have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of our 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 warrant 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.
While our significant accounting policies are more fully described in Note 3 to our consolidated financial statements filed with this Annual Report on Form 10-K, we believe that the following accounting policies relating to revenue recognition, research and development costs, inventory valuation, liabilities related to warrants issued, stock-based compensation and income taxes are significant and; therefore, they are important to aid you in fully understanding and evaluating our reported financial results.
Revenue Recognition
Refer to Notes 3 and 10 to the accompanying consolidated financial statements.
Stock-based Compensation
The Stock Incentive Plan provides that stock options, and other equity interests or equity-based incentives, may be granted to key personnel, directors and advisors at the fair value of the common stock at the time the option is granted, which is approved by our board of directors. The maximum term of any option granted pursuant to the Stock Incentive Plan is ten years from the date of grant.
In accordance with ASC 718, Compensation - Stock Compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The expected terms of options granted represent the period of time that options granted are estimated to be outstanding and are derived from the contractual terms of the options granted. We amortize the fair value of each option over each option’s vesting period.
Results of Operations for the Years ended December 31, 2020 and 2019
Revenues and Cost of Revenues
Revenues for the year ended December 31, 2020 were $4,057,471, compared to $1,028,730 for the same period in 2019, an increase of $3,028,741 or 294%. Revenue resulted primarily from sales in Europe and Asia/Pacific of our orthoPACE devices and related applicators and sales in the United States and Asia/Pacific of our dermaPACE® devices and related applicators as well as UltraMist product sales after the August 6, 2021 Acquisition. The primary driver for the revenue increase were sales of UltraMist product totaling $3,682,121 between August 6, 2020 and December 31, 2020.
Cost of revenues for the year ended December 31, 2020 were $1,162,021, compared to $538,923 for the same period in 2019. The increase in cost of revenues was primarily driven by sales of the UltraMist product subsequent to the August 6, 2020 Acquisition. Gross profit as a percentage of revenues was 71% for the year ended December 31, 2020, compared to 48% for the same period in 2019. The increase in gross profit as a percentage of revenues in 2020 was primarily due the change in the sales mix toward higher margin UltraMist products.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2020 were $1,245,507, compared to $1,181,892 for the same period in 2019, an increase of $63,615, or 5%. The increase in research and development expenses in 2020, as compared to 2019, was due to contracting expenses for temporary services, increased services related to the dosage study in Poland and increased expenses related to electrical testing for the device as well as the acquisition of additional of employee to support the Ultramist products.
Selling and Marketing Expenses
Selling and marketing expenses for the year ended December 31, 2020 were $5,159,740 as compared to $1,590,957 for the same period in 2019, an increase of $3,568,783, or 224%. The year-over-year increase in sales and marketing expenses in 2020 was due primarily to the August 6, 2020 Acquisition transaction and the additional sales and marketing payroll, travel, tradeshow and training costs associated with the acquired UltraMist business as well as increased costs related to the to the commercialization of dermaPACE®.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2020 were $13,723,888 as compared to $6,440,093 for the same period in 2019, an increase of $7,283,795, or 113%. The increase in 2020 as compared to 2019, was primarily due to acquisition-related transaction expenses, share-based compensation for services, higher lease and payroll-related to costs subsequent to the August 6, 2020 Acquisition, as well as increased consulting and IT costs associated with the integration of the Acquisition.
Impairment of Intangible Assets
During the fourth quarter of 2020, the Company determined that the intangible asset for customer relationships related to the biological products was impaired due to significant shortfalls in sales of the products during that period compared with the sales projections used to determine the fair value the intangible asset as of the August 6, 2020 acquisition date. The Company does not expect sales of biological products to sufficiently recover. At December 31, 2020. the Company recorded a $7,185,120 Impairment charge for this intangible asset.
Depreciation and Amortization Expenses
Depreciation and amortization operating expenses were $781,002 for the year ended December 31, 2021 versus $71,213 for the same period of 2019. The year-over-year increase was due to $713,021 of intangible amortization expense recorded in 2020 in conjunction with the August 6, 2020 Acquisition.
Other Income (Expense)
Other income (expense) was a net expense of $5,737,226 for the year ended December 31, 2020, as compared to a net expense of $1,635,491 for the same period in 2019, a net expense increase of $4,101,735. The change was driven by increased expense for the change in the fair value of derivative liability of $3,420,289, increased interest expense of $704,850 and loss on extinguishment of debt of $565,374, partially offset by $600,000 partnership fee in 2020. The increased interest expense was the result of higher levels of debt outstanding during 2020 compared with 2019 and the change in fair value of the derivative liability relates to warrants issued during 2020.
Net Loss
Net loss for the year ended December 31, 2020 was $30.9 million, or ($0.08) per basic and diluted share, compared to a net loss of $10.4 million, or ($0.05) per basic and diluted share, for the same period in 2019. The increase in the net loss was primarily a result of higher 2021 operating and other expenses, partially offset by increases in revenues/gross margin as noted above.
Liquidity and Capital Resources
We expect to devote substantial resources for the commercialization of the dermaPACE® System and will 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. 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. Cash used in operations for the Company were approximately $500,000 to $1,000,000 per month for the first half of 2021 and management anticipates cash used for operations of up to$100,000 per month for the second half of 2021 and plan to break even in the first half of 2022 as resources are devoted to the commercialization of the dermaPACE and UltraMist product including hiring of new employees, expansion of our international business and continued research and development of next generation of our technology as well as non-medical uses of our technology.
Management’s plans are to obtain additional capital in 2021 and 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. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, 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 consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our 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.
Through sales of a combination of equity and debt instruments, the Company has raised a total of $2.3 million in securities transactions closing on April 20, 2021, May 15, 2021 and September 7, 2021. See further discussion in Note 24, Subsequent Events.
Master Equipment Lease
On January 26, 2018, the Company entered into a Master Equipment Lease with NFS Leasing Inc. (“NFS”) to provide financing for equipment purchases to enable the Company to begin placing the dermaPACE® System in the marketplace. This agreement provides for a lease line of up to $1,000,000 with a term of 36 months, and grants NFS a security interest in the Company’s accounts receivable, tangible and intangible personal property and cash and deposit accounts of the Company. In 2019 and 2020, the Company entered into additional equipment leases under the Master Equipment Lease and they are included in property, plant and equipment as a right of use asset with a related finance lease liability in our consolidated balance sheets.
Series C convertible preferred stock certificate of designation
On January 31, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series C Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate 90 shares of our preferred stock as Series C Convertible Preferred Stock. Although we have no other shares of preferred stock currently outstanding and no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.
Convertible notes payable
On August 6, 2020, the Company entered into a letter agreement (the “HealthTronics Agreement”) with HealthTronics pursuant to which the Company paid off all outstanding debt due and owed to HealthTronics, including the notes payable. Pursuant to the HealthTronics Agreement, as consideration for the extinguishment of the debt due to HealthTronics, (i) the Company paid to HealthTronics an amount in cash equal to $4,000,000, (ii) HealthTronics exercised all of its outstanding Class K Warrants to purchase 7,200,000 shares of common stock, (iii) the Company issued to HealthTronics a convertible note payable in the amount of $1,372,743, and (iv) the Company and HealthTronics entered into a Securities Purchase Agreement dated August 6, 2020 pursuant to which the Company issued to HealthTronics an aggregate of 8,275,235 shares of common stock and an accompanying Class E warrant to purchase up to an additional 8,275,235 shares of common stock. The warrant has an exercise price of $0.25 per share and a three-year term.
The convertible promissory note, with principal amount of $1,372,743, matured on August 6, 2021 and has not been repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the convertible note payable and, accordingly, it began accruing interest of 2% in addition to the 12% initial rate as of the date of the default.
In the event that the Seller Note has not been repaid prior to January 1, 2021, HealthTronics may elect to convert the outstanding principal amount plus any accrued but unpaid interest thereon into shares of the Company’s common stock, at a conversion price of $0.10 per share. As this conversion option is contingent, the conversion option has not been bifurcated from the host instrument as of December 31, 2020. The convertible promissory note is expressly subordinate to the NWPSA “Senior Secured Notes” described in Note 12. The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty.
SBA loans
On May 28, 2020, the Company received proceeds from a loan in the amount of $464,335 (the “PPP Loan”) from Truist Bank, as lender, pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on May 28, 2022 and bears interest at a rate of 1% per annum. Commencing December 12, 2020, the Company is required to pay the lender equal monthly payments of principal and interest. The PPP Loan is evidenced by a promissory note dated May 28, 2020 (the “Note”), which contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties and covenants. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.
All or a portion of the PPP Loan may be forgiven by the U.S. Small Business Administration (“SBA”) upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. The ultimate forgiveness of the PPP Loan is also predicated upon regulatory authorities concurring with management’s good faith assessment that the current economic uncertainty made the loan request necessary to support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company satisfied all eligibility requirements for the PPP Loan, the Company is later determined to have violated any applicable laws or regulations or it is otherwise determined that the Company was ineligible to receive the PPP Loan, the Company may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. Under the terms of the PPP Loan, the Company may be eligible for full or partial loan forgiveness in the third quarter of 2020. The Company completed the application for loan forgiveness during the third quarter of 2021, however, no assurance is provided that the Company will obtain forgiveness for, any portion of the PPP Loan. The Company received a letter from the SBA dated August 27, 2021 forgiving $454,335 of the PPP Loan principal and $5,755 of interest.
On June 10, 2020, the Company secured a loan offered by the U.S. Small Business Administration (“SBA”) under its Economic Injury Disaster Loan assistance program (“EIDL”) in light of the impact of COVID-19 pandemic on the Company’s business. The principal amount of this loan was $150,000 and interest accrued at the rate of 3.75% per annum. This loan was repaid in full on August 5, 2020 with proceeds from the NWPSA Senior Notes as part of the conditions of that agreement.
Senior Secured promissory notes
On August 6, 2020, the Company entered into a Note and Warrant Purchase and Security Agreement (the “NWPSA”), with the noteholder party thereto and NH Expansion Credit Fund Holdings LP, as agent. As a result, the Company issued a $15,000,000 Secured Promissory Note (the “Senior Notes”) and Warrant exercisable into shares of the Company’s common stock (the “Warrant”) in exchange for cash to support operations, repay outstanding debt and close on the acquisition of the UltraMIST assets from Celularity, among other transactions. The Company received net proceeds from issuing the Notes and NH Warrant of $13,346,547. The NWPSA provides for (i) the sale and purchase of secured notes in an aggregate original principal amount of $15 million and (ii) the issuance of 13,091,160 warrants equal to 2.0% of the fully-diluted common stock of the Company as of the issue date. The warrant has an exercise price of $0.01 per share and a 10-year term. The warrant agreement contains a put option. Upon payment in full of the Note, the holder has the ability to require the Company to purchase the warrants from the holder for cash. Accordingly, the warrant has been classified as a derivative liability. The holder has the option to exercise the put any time between the payment of the Note and the expiration of the warrants. The Note has a maturity date of September 30, 2025 and accrues interest at a rate that is the sum of: (a) the greater of the quarter end prime rate or 3% plus (b) 9%, due in quarterly arrears. The Senior Notes are secured by substantially all assets of the Company including in the event of default placing bank accounts under a control agreement, copyrights, trademarks, patents, applications, registered and unregistered, licenses, designs, held or acquired after August 6, 2020 by the Company.
The Company was in default of the minimum liquidity Provisions of the Senior Secured Promissory Notes beginning in October 2020 and, accordingly, the Senior Promissory Notes began accruing interest of 5.0% in addition to the stated rate as of the date of the default.
Convertible promissory notes - 2020
On August 6, 2020, the Company entered into an asset purchase agreement with Celularity, pursuant to which the Company acquired Celularity’s UltraMIST assets. A portion of the aggregate consideration of $24,000,000 paid for the assets included the issuance of a promissory note to Celularity in the principal amount of $4,000,000. The Seller Note has a maturity date of August 6, 2021 and was not repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the Seller Note and, accordingly, it began accruing additional interest of 5.0% in addition to the 12.0% initial rate, as of the date of default.
In the event that the Seller Note has not been repaid prior to January 1, 2021, Celularity may elect to convert the outstanding principal amount plus any accrued but unpaid interest thereon into shares of the Company’s common stock, at a conversion price of $0.10 per share. As this conversion option is contingent on a future event, the conversion option has not been bifurcated from the host instrument as of December 31, 2020. The Seller Note is expressly subordinate to the NWPSA Senior Notes described above under “Senior Secured Promissory Notes.” The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty.
On June 5, 2020, the Company entered into a Securities Purchase Agreement with investor LGH Investments LLC (the “Investor”) for (i) a Promissory Note (the “Convertible Promissory Note”) in the original principal amount of $1,210,000, convertible into shares of common stock, (ii) warrants entitling the Investor to acquire 1,075,000 shares of common stock (the “Warrants”) and (iii) 200,000 restricted common shares in the Company as an inducement grant (the “Inducement Shares”). Such note contained certain default provisions, as defined, resulting in net proceeds of $1,100,000. As part of the Securities Purchase Agreement, the Company established a reserve of shares of its authorized but unissued and unreserved common stock in the amount of 11,000,000 shares for purposes of exercise of the Warrant or conversion of the Convertible Promissory Note. The Convertible Promissory Note matures on February 5, 2021 and includes a one-time interest charge of 8% to be applied on the issuance date to the original principal amount. The Investor can convert the Convertible Promissory Note and interest at any time prior to maturity to the number of shares of common stock, equal to the amount obtained by dividing (i) the amount of the unpaid principal and interest on the note by (ii) $0.25. The Warrants have an exercise price of $0.35 per share and have a term of five years and recorded as a liability by the Company. With respect to the Inducement Shares, in the event the Company’s share price has declined on the date on which the Investor seeks to have the restricted legend removed on such shares, the Company agrees to issue the Investor additional shares such that the aggregate value of the Inducement Shares equals the aggregate value of the Inducement Shares as of June 5, 2020. The Inducement Shares were issued on September 11, 2020 and included in common stock and additional paid in capital.
We may also attempt to raise additional capital if there are favorable market conditions or other strategic considerations even if we have sufficient funds for planned operations. To the extent that we raise additional funds by issuance of equity securities, our shareholders will experience dilution and we may be required to use some or all of the net proceeds to repay our indebtedness, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones would harm our future capital position.
Cash flows (uses) from operating, investing and financing activities - For the years ended December 31, 2020 and 2019, net cash used by operating activities was $12,718,292 and $6,410,758, respectively, primarily consisting of compensation costs, research and development activities and general corporate operations. The increase in the use of cash for operating activities for the year ended December 31, 2020, as compared to the same period for 2019, of $6,307,534, or 98.4%, was primarily due to the increase in the net loss, an increase in accounts receivable, as well as decreases in accrued interest, and interest payable, related parties, partially offset by increases in certain non-cash expenses, such as depreciation and amortization, bad debt expense, amortization of debt issuance costs and original issue discount, and change in fair value of derivative liability and increases in accounts payable and accrued expenses.
Net cash used by investing activities in 2020 was $20,052,870 as compared to net cash used by investing activities of $53,939 in 2019. The increase is primarily due to the $20,000,000 Acquisition of UltraMist on August 6, 2020.
Net cash provided by financing activities for the year ended December 31, 2020 was $33,447,739, which consisted of proceeds from PIPE offerings of $21,456,468, proceeds from notes payable of $13,346,547, advances from related parties of $22,500, net proceeds from sales of convertible preferred stock and convertible promissory notes totaling $3,550,000, proceeds from SBA loans of $614,335, and proceeds from exercises of stock options and warrants totaling $58,250, less principal payments totaling $5,600,361 on debt and finance lease obligations. Net cash provided by financing activities totaled $7,859,969 in 2019, which primarily consisted of proceeds from PIPE offering of $2,800,100, advances from related parties of $2,055,414, proceeds from warrant exercises of $1,758,142, proceeds from short term notes payable of $1,215,000 and proceeds from line of credit, related party of $90,000, net of payment of principal on finance leases of $58,687.
Cash and cash equivalents increased by $676,529 for the year ended December 31, 2020 and cash and cash equivalents increased by $1,395,906 for the year ended December 31, 2019.
Contractual Obligations
Our major outstanding contractual obligations relate to operating leases for our two facilities and office equipment, as well purchase and supplier obligations for product component materials and equipment, and our notes payable, related parties.
In August 2016, we entered into a lease agreement for 7,500 square feet of office space for office, research and development, quality control, production and warehouse space which expires on December 31, 2021. On February 1, 2018, we entered into an amendment to the lease agreement for an additional 380 square feet of office space for storage which expires on December 31, 2021. On January 2, 2019, we entered into a second amendment to the lease agreement for an additional 2,297 square feet of office space for office space which expires on December 31, 2021. Under the terms of the lease, we pay monthly rent of $14,651, subject to a 3% adjustment on an annual basis.
As part of its August 6, 2020 Acquisition, we became party to a lease agreement for 8,199 square feet of office space for office, research and development, quality control, and warehouse space which expires on August 31, 2023. Under the terms of the lease, the Company pays monthly rent of $7,051, with escalation of approximately 2% on May 1 of each lease year.
Also on August 6, 2020, the Company became party to a lease for office equipment that requires monthly payments of $669 through May 31, 2025.
We have developed a network of suppliers, manufacturers, and contract service providers to provide sufficient quantities of product component materials for our products through the development, clinical testing and commercialization phases. We have a manufacturing supply agreement with Swisstronics Contract Manufacturing AG in Switzerland, a division of Cicor Technologies Ltd., covering the generator box component of our PACE devices. We have a manufacturing supply agreement with Minnetronix for the UltraMist devices and the Dynamic Group for UltraMist applicators. Celularity is our current supplier of the Biovance and Interfyl product lines. See Note 24 Subsequent Events, for information regarding disputes with Celularity and Minnetronix.
On August 6, 2020 the Company assumed obligations for a purchase order for UltraMist devices from Celularity related to purchases of UltraMist devices from Minnetronix . This purchase order had a remaining purchase commitment of $1,058,170. This purchase agreement also calls for production delay fees of 1.25% of the committed inventory if the Company delays production. There is also a cancelation clause of 20% of the remaining balance in the event that the Company delays production for more than six months. For additional details, see “Subsequent Events” in Note 24 of the Notes to Consolidated Financial Statements.
Recently Issued Accounting Standards
New accounting pronouncements are issued by the Financial Standards Board (“FASB”) or other standards setting bodies that the Company adopts according to the various timetables the FASB specifies. The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow. See Note 3 to the accompanying consolidated financial statements.
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 affects such expenses 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies”.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
SANUWAVE Health, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SANUWAVE Health, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive loss, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph - Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has violated its debt covenants, incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of UltraMIST Assets - Valuation of Acquired Intangible Assets
Critical Audit Matter Description
As described in Note 5 to the financial statements, on August 6, 2020, the Company entered into an asset purchase agreement with Celularity Inc. pursuant to which the Company acquired Celularity Inc.’s UltraMIST assets for an aggregate purchase price of $24 million. As of the date of the acquisition, the Company recognized the intangible assets acquired at their estimated fair value of $14.4 million, which consist of customer relationships, patent and trade names. As disclosed by management, the Company valued the acquired intangible assets utilizing the multi-period excess earnings method and the relief from royalty method, forms of income approach. Determining
the fair value of the intangible assets acquired required management to make significant judgments, including the revenue growth rate assumption, attrition rates, royalty rates, and discount rates.
We identified the valuation of intangible assets acquired in the acquisition of UltraMIST assets as a critical audit matter due to the significant judgments made by management to estimate the fair values of the intangible assets and the sensitivity of the respective fair values to the significant underlying assumptions, which include the revenue growth rate assumption, attrition rates, royalty rates, and discount rates. These significant assumptions are forward looking and could be affected by future economic and market conditions. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s fair value measurement of the acquired intangible assets.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of acquired intangible assets included the following, among others:
•
We obtained an understanding of the design of controls associated with management’s process for estimating the fair value of the acquired intangible assets.
•
We assessed the reasonableness of management’s projections by comparing the projection used to the historical financial results of the acquired business and certain peer companies.
•
We evaluated the reasonableness of the attrition rates by assessing the underlying data used in determining the rates and testing mathematical accuracy of the calculation.
•
With the assistance of our valuation specialists, we evaluated the reasonableness of the valuation methodology and the following significant valuation assumptions:
o
Royalty rates by testing the source information underlying the determination of the royalty rates and testing mathematical accuracy of the calculation
o
Discount rates by testing the source information underlying the determination of the discount rates, testing mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates selected by management.
•
We also performed a sensitivity analysis on the significant assumptions to evaluate the change in the fair values of the intangible assets that would result from the changes in assumptions.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2018.
New York, NY
October 21, 2021
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
ASSETS
CURRENT ASSETS
Cash
$
2,436,984
$
1,760,455
Accounts receivable, net of allowance for doubtful accounts of $342,898 in 2020 and $72,376 in 2019
2,355,396
75,543
Inventory
2,956,344
542,955
Prepaid expenses and other current assets
179,343
125,405
TOTAL CURRENT ASSETS
7,928,067
2,504,358
PROPERTY AND EQUIPMENT, net
470,981
93,954
RIGHT OF USE ASSETS, net
794,831
741,749
OTHER INTANGIBLE ASSETS, net
6,545,284
-
GOODWILL
7,259,795
-
OTHER ASSETS
28,602
41,931
TOTAL ASSETS
$
23,027,560
$
3,381,992
LIABILITIES
CURRENT LIABILITIES
Senior secured promissory note payable, in default
$
10,675,637
$
-
Convertible promissory notes payable, in default
4,000,000
-
Convertible promissory notes, related parties, in default
1,596,254
-
Accounts payable
4,454,385
1,439,413
Accrued expenses
2,126,768
957,109
Accrued employee compensation
2,540,675
1,606,910
Warrant liability
8,855,379
-
Current portion of SBA loans
320,707
-
Accrued interest
1,021,495
-
Accrued interest, related parties
77,145
1,859,977
Current portion of lease liabilities
450,787
294,904
Current portion of contract liabilities
32,258
66,577
Notes payable, related parties, net
-
5,372,743
Short term notes payable
-
587,233
Line of credit, related parties
-
212,388
Advances from related parties
22,500
18,098
TOTAL CURRENT LIABILITIES
36,173,990
12,415,352
NON-CURRENT LIABILITIES
SBA loans
143,628
-
Lease liabilities
391,310
457,017
Contract liabilities
37,514
573,224
TOTAL NON-CURRENT LIABILITIES
572,452
1,030,241
TOTAL LIABILITIES
36,746,442
13,445,593
CONTINGENCIES
STOCKHOLDERS’ DEFICIT
PREFERRED STOCK, par value $0.001, 5,000,000 shares authorized; 6,175, 293, 90 and 8 shares
designated Series A, Series B, Series C and Series D, respectively; no shares issued and outstanding at
December 31, 2020 and 2019
-
-
COMMON STOCK, par value $0.001, 800,000,000 shares authorized; 470,694,621 and 293,780,400 issued
and outstanding at December 31, 2020 and 2019, respectively
470,695
293,781
ADDITIONAL PAID-IN CAPITAL
142,562,694
115,457,808
ACCUMULATED DEFICIT
(156,689,989
)
(125,752,956
)
ACCUMULATED OTHER COMPREHENSIVE LOSS
(62,282
)
(62,234
)
TOTAL STOCKHOLDERS’ DEFICIT
(13,718,882
)
(10,063,601
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
23,027,560
$
3,381,992
The accompanying notes to consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31, 2020 and 2019
REVENUES
Product
$
2,267,259
$
645,169
Accessory and parts revenue
1,637,997
12,021
License fees and other
152,215
371,540
TOTAL REVENUES
4,057,471
1,028,730
COST OF REVENUES
1,162,021
538,923
GROSS MARGIN
2,895,450
489,807
OPERATING EXPENSES
Research and development
1,245,507
1,181,892
Selling and marketing
5,159,740
1,590,957
General and administrative
13,723,888
6,440,093
Impairment of intangible assets
7,185,120
-
Depreciation and amortization
781,002
71,213
TOTAL OPERATING EXPENSES
28,095,257
9,284,155
OPERATING LOSS
(25,199,807
)
(8,794,348
)
OTHER INCOME (EXPENSE)
Change in warrant valuation
(3,192,620
)
227,669
Loss on extinguishment of debt
(565,374
)
-
Partnership fee income
600,000
-
Interest expense
(2,025,017
)
(1,147,986
)
Interest expense, related party
(516,014
)
(688,195
)
Loss on foreign currency exchange
(38,201
)
(26,979
)
TOTAL OTHER INCOME (EXPENSE), NET
(5,737,226
)
(1,635,491
)
NET LOSS
(30,937,033
)
(10,429,839
)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments
(48
)
19,844
TOTAL COMPREHENSIVE LOSS
$
(30,937,081
)
$
(10,409,995
)
LOSS PER SHARE:
Net loss per share, basic and diluted
$
(0.08
)
$
(0.05
)
Weighted average shares outstanding, basic and diluted
378,128,645
203,588,106
The accompanying notes to consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years Ended December 31, 2020 and 2019
Preferred Stock
Common Stock
Number of
Shares
Issued and
Outstanding
Par Value
Number of
Shares
Issued and
Outstanding
Par Value
Additional Paid-
in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Balances as of December 31, 2018
-
$
-
155,665,138
$
155,665
$
101,153,882
$
(116,602,778
)
$
(62,868
)
$
(15,356,099
)
Net loss
-
-
-
-
-
(10,429,839
)
-
(10,429,839
)
Cashless warrant exercises
-
-
4,962,157
4,962
(4,962
)
-
-
-
Cashless warrant exercises with waived proceeds
-
-
450,000
35,550
-
-
36,000
Proceeds from warrant exercise
-
-
40,284,422
40,285
3,581,674
-
-
3,621,959
Conversion of short term notes and convertible notes payable
-
-
65,247,517
65,248
6,427,607
-
-
6,492,855
Reclassification of warrant liability to equity due to adoption
of ASU 2017-11
-
-
-
-
262,339
1,279,661
-
1,542,000
Conversion of line of credit, related parties to equity
-
-
7,020,455
7,020
672,980
-
-
680,000
Warrants issued for services
-
-
-
-
186,867
-
-
186,867
Shares issued for services
-
-
150,000
28,350
-
-
28,500
Proceeds from PIPE offering
-
-
20,000,711
20,001
2,780,099
-
-
2,800,100
Stock-based compensation
-
-
-
-
333,422
-
-
333,422
Foreign currency translation adjustment
-
-
-
-
-
-
Balances as of December 31, 2019
-
$
-
293,780,400
$
293,781
$
115,457,808
$
(125,752,956
)
$
(62,234
)
$
(10,063,601
)
Net loss
-
-
-
-
-
(30,937,033
)
-
(30,937,033
)
Proceeds from warrant exercise
-
-
1,000,000
1,000
9,000
-
-
10,000
Conversion of short term notes and convertible notes payable
-
-
4,829,789
4,829
559,900
-
-
564,729
Reclassification of warrant liability to equity
-
-
-
-
6,292,695
-
-
6,292,695
Conversion of advances from related parties
-
-
262,811
17,835
-
-
18,098
Conversion of notes payable, related parties
-
-
15,475,235
15,475
2,275,572
-
-
2,291,047
Shares issued for services
-
-
12,700,000
12,700
2,533,492
-
-
2,546,192
Proceeds from PIPE offering, net of offering costs
-
-
124,621,428
124,621
12,557,895
-
-
12,682,516
Stock-based compensation
-
-
-
-
21,900
-
-
21,900
Proceeds from stock option exercise
-
-
325,000
47,925
-
-
48,250
Beneficial conversion feature on convertible debt
-
-
-
-
560,682
-
-
560,682
LGH warrant liability
-
-
-
-
(249,049
)
-
-
(249,049
)
Series C and Series D preferred stock converted to common stock
-
-
17,499,958
17,501
2,432,499
-
-
2,450,000
Inducement shares issued
-
-
200,000
44,540
-
-
44,740
Foreign currency translation adjustment
-
-
-
-
-
-
(48
)
(48
)
Balances as of December 31, 2020
-
$
-
470,694,621
$
470,695
$
142,562,694
$
(156,689,989
)
$
(62,282
)
$
(13,718,882
)
The accompanying notes to consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020 and 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$
(30,937,033
)
$
(10,429,839
)
Adjustments to reconcile net loss to net cash used by operating activities
Amortization of intangibles
713,021
-
Depreciation
298,741
71,213
Bad Debt Expense
302,193
39,331
Impairment of Intangible Assets
7,185,120
-
Stock-based compensation
21,900
333,422
Shares issued for services
2,546,192
28,500
Shares issued for inducement shares
44,740
-
Loss on extinguishment of debt
565,374
-
Warrants issued for consulting services
-
186,867
Change in warrant valuation
3,192,620
(227,669
)
Amortization of debt issuance costs and debt discount
484,185
-
Accrued interest
1,097,577
1,159,713
Interest payable, related parties
401,081
688,195
Waived proceeds from warrant exercise
-
36,000
Changes in operating assets and liabilities
Accounts receivable - trade
(2,582,046
)
(8,600
)
Inventory
(553,424
)
(185,135
)
Prepaid expenses
(53,938
)
(294
)
Due from related parties
-
1,228
Other assets
13,328
(25,440
)
Operating leases
(6,290
)
35,386
Accounts payable
3,014,972
(138,730
)
Accrued expenses
1,169,659
267,829
Accrued employee compensation
933,765
1,288,497
Contract liabilties
(570,029
)
468,768
NET CASH USED BY OPERATING ACTIVITIES
(12,718,292
)
(6,410,758
)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of UltraMIST, net of $4,000,000 note payable to seller
(20,000,000
)
-
Purchases of property and equipment
(52,870
)
(53,939
)
NET CASH USED BY INVESTING ACTIVITIES
(20,052,870
)
(53,939
)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of convertible preferred stock
2,450,000
-
Proceeds from convertible promissory note
1,100,000
-
Proceeds from SBA loan
614,335
-
Proceeds from PIPE offering, net of offering costs
21,456,468
2,800,100
Proceeds from senior secured promissory note payable
13,346,547
-
Proceeds from stock option exercises
48,250
-
Proceeds from short term note
-
1,215,000
Proceeds from line of credit, related party
-
90,000
Proceeds from warrant exercises
10,000
1,758,142
Advances from related parties
22,500
2,055,414
Repayments of debt principal on convertible promissory notes, related parties, convertible promissory notes and SBA loans
(5,457,662
)
-
Payments of principal on finance leases
(142,699
)
(58,687
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
33,447,739
7,859,969
EFFECT OF EXCHANGE RATES ON CASH
(48
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
676,529
1,395,906
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,760,455
364,549
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
2,436,984
$
1,760,455
-
-
SUPPLEMENTAL INFORMATION
Cash paid for interest
$
436,333
$
-
NONCASH INVESTING AND FINANCING ACTIVITIES
Reclassification of warrant liabilities to equity
$
6,292,695
$
1,542,000
Acquistion of UltraMIST partially financed with convertible promissory note
4,000,000
-
Conversion of short-term notes payable to equity
564,729
3,559,542
Beneficial conversion feature on convertible debt
560,682
-
Conversion of advance from related parties
$
18,098
-
Conversion of notes payable, related parties
$
2,291,047
-
Series C and Series D preferred stock converted to common stock
$
2,450,000
-
Exchange line of credit and notes payable, related parties, for convertible promissory notes, related parties
$ 1,596,254
-
Conversion of convertible promissory notes to equity
-
2,933,313
Conversion of line of credit, related party to equity
-
680,000
Conversion of line of credit, related party to accounts receivable
-
121,000
Accounts payable and accrued employee compensation converted to equity
-
36,500
Other warrant exercise
-
1,863,815
The accompanying notes to consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
1.
Nature of the Business and Basis of Presentation
SANUWAVE Health, Inc. and Subsidiaries (“SANUWAVE” or the “Company”) is focused on the research, development, and commercialization of its patented noninvasive and biological response activating medical systems for the repair and regeneration of skin, musculoskeletal tissue, and vascular structures. The Company’s lead regenerative product in the United States is the dermaPACE® device used for treating diabetic foot ulcers.
Through the Company’s acquisition, on August 6, 2020, of the UltraMIST® assets from Celularity, Inc. (“Celularity”), SANUWAVE now combines two highly complementary and market-cleared energy transfer technologies and two human tissue biologic products, which creates a platform of scale with an end-to-end product offering in the advanced wound care market.
Basis of Presentation- The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The functional currencies of the Company’s foreign operations are their local currencies. The financial statements of the Company’s foreign subsidiary have been translated into United States dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. Translation adjustments are reported in other comprehensive loss in the Consolidated Statements of Comprehensive Loss and as cumulative translation adjustments in accumulated other comprehensive loss in the Consolidated Balance Sheets.
Certain accounts in the prior period Consolidated Financial Statements have been reclassified to conform to the presentation of the current year Consolidated Financial Statements. Accrued executive severance at December 31, 2019 of $154,000 was reclassified from accrued expenses to accrued employee compensation. In addition $12,021 of revenue in 2019 was reclassified from other revenue to accessory and parts revenue and the remaining balance of other revenue was combined with license fees. These reclassifications had no effect on the previously reported operating results.
Covid-19 - The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely 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 until the disease is contained. 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 have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict.
2.
Going Concern
Our recurring losses from operations and dependency upon future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern. We will be required to raise additional funds to finance our operations and remain a going concern; we may not be able to do so, and/or the terms of any financings may not be advantageous to us.
The continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources for the commercialization of the dermaPACE and will continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. The operating losses and the events of default on the Company’s notes payable indicate substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-K.
The continuation of our business is dependent upon raising additional capital to fund operations. Management’s plans are to obtain additional capital in 2021 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. 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. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms.
The accompanying 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 Consolidated Financial Statements do not necessarily purport to represent realizable or settlement values. The Consolidated Financial Statements do not include any adjustment that might result from the outcome of this uncertainty. Our 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.
3.
Summary of Significant Accounting Policies
The significant accounting policies followed by the Company are summarized below:
Estimates - These Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These Consolidated Financial Statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein.
Significant estimates include the recording of allowances for doubtful accounts, the net realizable value of inventory, useful lives of long-lived assets, fair value of goodwill and other intangible assets, the determination of the valuation allowances for deferred taxes, estimated fair value of stock-based compensation, and the estimated fair value of warrants.
Cash - The Company maintains its cash in bank accounts which may exceed federally insured limits.
Accounts receivable - Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings based on its assessment of the current status of individual accounts. Receivables are generally considered past due if greater than 60 days old. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts.
Concentration of credit risk and limited suppliers - Management routinely assesses the financial strength of its customers and, as a consequence, believes accounts receivable are stated at the net realizable value and credit risk exposure is limited.
As of December 31, 2020, receivables from Celularity (see Note 5) constituted approximately 46% of our accounts receivable balance. No other distributors or partners made up more than 10% of the Company’s revenues for the year ended December 31, 2020 or more than 10% of the Company’s accounts receivables as of December 31, 2020.
Three distributors and partners accounted for 18%, 15% and 12% of revenues for the year ended December 31, 2019, and 0%, 0% and 22% of accounts receivable at December 31, 2019.
The Company depends on suppliers for product component materials and other components that are subject to stringent regulatory requirements. The Company currently purchases most of its product component materials from single suppliers and the loss of any of these suppliers could result in a disruption in our production. If this were to occur, it may be difficult to arrange a replacement supplier because certain of these materials may only be available from one or a limited number of sources. In addition, our suppliers could be disrupted by conditions related to COVID-19 or other epidemics. Establishing additional or replacement suppliers for these materials may take a substantial period of time as these suppliers must be approved by regulatory authorities. Three of the Company’s suppliers accounted for 41%, 24% and 11% of the Company’s purchases, respectively, during the year ended December 31, 2020. During the year ended December 31, 2019, one supplier accounted for approximately 65% of the Company's purchases. No other suppliers made up more than 10% of the Company’s purchases.
Inventory - Inventory consists of purchased medical equipment and parts and is stated at the lower of cost, which is valued using the first in, first out (“FIFO”) method, or net realizable value less allowance for selling and distribution expenses. The Company analyzes its inventory levels and writes down inventory that has, or is expected to, become obsolete.
Property and equipment - Property and equipment is recorded at cost, net of accumulated depreciation. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance, which do not extend the economic useful life of the related assets, are expensed. The straight-line method of depreciation is used for computing depreciation on property and equipment over the following estimated useful lives:
Estimated
Useful Life
Machines and equipment
3 years
Office and computer equipment
3 years
Medical devices on rent
5 - 15 years
Software
2 years
Furniture and fixtures
3 years
Goodwill and Other Intangible Assets - Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under ASC Topic 350, Intangibles-Goodwill
and Other. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter. Intangible assets arising from the Company’s acquisition are amortized on a straight-line basis over the estimated useful life of each asset. Customer realtionships have a useful life of seven years. Patents and tradenames have a useful life of nineteen years. The Company does not have any indefinite-lived intangible assets. At December 31, 2020, the Company determined that intangible assets related to certain customer relationships was impaired. See Note 8 for additional discussion of this impairment.
Impairment of long-lived assets - The Company reviews long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the asset’s carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. The Company determines fair value by using a combination of comparable market values and discounted cash flows, as appropriate. Except for the Impairment of intangible assets discussed above, the Company determined that no impairment of long-lived assets was indicated at December 31, 2020.
Leases - We determine whether an arrangement is a lease at inception. When our lease arrangements include lease and non-lease components, we account for lease and non-lease components (e.g. common area maintenance) separately based on their relative standalone prices.
For leases where the Company is the lessee, Right of Use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases did not provide an implicit interest rate, the Company used the equivalent borrowing rate for a secured financing with the term of equal to the remaining life of the lease at inception.
Any lease arrangements with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheet, and we recognize lease costs for these lease arrangements on a straight-line basis over the lease term. In the event a lease arrangement would provide us with options to exercise one or more renewal terms or to terminate the lease arrangement, we would include these options when we are reasonably certain to exercise them in the lease term used to establish our right of use assets and lease liabilities. None of our lease agreements include an option to purchase the leased asset, residual value guarantees, or material restrictive covenants.
We have other lease arrangements that are adjusted periodically based on an inflation index or rate. The future variability of these payments and adjustments are unknown, and therefore they are not included as minimum lease payments used to determine our Right of Use (“ROU”) assets and lease liabilities. Variable rental payments are recognized in the period in which the obligation is incurred.
Fair value of financial instruments - The carrying values of accounts payable, and other short-term obligations approximate their fair values, because of the short-term maturities of these instruments.
The Company utilizes the guidance of ASC Topic 820-10, Fair Value Measurements (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The framework that is set forth in this standard is applicable to the fair value measurements where it is permitted or required under other accounting pronouncements.
The ASC 820-10 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
•
Level 1 - Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets and liabilities;
•
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
•
Level 3 - Unobservable inputs that are not corroborated by market data, therefore requiring the Company to develop its own assumptions.
The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value. The fair value of the warrant liability is determined based on a Black-Sholes model, which approximates the binomial approach pricing model and includes the use of unobservable inputs such as the expected term, anticipated volatility and risk-free interest rate, and therefore is classified within Level 3 of the fair value hierarchy.
Preferred stock - The Company evaluates preferred stock issuances for liability or equity classification in accordance with the provisions of ASC Topic 480, Distinguishing Liabilities from Equity, and determines appropriate equity or liability accounting treatment. Additionally, the Company determines, if classified as equity, whether it would be recorded as permanent or temporary equity.
Sequencing policy - During the year ended December 31, 2020, the Company granted certain options and warrants which, upon settlement, would have exceeded the limit of authorized number of shares of common stock. The Company followed a sequencing policy for which in the event partial reclassifications of contracts subject to ASC Topic 815-40-25, Derivatives and Hedging, is necessary, due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of earliest issuance date of potentially dilutive instruments with the earliest grants receiving first allocation of shares. On August 6, 2020, the Company issued shares of common stock, convertible debt and warrants exercisable into shares of common stock in connection with a private placement funding and Senior Secured Notes. In the event that all outstanding convertible securities were converted into shares of common stock of the Company, the Company would exceed the total number of shares authorized for issuance in the Company’s Articles of Incorporation.
Convertible instruments and liabilities related to warrants issued - The Company evaluates its convertible instruments to determine if those contracts, or embedded components of those contracts, qualify as derivative financial instruments to be separately accounted for in accordance with ASC Topic 815 “Derivatives and Hedging” (“ASC 815”). The accounting treatment of derivative financial instruments requires that the Company record any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. Conversion options are recorded as a discount to the host instrument and are amortized as amortization of debt discount on the Consolidated Statements of Comprehensive Loss over the life of the underlying instrument. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. A Black-Sholes model, which approximates the binomial model was used to estimate the fair value of the warrants that are classified as derivative liabilities on the Consolidated Balance Sheets. The models include subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the actual volatility during the most recent historical period of time equal to the weighted average life of the instruments.
Warrants related to debt issued - The Company records a warrant discount related to warrants issued with debt at fair value and recognizes the cost using the straight-line method, which approximates the effective interest method, over the term of the related debt as interest expense, which is reported in the Other Income (Expense) section in our Consolidated Statements of Comprehensive Loss. This warrant discount is reported as a reduction of the related debt liability.
Beneficial conversion feature on convertible debt - The Company records a beneficial conversion feature related convertible debt at fair value and recognizes the cost using the straight-line method, which approximates the effective interest method, over the term of the related debt as interest expense in the accompanying Consolidated Statements of Comprehensive Loss. This beneficial conversion feature is reported as a reduction of the related debt liability in the accompanying Consolidated Balance Sheet.
Segment information - We have determined that we have one operating segment. Our revenues are generated from sales in United States, Europe, Canada, Asia and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are located in the United States.
Revenue Recognition - The core principle of ASC Topic 606 “Revenue from Contracts with Customers” (“ASC 606”) requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under previous U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
In accordance with ASC 606, we apply the following the five-step model:
1.
Identify the contract(s) with a customer. A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
2.
Identify the performance obligation(s) in the contract. If a contract promises to transfer more than one good or service to a customer, each good or service constitutes a separate performance obligation if the good or service is distinct or capable of being distinct.
3.
Determine the transaction price. The transaction price is the amount of consideration to which we expect to be entitled in exchanging the promised goods or services to the customer.
4.
Allocate the transaction price to the performance obligations in the contract. For a contract that has more than one performance obligation, we allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which we expect to be entitled in exchange for satisfying each performance obligation.
5.
Recognize revenue when (or as) the Company satisfies a performance obligation. For each performance obligation, we determine whether we satisfy the performance obligation at a point in time or over time. Appropriate methods of measuring progress include output methods and input methods.
The Company recognizes revenue primarily from the following types of contracts:
Product Sales and Accessory and Part Sales - Product sales and accessory and part sales include devices and applicators (new and refurbished). Performance obligations are satisfied at the point in time when the customer obtains control of the goods, which is generally at the point in time that the product is shipped.
Licensing Fees - Licensing transactions include distribution licenses and intellectual property licenses. Licensing revenue is recognized as the Company satisfies its performance obligations, which may vary with the terms of the licensing agreement.
Other Revenue - Other revenue primarily includes warranties, repairs and billed freight. Device product sales are bundled with an initial one-year warranty and the Company offers a separately priced second-year warranty. The Company allocates the device sales price to the product and the embedded warranty by reference to the stand-alone extended warranty price. Because the warranty represents a stand-ready obligation, revenue is recognized over the time period that the Company satisfies its performance obligations, which is generally the warranty term. Repairs (parts and labor) and billed freight revenue are recognized at the point in time that the service is performed, or the product is shipped, respectively.
Shipping and handling costs - Shipping charges billed to customers are included in revenues. Shipping and handling costs incurred have been recorded in cost of revenues.
Research and development - Research and development costs are expensed as incurred. Research and development costs include payments to third parties that specifically relate to the Company’s products in clinical development, such as payments to contract research organizations, consulting fees for FDA submissions, universities performing non-medical related research and insurance premiums for clinical studies and non-medical research. In addition, employee costs (salaries, payroll taxes, benefits and travel) for employees of the clinical affairs, and research and development departments are classified as research and development costs.
Stock-based compensation - The Company uses the fair value method of accounting for its employee stock option program. Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the award measured on the grant date. The Company recognizes the estimated fair value of the award as compensation cost on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The Company generally issues new shares of common stock to satisfy option and warrant exercises.
The expected life of options granted represent the period of time that options granted are expected to be outstanding and are derived from the contractual terms of the options granted calculated under the simplified method. The risk-free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of the grant. The expected volatility is based on the average volatility of the Company’s stock. The expected dividend yield is based on our historical dividend experience, however, since our inception, we have not declared dividends.
The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards that actually vest net of actual forfeitures during the period
Comprehensive income (loss) - Comprehensive income (loss) results from the translation of the Company’s foreign entity’s financial statements from their functional currency to U.S. dollars for consolidation in the accompanying Consolidated Financial Statements.
Recent Accounting Pronouncements - In August 2020, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature and simplifies the guidance for determining whether a conversion feature is a derivative. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. In addition, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes in several areas including calculating taxes in an interim period, clarifying how to account for taxes that are partially based on income and requiring an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This amendment is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2019-12 on its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. The amendments in ASU 2017-04 modified the testing that an entity should perform for its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This amendment is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-04 on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was subsequently revised by ASU 2018-19. The ASU introduces a new model for assessing impairment of most financial assets. Entities will be required to use a forward-looking expected loss model, which will replace the current incurred loss model, which will result in earlier recognition of allowance for losses. The ASU is effective for annual reporting periods beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-19 on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify the disclosure requirements associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance did not impact our results of operations or financial position.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting. The amendments in ASU 2018-07 requires an entity to apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance did not impact our results of operations or financial position
4.
Loss per share
The net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares outstanding for the years ended December 31, 2020 and 2019. In accordance with ASC Topic 260-10-45-13, Earnings Per Share, the weighted average of number of shares outstanding includes outstanding common stock and shares issuable for nominal consideration. Accordingly, warrants issued with a $0.01 per share exercise price, are included in weighted average shares outstanding as follows:
Weighted average shares outstanding
Common shares
359,880,132
203,588,106
Common shares issuable assuming excercise of nominally priced warrants
18,248,513
-
Weighted average shares outstanding
378,128,645
203,588,106
Diluted net loss per share would be computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net loss per share. As a result of the net loss for the years ended December 31, 2020 and 2019, all potentially dilutive shares were anti-dilutive and therefore excluded from the computation of diluted net loss per share. Anti-dilutive equity securities consist of the following at December 31, 2020 and 2019, respectively:
Common stock options
31,938,385
34,303,385
Common stock purchase warrants
142,265,576
9,474,091
Convertible notes payable
58,656,570
2,250,000
232,860,531
46,027,476
5.
Asset Purchase Agreement
On August 6, 2020, the Company completed an asset purchase agreement (the “Asset Purchase Agreement”) with Celularity pursuant to which the Company acquired (the “Transaction”) Celularity’s UltraMIST assets (“UltraMIST”, or the “Assets”). The acquisition provides the Company with a robust product offering in the advanced wound care market and gives the Company an end-to-end advanced wound care product portfolio that addresses the entire care pathway. The aggregate consideration paid for the Assets was $24,000,000, which consisted of (i) a cash payment of $18,890,000, (ii) the issuance of a convertible promissory note to Celularity in the principal amount of $4,000,000 (the “Seller Note”), and (iii) a credit of $1,110,000 for the previous payment made by the Company to Celularity pursuant to that certain letter of intent between the Company and Celularity dated June 7, 2020.
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, 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 provides written notice at least 180 days prior to the expiration of the current term. The license agreement calls for prepaid minimum quarterly upfront royalty of $446,329 payments for the Biovance Product which are credited against sales in that quarter. Royalties are based on a transfer price for each Biovance product and sales are reported on a quarterly basis to Celularity. In the event of sales in excess of the quarterly minimums, any additional royalties are due at that time. The unpaid license fee for the fourth quarter of 2020 is included in accured expense at December 31, 2020 (see Note 9).
As part of the Transaction, the Company entered into a transition services agreement with Celularity for a period of approximately three months. We utilized Celularity to fulfill certain customer orders and to collect related accounts receivable payments until we transitioned our systems. For the year ended December 31, 2020, orders fulfilled by the seller comprised approximately 49% of the Company’s 2020 full year revenues.
The Company evaluated the transaction and has accounted for it as a business combination and applied the related accounting guidance as required, using the acquisition method and a fair value model.
The tables below present the consideration paid to Celularity and the fair value of the Assets acquired on August 6, 2020:
Purchase Consideration
Cash paid at closing
$
18,890,000
Cash paid pursuant to letter of intent
1,110,000
Note payable to seller
4,000,000
Total consideration
$
24,000,000
Fair Value of Net Assets Acquired
Inventory
$
1,859,965
Property and equipment
436,815
Intangible assets (a)
14,443,425
Goodwill (b)
7,259,795
Total fair value of net assets acquired
$
24,000,000
(a)
Intangible assets, as summarized below, are recorded at their estimated fair value. The estimated fair value of the acquired customer relationships is determined using the multi-period excess earnings method. At December 31, 2020, the Company determined that intangible assets related to certain customer relationships was impaired. See Note 8 for additional discussion of this impairment. The estimated fair value of the acquired patent and trade names is based on a relief from royalty method. The estimated useful lives for intangible assets were determined based on the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.
(b)
Goodwill represents the excess of the total purchase consideration over fair value of the assets recognized and represents the future economic benefits that we believe will result from combining the operations of SANUWAVE and UltraMIST, including expected future synergies and operating efficiencies. Goodwill resulting from the Transaction has been assigned to the Company’s lone operating segment. Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. The goodwill recognized is expected to be deductible for income tax purposes.
Intangible Assets
Fair Value
Useful Life
(Years)
Customer relationships - UltraMIST
$
3,820,000
Customer relationships - Biologics
7,618,100
Patent
2,311,825
Trade names
693,500
Total intangible assets
$
14,443,425
Acquisition and related costs - During the year ended December 31, 2020, acquisition costs of $1,084,994 were expensed as incurred and included in general and administrative expenses in the Consolidated Statements of Comprehensive Loss. Such costs include professional fees of advisors and integration and synergy costs related to the combination of UltraMIST and SANUWAVE.
Pro forma impact of acquisition - The table below shows summarized unaudited pro forma combined operating results of the Company for the years ended December 31, 2020 and 2019 as if the UltraMIST business acquisition had occurred on the same terms as of January 1, 2019. Pro forma adjustments have been made related to amortization of intangibles, interest expense, and income tax expense for the years ended December 31, 2020 and 2019. The pro forma financial information does not reflect revenue opportunities and cost savings which the Company expected to realize as a result of the acquisition or estimates of charges related to the integration activity.
Year Ended December 31,
(unaudited)
Total revenues
$
7,832,221
$
9,003,555
Net Loss
(35,533,724
)
(15,222,591
)
The unaudited pro forma combined results of operations were prepared using the acquisition method of accounting and are based on the historical financial operating results of the Company and UltraMIST. Except to the extent realized in the year ended December 31, 2020, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of the acquisition, or the expenses to be incurred to achieve these savings, operating synergies and other benefits. In addition, except to the extent recognized in the years ended December 31, 2020, the unaudited pro forma information does not reflect the costs to integrate the operations of UltraMIST within the Company.
Significant adjustments to the pro forma information above include recognition of non-recurring direct incremental acquisition costs in the year ended December 31, 2019 and exclusion of those costs from all other periods presented; recognition of the Biovance® license fee pursuant to the License Agreement; increase in interest expense related to the Senior Secured Debt Notes described in Note 12, the Seller Note described in Note 11, the HealthTronics Note described in Note 11, and the Stolarski Note described in Note 11; increase in depreciation expense related to the fair value adjustment of acquired property and equipment; and amortization associated with an estimate of the acquired intangible assets.
The acquired Assets were consolidated into our financial statements starting on the acquisition date. The total revenues and operating income of UltraMIST consolidated into our financial statements since the date of acquisition through December 31, 2020 were $3,632,584 and $467,112, respectively. In addition, the intangible asset related to Customer relationships - Bilogics was impaired at December 31, 2020 for $7,185,120.
6.
Inventory
Inventory consists of the following at December 31, 2020 and 2019:
Inventory - finished goods
$
1,145,737
$
357,265
Inventory - parts and accessories
1,810,607
185,690
Total inventory
$
2,956,344
$
542,955
7.
Property and equipment
Property and equipment consists of the following at December 31, 2020 and 2019:
Machines and equipment
278,133
281,633
Office and computer equipment
244,483
201,841
Medical devices on rent
513,336
81,059
Software
38,127
38,127
Furniture and fixtures
22,929
22,929
Other assets
2,532
2,258
Total
1,099,540
627,847
Accumulated depreciation
(628,559
)
(533,893
)
Net property and equipment
$
470,981
$
93,954
Depreciation expense was $97,956 and $37,740 for the years ended December 31, 2020 and 2019, respectively.
8.
Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill and other intangible assets during the year ended December 31, 2020 consist of the following activity:
December 31,
Celularity
Acquisition
(Note 5)
Amortization
Impairment
December 31,
Goodwill
$
7,259,795
$
7,259,795
Intangible assets subject to amortization:
Customer relationships - UltraMIST
$
-
$
3,820,000
$
(217,112
)
$
-
3,602,888
Customer relationships - Biologics
-
7,618,100
(432,980
)
(7,185,120
)
-
Patents
-
2,311,825
(48,408
)
-
2,263,417
Trade names
-
693,500
(14,521
)
-
678,979
Other intangible assets
$
-
$
14,443,425
$
(713,021
)
$
(7,185,120
)
$
6,545,284
Future amortization expense is expected to be the following:
Amortization
Year ending December 31,
$
703,889
703,889
703,889
703,889
703,889
Thereafter
3,025,839
$
6,545,284
Impairment - During the fourth quarter of 2020, the Company determined that the intangible asset for customer relationships related to the biological products was impaired due to significant shortfalls in sales of the products during that period compared with the sales projections used to determine the fair value the intangible asset as of the August 6, 2020 acquisition date. The Company does not expect sales of biological products to sufficiently recover. The estimated fair value of the customer relationships at the acquisition date and at December 31, 2020 were determined using the multi-period excess earnings method. At December 31, 2020, the Company recorded a $7,185,120 impairment charge for this intangible asset in the Consolidated Statements of Comprehensive Loss.
9.
Accrued expenses
Accrued expenses consist of the following at December 31, 2020 and 2019:
Outside services
$
346,895
$
108,033
License fees
335,517
-
Board of director’s fees
320,000
400,000
Registration penalties
263,750
-
Commissions
238,730
-
Legal and professional fees
196,614
134,970
Warranty reserve
180,000
-
Inventory purchases
91,493
167,050
Other
153,769
147,056
$
2,126,768
$
957,109
A summary of activity in the warranty reserves as follows:
Balance December 31, 2019
$
-
Additions
180,000
Balance December 31, 2020
$
180,000
10.
Revenue
Disaggregation of Revenue - The disaggregation of revenue is based on geographical region. The following table presents revenue from contracts with customers for the years ended December 31, 2020 and 2019:
Year ended December 31, 2020
Year ended December 31, 2019
United States
International
Total
United States
International
Total
Product
$
2,178,582
$
88,677
$
2,267,259
$
277,527
$
367,642
$
645,169
Accessories and parts
1,549,969
88,028
1,637,997
-
12,021
12,021
License fees and other
-
152,215
152,215
127,450
244,090
371,540
$
3,728,551
$
328,920
$
4,057,471
$
404,977
$
623,753
$
1,028,730
Contract liabilities - As of December 31, 2020 and 2019, the Company has contract liabilities from contracts with customers as follows:
December 31,
December 31,
Service agreement
$
69,772
$
133,510
Partnership fee
-
500,000
Other
-
6,291
Total Contract liabilities
69,772
639,801
Non-Current
(37,514
)
(573,224
)
Total Current
$
32,258
$
66,577
The timing of the Company’s revenue recognition may differ from the timing of payment from its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the satisfaction of performance obligations, the Company records a contract liability (deferred revenue) until the performance obligations are satisfied. Of the aggregate contract liability balances as of December 31, 2020, the Company expects to satisfy its remaining performance obligations associated with $32,258 and $37,514 within the next twelve months and following 27 months, respectively.
11. Debt with related parties
Debt with related parties at December 31, 2020 and 2019 consisted of the following:
Convertible promissory notes (HealthTronics), related parties, in default
$
1,372,743
$
-
Notes payable, related parties
-
5,372,743
Convertible promissory notes (Stolarski), related parties, in default
223,511
Line of credit, related parties
-
212,388
Advances from related parties
22,500
18,098
Total debt with related parties
$
1,618,754
$
5,603,229
Convertible promissory notes payable (HealthTronics), in default - At December 31, 2019, the Company had a note payable, related party due to HealthTronics, Inc. (“HealthTronics”) with an outstanding balance of $5,372,743 that was entered into in connection with the Company’s purchase of the orthopedic division of HealthTronics in 2018 (the “HealthTronics Purchase Note”). This note payable matured on December 31, 2018 and was not repaid. At the inception of the HealthTronics Purchase Note, the Company also entered into a security agreement with HealthTronics to provide a first security interest in the assets of the Company. HealthTronics is considered a related party because they are a shareholder in the Company and hold the security agreement with the Company. The HealthTronics Purchase Note was in default and interest was accrued at the default rate until settled through proceeds raised by the Company on August 6, 2020.
On August 6, 2020, the Company entered into a letter agreement with HealthTronics (the “HealthTronics Agreement”) pursuant to which the Company satisfied all of the outstanding debt due to HealthTronics, including the notes payable. Pursuant to the HealthTronics Agreement, as consideration for the extinguishment of the note payable due to HealthTronics, (i) the Company paid to HealthTronics an amount in cash equal to $4,000,000, (ii) HealthTronics exercised all of its outstanding Class K Warrants to purchase 7,200,000 shares of common stock, (iii) the Company issued to HealthTronics a convertible note payable in the amount of $1,372,743 (the “HealthTronics Note”), and (iv) the Company and HealthTronics entered into a securities purchase agreement dated August 6, 2020 pursuant to which the Company issued to HealthTronics an aggregate of 8,275,235 shares of common stock and an accompanying Class E warrant to purchase up to an additional 8,275,235 shares of common stock. The warrant has an exercise price of $0.25 per share and a three-year term.
The HealthTronics Note, with principal amount of $1,372,743, matured on August 6, 2021 and was not repaid, see Note 24 Subsequent Events for additional discussion. The note accrues interest at a rate equal to 12.0% per annum. In the event that the Seller Note (as defined in Note 12) has not been repaid prior to January 1, 2021, HealthTronics may elect to convert the outstanding principal amount plus any accrued but unpaid interest thereon into shares of the Company’s common stock, at a conversion price of $0.10 per share. As this conversion option is contingent, the conversion option has not been bifurcated from the host instrument as of December 31, 2020. The convertible promissory note is expressly subordinate to the Senior Secured Notes (as defined in Note 12). The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty.
Convertible promissory notes payable (Stolarski), in default - The Company entered into a line of credit agreement with A. Michael Stolarski, a member of the board of directors and an existing shareholder on December 29, 2017 (the “Stolarski Line of Credit”). The agreement established a line of credit in the amount of $370,000 with an annualized interest rate of 6%. On November 12, 2018, the Company entered into an amendment to the line of credit agreement that increased the line of credit to $1,000,000 with an annualized interest rate of 6%. During the year ended December 31, 2019, the amount of the line of credit was decreased by $680,000 through a conversion to 7,020,455 shares of common stock, by $121,000 through payment on purchase of dermaPACE Systems and was increased by $90,000 through a deposit on purchase of future dermaPACE Systems. The outstanding balance on the Stolarski Line of Credit was $212,388 at December 31, 2019. Interest expense on the line of credit was approximately $40,000 for the year ended December 31, 2019.
On August 6, 2020, the Company terminated the Stolarski Line of Credit agreement and, as consideration for the termination, issued to Stolarski a convertible promissory note in the principal amount of $223,511 (the “Stolarski Note”). The Stolarski Note matured on August 6, 2021 and was not repaid, see Note 24 Subsequent Events for additional discussion. The note accrues interest at a rate equal to 12.0% per annum. In the event that the Stolarski Note has not been repaid prior to January 1, 2021, the holder may elect to convert the outstanding principal amount plus any accrued by unpaid interest thereon into shares of common stock at a conversion price of $0.10 per share. As of December 31, 2020, $223,511 plus accrued interest of $10,952 remained outstanding on the Stolarski Note.
Advances from related parties - During the year ended December 31, 2019, the Company received $2,055,414 for warrant exercises and short-term notes, for which shares were not immediately issued and recorded as a liability. During the year ended December 31, 2019, the Company converted $1,827,316 of the advances from related parties to equity through issuance of 18.2 million shares of common stock and $210,000 of the advances from related parties to short term notes. Advances from related parties totaled $22,500 and $18,098 at December 31, 2020 and 2019, respectively.
12. Debt with unaffiliated parties
Debt with unaffiliated parties at December 31, 2020 and 2019 consisted of the following:
Senior secured promissory note payable, in default
$
10,675,637
$
-
Convertible promissory note payable, in default
4,000,000
-
SBA loans
464,335
-
Short term notes payable
-
587,233
15,139,972
587,233
Less: current maturities including notes in default
(14,996,344
)
(587,233
)
Debt with unafffiliated parties, long-term
$
143,628
$
-
Senior secured promissory note payable, in default - On August 6, 2020, the Company entered into a Note and Warrant Purchase and Security Agreement (the “NWPSA”), with NH Expansion Credit Fund Holdings LP, as noteholder and agent. In accordance with the NWPSA, the Company issued a $15,000,000 Senior Secured Promissory Note Payable (the “Senior Secured Note”) and a warrant exercisable into shares of the Company’s common stock (the “NH Expansion Warrant”) in exchange for cash to support operations, repay outstanding debt and close on the acquisition of the UltraMIST assets from Celularity, among other transactions. The Company received net proceeds of $13,346,547 from issuing the Senior Secured Note and NH Expansion Warrant. The NWPSA provides for (i) the sale and purchase of Senior Secured Notes in an aggregate original principal amount of $15 million and (ii) the issuance of 13,091,160 warrants equal to 2.0% of the fully diluted common stock of the Company as of the issue date. The NH Expansion Warrant has an exercise price of $0.01 per share and a 10-year term (Note 13).
The Senior Secured Note has a maturity date of September 30, 2025 and accrues interest at a rate that is the sum of: (a) the greater of the quarter end prime rate or 3% plus (b) 9%, due in quarterly in arrears and at a rate of three percent (3.00%) per annum , which shall be compounded by being added to the principal amount of the Senior Secured Notes on each payment date and which shall be payable in cash upon the earliest to occur of (x) the maturity date, (y) prepayment of the Senior Secured Note, or (z) acceleration of the maturity of the Senior Secured Note upon an event of default.. The Senior Secured Notes are secured by substantially all assets of the Company including, in the event of default, placing bank accounts under a control agreement, copyrights, trademarks, patents, applications, registered and unregistered, licenses, designs, held or acquired after August 6, 2020 by the Company. The NWPSA contains several default conditions, including non-monetary default events including misrepresentations and material adverse changes. In the case of default, the agent has the right to declare the Senior Secured Notes immediately due, not extend further credit, take actions to protect the security, demand and take possession of the books, and is appointed an attorney in fact in certain conditions. Covenants include restrictions on dispositions, mergers or acquisitions, incurring indebtedness and minimum liquidity provisions. As of December 31, 2020, the Company was in default of the minimum liquidity provisions on the Senior Secured Note, and, as a result, it is classified in current liabilities in the accompanying Consolidated Balance Sheets. As a result of the default, the comapny is accuring interest at the default interest note of an additional 5%.
At issuance
December 31, 2020
Senior secured promissory note payable, in default
Principal
$
15,000,000
$
15,000,000
Debt issuance costs
(1,653,453
)
(1,520,110
)
Debt discount
(3,050,240
)
(2,804,253
)
$
10,296,307
$
10,675,637
The debt issuance costs and debt discount related to the Senior Secured Note were capitalized as a reduction in the principal amount and are being amortized to interest expense over the life of the Senior Secured Note. Amortization expense for the year ended December 31, 2020 was $379,330. Accrued interest related to the Senior Secured Note was $642,284 at December 31, 2020. Interest expense on this note was $1,484,468 for the year ended December 31, 2020.
The NH Expansion Warrant agreement contains a put option. Upon payment in full of the Senior Secured Note, the holder has the ability to require the Company to purchase the warrants from the holder for cash. Accordingly, the NH Expansion Warrant have been classified as a derivative liability. The holder has the option to exercise the put any time between the payment of the Senior Secured Note and the expiration of the warrants. At issuance, the Company recorded a warrant liability of $3,050,240 for the fair value of the NH Expansion Warrant.
Convertible promissory notes payable, in default - On August 6, 2020, the Company entered into an asset purchase agreement with Celularity, described in Note 5, to acquire Celularity’s UltraMIST assets. A portion of the aggregate consideration of $24,000,000 paid for the assets included the issuance of a promissory note to Celularity in the principal amount of $4,000,000 (the “Seller Note”). The Seller Note matured on August 6, 2021 and was not repaid, see Note 24 Subsequent Events for additional discussion. The Seller Note accrues interest at a rate equal to 12.0% per annum. In the event that the Seller Note has not been repaid prior to January 1, 2021, Celularity may elect to convert the outstanding principal amount plus any accrued but unpaid interest thereon into shares of the Company’s common stock, at a conversion price of $0.10 per share. As this conversion option is contingent on a future event, the conversion option has not been bifurcated from the Seller Note as of December 31, 2020. The Seller Note is expressly subordinate to the Senior Secured Note. The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty. As of December 31, 2020, $4,000,000 remained outstanding and had accrued interest of $192,258.
LGH convertible promissory note -- On June 5, 2020, the Company entered into a securities purchase agreement with investor LGH Investments LLC ("LGH") for (i) a convertible promissory note (the “LGH Note”) in the original principal amount of $1,210,000, convertible into shares of common stock, (ii) warrants entitling LGH to acquire 1,075,000 shares of common stock (the “LGH Warrants”) and (iii) 200,000 unregistered common shares of the Company as an inducement grant (the “Inducement Shares”). The LGH Note contained certain default provisions, as defined, resulting in net proceeds to the Company of $1,100,000.
As part of the securities purchase agreement with LGH, the Company established a reserve of shares of its authorized but unissued and unreserved common stock for 11,000,000 shares for purposes of exercise of the LGH Warrant or conversion of the LGH Note. The LGH Note matures on February 5, 2021 and includes a one-time interest charge of 8% to be applied on the issuance date to the original principal amount. LGH can convert the LGH Note and accrued interest at any time prior to maturity to the number of shares of common stock, equal to the amount obtained by dividing (i) the amount of the unpaid principal and interest on the note by (ii) $0.25.
On August 6, 2020, the Company repaid all amounts owing to LGH in the original principal amount of LGH Note $1,210,000. As a result, all obligations of the Company under the LGH Note have been terminated. The Company recorded a loss on extinguishment of debt of $565,374 during the year ended December 31, 2020.
The LGH Warrants have an exercise price of $0.35 per share and have a term of five years and are recorded as a derivative liability by the Company. With respect to the Inducement Shares, in the event the Company’s share price has declined on the date on which the LGH seeks to have the restricted legend removed on such shares, the Company agrees to issue to LGH additional shares such that the aggregate value of the Inducement Shares equals the aggregate value of the Inducement Shares as of June 5, 2020.
The LGH Warrants, as more fully discussed in Note 14, contain certain ratchet provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants. As a result of certain dilutive issuances of securities by the Company on August 6, 2020, the exercise price of the LGH Warrants decreased to $0.01 per share and the number of shares subject to the LGH Warrants increased to 35,000,000 shares. As a result, the Company determined that these warrants meet the definition of a derivative liability.
SBA loans - On May 28, 2020, the Company received proceeds from a loan in the approximate amount of $460,000 (the “PPP Loan”) from Truist Bank, as lender, pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on May 28, 2022 and bears interest at a rate of 1% per annum. Commencing December 12, 2020, the Company is required to pay the lender equal monthly payments of principal and interest. The PPP Loan is evidenced by a promissory note dated May 28, 2020 (the “PPP Note”), which contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties and covenants. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.
All or a portion of the PPP Loan may be forgiven by the U.S. Small Business Administration (“SBA”) upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. The ultimate forgiveness of the PPP Loan is also predicated upon regulatory authorities concurring with management’s good faith assessment that the current economic uncertainty made the loan request necessary to support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company satisfied all eligibility requirements for the PPP Loan, the Company is later determined to have violated any applicable laws or regulations or it is otherwise determined that the Company was ineligible to receive the PPP Loan, the Company may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. Under the terms of the PPP Loan, the Company may be eligible for full or partial loan forgiveness in the third quarter of 2020. The Company completed the application for loan forgiveness during the third quarter of 2021, however, no assurance is provided that the Company will obtain forgiveness for, any portion of the PPP Loan. As of December 31, 2020, $320,707 is classified as current and $143,628 is classified as non-current.
On June 10, 2020, the Company secured a loan offered by the U.S. Small Business Administration (“SBA”) under its Economic Injury Disaster Loan assistance program (“EIDL”) in light of the impact of COVID-19 pandemic on the Company’s business. The principal amount of this loan was $150,000 and interest accrued at the rate of 3.75% per annum. This loan was repaid in full on August 5, 2020 with proceeds from the NWPSA Senior Notes as part of the conditions of that agreement.
Short-term notes payable - The Company had short-term notes payable with an aggregate outstanding balance of $587,233 at December 31, 2019. During the year ended December 31, 2020, the Company issued 4,829,789 shares of common stock upon the conversion of principal and accrued interest in order to satisfy $564,729 of the obligation with the remaining balance being paid in cash.
13.
Warrants
A summary of the warrant activity during the years December 31, 2020 and 2019 is as follows:
Warrant class
Outstanding
December 31,
Issued
Exercised
Expired
Outstanding
December 31,
Class E Warrants
-
141,091,485
-
-
141,091,485
Class K Warrants
7,200,000
-
(7,200,000
)
-
-
Class O Warrants
909,091
-
-
-
909,091
Class P Warrants
1,365,000
-
(1,000,000
)
(100,000
)
265,000
LGH Warrant
-
35,000,000
-
-
35,000,000
NH Expansion Warrant
-
13,091,160
-
-
13,091,160
Total
9,474,091
189,182,645
(8,200,000
)
(100,000
)
190,356,736
Warrant class
Outstanding
December 31,
Issued
Exercised
Expired
Outstanding
December 31,
Class K Warrants
7,200,000
-
-
-
7,200,000
Class L Warrants
57,258,339
-
(57,133,339
)
(125,000
)
-
Class N Warrants
30,451,815
-
(29,951,815
)
(500,000
)
-
Class O Warrants
7,929,091
-
(6,549,090
)
(470,910
)
909,091
Class P Warrants
-
1,365,000
-
-
1,365,000
Series A Warrants
1,155,682
-
(1,092,936
)
(62,746
)
-
Total
103,994,927
1,365,000
(94,727,180
)
(1,158,656
)
9,474,091
A summary of the warrant exercise price per share and expiration date as of December 31, 2020 is as follows:
Exercise
price/share
Expiration
date
Class E Warrants
$
0.25
August 2023
Class O Warrants
0.11
January 2022
Class P Warrants
0.20
June 2024
LGH Warrant
0.01
June 2025
NH Expansion Warrant
0.01
August 2030
Except for the LGH Warrants, the fair value of the common stock purchase warrants is estimated on the date of grant using the Black-Scholes option pricing model which approximates the binomial model, using the following weighted average assumptions for the year ended December 31, 2020:
Weighted average contractual terms in years
1.3
Weighted average risk free interest rate
0.15
%
Weighted average volatility
92.76
%
The LGH Warrants were valued at the ratchet date of August 6, 2020 using the binomial/lattice model.
14.
Warrant Liabilities
On August 6, 2020, the Company, issued 132,816,250 warrants to investors and the placement agent in connection with a private placement offering (Note 12). Additionally, on that date, the Company issued 13,091,160 NH Expansion Warrants to the holder of the Senior Secured Notes (Note 12) and 8,275,235 warrants to settle certain outstanding debt (Note 11). The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the public share offering.
The Company, not having sufficient authorized common shares at the time of issuance, in the event that all of the warrants were exercised, required the reclassification of 112,210,902 warrants from the August 6, 2020 private placement as a warrant liability. On December 30, 2020 the shareholders of the Company authorized sufficient additional share and the Company at that time re-valued 64,119,742 of these shares and reclassified them as equity.
A summary of the warrant liability activity for the year ended December 31, 2020 is as follows:
Warrant Liability
Warrants
Outstanding
Fair Value
per Share
Fair Value
Balance December 31, 2019
-
$
-
$
-
Warrants classified as liabilities
112,210,902
0.11
11,955,454
Warrants reclassifed as Equity
(64,119,742
)
0.10
(6,292,695
)
Loss on remeasurement of warrant liability
3,192,620
Balance December 31, 2020
48,091,160
$
0.18
$
8,855,379
NH Expansion Warrants -- Management determined that the NH Expansion Warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC Topic 480 “Distinguishing Liabilities from Equity”. In accordance with the accounting guidance, 13,091.160 of the outstanding NH Expansion Warrants were recognized as a warrant liability on the Consolidated Balance Sheets and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the Consolidated Statements of Comprehensive Loss.
The derivative liability for the NH Expansion Warrants is considered a Level 3 liability on the fair value hierarchy as the determination of fair value includes various assumptions about future activities and the Company’s stock prices and historical volatility as inputs. The fair value of the NH Expansion Warrants derivative liability was measured using the Black Scholes option pricing model. Given the plain vanilla nature of the NH Expansion Warrant terms, including the absence of any exercise contingencies, the Black Scholes Merton model sufficiently captures the terms of the NH Expansion Warrant as inputs to the valuation and produces a value that is not materially different from a binomial/lattice model.
Significant inputs into the model at the inception and December 31, 2020 are as follows:
Black Scholes option pricing model
Issuance date (1)
August 6, 2020
December 31, 2020
Exercise Price(1)
$
0.01
$
0.01
Warrant Expiration Date (1)
August 6, 2030
August 6, 2030
Interest Rate (annual) (2)
0.21
%
0.65
%
Volatility (annual) (3)
102.09
%
143.94
%
Time to Maturity (Years)
9.6
Calculated fair value per share
$
0.2330
$
0.1891
(1)
Based on the terms provided in the warrant agreement to purchase common stock of the Company dated August 6, 2020.
(2)
Interest rate for U.S. Treasury Bonds, as of August 6, 2020 and each presented period ending date, as published by the U.S. Federal Reserve.
(3)
Based on the historical daily volatility of the Company as of August 6, 2020 and each presented period ending date.
LGH Warrants - As discussed above, the Company consummated a series of transactions on August 6, 2020, involving the issuance of common stock and various equity-linked instruments, each of which constitutes a dilutive issuance in the LGH Warrant Agreement (see Note 12). As a result of these transactions, a ratchet provision, as defined in the agreement, was triggered with the effect of decreasing the warrant’s exercise price to $0.01. With the reduction of the warrant exercise price from the initial $0.35 to $0.01 per share, so as to maintain the $350,000 aggregate exercise amount in effect prior to the adjustment (1,000,000 warrant shares with an exercise price of $0.35), as required by the ratchet provision, the Company was required to increase the number of warrant shares to 35,000,000 shares, thereby entitling LGH to purchase 35,000,000 shares of the Company’s common stock at $0.01 per share.
Due to the ratchet provision of the LGH Warrants, the Company determined that these warrants meet the definition of a derivative liability. Pursuant to this conclusion, the LGH Warrant was recorded as derivative liability In accordance with the accounting guidance, 35,000.000 of the outstanding LGH Warrants were recognized as a warrant liability on the Consolidated Balance Sheets and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the Consolidated Statements of Comprehensive Loss.
The fair value of the LGH Warrant liabilities was determined using the binomial pricing model at the insurance date. The Black Sholes model was used to determine the fair value at the ratchet date and at December 31,2020. Significant inputs into the model at the date of issuance, the ratchet date and December 31, 2020 are as follows:
Issuance date (1)
Ratchet Date
June 5, 2020
August 6, 2020
December 31, 2020
Exercise Price(1)
$
0.35
$
0.01
$
0.01
Warrant Expiration Date (1)
June 5, 2025
June 5, 2025
June 5, 2025
Interest Rate (annual) (2)
0.29
%
0.20
%
0.36
%
Volatility (annual) (3)
%
%
%
Time to Maturity (Years)
4.83
4.43
Calculated fair value per share
$
0.25
$
0.24
$
0.18
(1)
Based on the terms provided in the warrant agreement to purchase common stock of the Company dated August 6, 2020.
(2)
Interest rate for U.S. Treasury Bonds, as of August 6, 2020 and each presented period ending date, as published by the U.S. Federal Reserve.
(3)
Based on the historical daily volatility of the Company as of August 6, 2020 and each presented period ending date.
15.
Leases
The following is a summary of the Company’s ROU assets and lease liabilities at December 31, 2020 and 2019:
December 31, 2020
December 31, 2019
Operating
Leases
Financing
Leases
Total
Operating
Leases
Financing
Leases
Total
Right of use assets
$
724,604
$
643,517
$
1,368,121
$
476,029
$
451,561
$
927,590
Less: Accumulated amortization
(339,032
)
(234,258
)
(573,290
)
(152,368
)
(33,473
)
(185,841
)
Right of use assets, net
$
385,572
$
409,259
$
794,831
$
323,661
$
418,088
$
741,749
Lease liabilities
$
414,668
$
427,429
$
842,097
$
359,047
$
392,874
$
751,921
Less: current portion
(257,124
)
(193,663
)
(450,787
)
(173,270
)
(121,634
)
(294,904
)
Lease Liabilities
$
157,544
$
233,766
$
391,310
$
185,777
$
271,240
$
457,017
Total lease costs for the years ended December 31, 2020 and 2019 are as follows:
Finance lease costs:
Amortization of right-of-use assets
$
200,785
$
33,473
Interest on lease liabilities
58,804
60,863
Operating lease costs
296,686
157,395
Total lease costs
$
556,275
$
251,731
The following summarizes cash paid for amounts included in the measurement of lease liabilities as well as the related right-of-use assets obtained for the years ended December 31, 2020 and 2019:
Cash paid for amouonts included in measurement of lease liabilities:
Operating cash flows from finance leases
$
(210,333
)
$
(84,440
)
Operating cash flows from operating leases
$
(302,976
)
$
(165,403
)
Financing cash flows from finance leases
$
186,083
$
416,451
Right-of-use assets obtained in exchange for new finance lease liabilities
$
191,956
$
451,561
Right-of-use assets obtained in exchange for new operating lease liabilities
$
248,575
$
476,029
Operating Leases - The Company is a party to certain operating leases. The Company has entered into a lease agreement, as amended, for office space for office, research and development, quality control, production and warehouse space which expires on December 31, 2021. Under the terms of the lease, the Company pays monthly rent of $14,651, subject to a 3% adjustment on an annual basis.
As part of its August 6, 2020 acquisition, the Company became party to second lease agreement for office space for office, research and development, quality control and warehouse space which expires August 31, 2023. Under the terms of the lease, the Company pays monthly rent of $7,051, with escalation of approximately 2% on May 1 of each lease year.
Also on August 6, 2020, the Company became party to a lease for office equipment that requires monthly payments of $669 through May 31, 2025.
As of December 31, 2020, the maturities of the Company’s operating lease liability which have initial or remaining lease terms in excess of one year consist of the following:
Year ending December 31,
Amount
$
279,279
93,502
65,010
8,028
3,345
Total lease payments
449,164
Less: Present value adjustment
(34,496
)
Lease liability
$
414,668
As of December 31, 2020, the Company’s operating lease had a weighted average remaining lease term of 2.1 years and a weighted average discount rate of 9.9%.
Rent expense for the year ended December 31, 2020 and 2019 was $296,686 and $157,395, respectively.
Financing Lease - On January 26, 2018, the Company entered into a master equipment lease to provide financing for equipment purchases to enable the Company to begin placing the dermaPACE system in the marketplace. In 2019, the Company entered into additional equipment leases under the master lease agreement.
As of December 31, 2020, the maturities of the Company’s financing lease liability which have initial or remaining lease terms in excess of one year consist of the following:
Year ending December 31,
Amount
$
234,593
199,793
18,388
Total lease payments
452,774
Less: Present value adjustment
(25,345
)
Lease liability
$
427,429
As of December 31, 2020, the Company’s financing leases had a weighted average remaining lease term of 2.0 years based on annualized base payments expiring through 2023 and a weighted average discount rate of 13.2%.
As of December 31, 2020, the Company did not have additional operating or financing leases that have yet commenced.
16.
Common Stock
On July 23, 2020, in connection with the Company’s 2020 Annual Meeting of Stockholders, the Company’s stockholders approved, among other matters, an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 355,000,000 to 600,000,000.
Also on July 23, 2020, the Company’s stockholders approved the Company to amend the Company’s Articles of Incorporation to effect a reverse split of the Company’s outstanding common stock at a ratio of between 1-for-10 and 1-for-50, with the exact ratio to be determined by the board of directors of the Company in its sole discretion. The Company has not yet effected a reverse split of its stock.
On December 30, 2020, the Company held a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation, as amended, to increase the number of authorized shares of its common stock, par value $0.001 per share, to 800,000,000, and the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended with the Secretary of State of the State of Nevada on December 30, 2020 to reflect this amendment, which became effective on December 30, 2020.
17.
Preferred Stock
On January 31, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series C Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate 90 shares of our preferred stock as Series C Convertible Preferred Stock.
On February 6, 2020, the Company entered into a Series C Preferred Stock Purchase Agreement (the “Series C Purchase Agreement”) with certain accredited investors for the sale by the Company in a private placement of an aggregate of 90 shares of the Company’s Series C Convertible Preferred Stock, par value $0.001 per share at a stated value equal to $25,000 per share, for an aggregate total purchase price of $2,250,000.
On May 14, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series D Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate eight shares of our preferred stock as Series D Convertible Preferred Stock.
On May 14, 2020, the Company entered into a Series D Preferred Stock Purchase Agreement (the “Series D Purchase Agreement”) with certain accredited investors for the sale by the Company in a private placement of an aggregate of eight shares of the Company’s Series D Convertible Preferred Stock, par value $0.001 per share at a stated value equal to $25,000 per share (the “Series D Preferred Stock”), for an aggregate total purchase price of $200,000.
Subject to the terms of the Certificates of Designation, each share of Series C Preferred Stock and Series D Preferred Stock is convertible into shares of common stock of the Company at a rate equal to the stated value of such share of Series C Preferred Stock and Series D Preferred Stock of $25,000, divided by the conversion price of $0.14 per share (subject to adjustment from time to time upon the occurrence of certain events as described in the Certificate of Designation). The Certificates of Designation became effective upon filing with the Secretary of State of the State of Nevada. If all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were converted into common stock at the original conversion rate, such shares would convert into an aggregate of 17,500,000 shares of common stock.
On September 20, 2020, the Series C and D holders converted their preferred shares into 17,499,958 shares of common stock.
18.
Equity transactions
Warrant Exercises - During the year ended December 31, 2020, the Company issued 1,000,000 shares of common stock upon the exercise of 1,000,000 Class P Warrants to purchase shares of stock and an exercise price of $0.01 per share under the terms of the respective warrant agreement.
During the year ended December 31, 2020, the Company issued 7,200,000 shares of common stock to a related party upon the exercise of Class K Warrants upon the conversion of accrued interest related to a note payable, related party totaling $636,000, as described in Note 11.
During the year ended December 31, 2019, the Company issued 19,116,934 shares of common stock upon the exercise of 19,116,934 Class L Warrants, Class O Warrants, Class N Warrants and Series A Warrants to purchase shares of stock under the terms of the respective warrant agreements, in exchange for $1,758,142 in cash proceeds.
During the year ended December 31, 2019, the Company issued 21,167,488 shares of Common Stock upon the exercise of 21,167,488 Class L Warrants, Class O Warrants, Class N Warrants and Series A Warrants to purchase shares of stock under the terms of the respective warrant agreements, in exchange for $1,827,315 in customer deposits and $36,500 in accounts payable.
Cashless Warrant Exercises - During the year ended December 31, 2019, the Company issued 4,962,157 shares of Common Stock upon the cashless exercise of 10,423,886 Class N Warrants, Class L Warrants and Series A Warrants to purchase shares of stock under the terms of the respective warrant agreements.
During the year ended December 31, 2019, the Company issued 450,000 shares of Common Stock on a cashless basis upon the exercise of 450,000 Class L Warrants to purchase shares of stock under the terms of the respective warrant agreements. The Common Stock was issued on a cashless basis as a result of an email breach in March 2019. The warrant holder sent the funds to an incorrect bank account because of the email breach and the Company elected to waive the requirement to cash exercise and allowed the warrant holder to net exercise.
Conversion of liabilities - During the year ended December 31, 2020, the Company issued 2,579,789 shares of common stock upon the conversion of short-term notes payable in the principal and accrued interest amount of $354,729 with the receipt of notices of Class L warrant exercises, all pursuant to the terms of the short-term notes payable.
During the year ended December 31, 2020, the Company issued 2,250,000 shares of common stock upon the conversion of short-term notes payable in the principal and accrued interest amount of $210,000 pursuant to the terms of the short-term notes.
During the year ended December 31, 2020, the Company issued 15,475,235 shares of common stock to a related party upon the conversion of accrued interest related to a note payable, related party totaling $2,291,047, as described in Note 11.
During the year ended December 31, 2019, the Company issued 38,581,030 shares of Common Stock upon the exercise of 35,677,272 Class L Warrants, Class N Warrants and Series A Warrants, under the terms of the respective warrant agreements and 2,903,758 upon the conversion of interest and bonus shares pursuant to the terms of the short term note payable. The other warrant exercise constituted the conversion of short term note payable in the outstanding amount of $3,559,542 with the receipt of notices of Class L, Class N and Series A warrant exercises, all pursuant to the terms of the short term note payable.
During the year ended December 31, 2019, the Company issued 26,666,487 shares of Common Stock due upon exercise of the conversion of convertible promissory notes in the principal and interest amount of $2,933,313 with the receipt of notices of conversion, all pursuant to the terms of the convertible promissory notes.
During the year ended December 31, 2019, the Company issued 7,020,455 shares of Common Stock due upon exercise of 6,795,455 Class L and Class N Warrants and 225,000 upon the conversion of bonus share pursuant to the terms of the conversion of line of credit, related parties in the principal amount of $680,000 with the receipt of notices of conversion.
Conversion of advances from related parties - During the year ended December 31, 2020, the Company issued 262,811 shares of common stock upon the conversion of advances from related parties in the amount of $18,098 with the receipt of notice of Series A Warrant exercise to purchase shares of stock under the terms of the respective warrant agreement.
Consulting Agreement - In February 2019, the Company entered into a three-month consulting agreement for which a portion of the fee for the services was to be paid with common stock. The number of shares to be paid with common stock was 75,000 earned upon signing and an additional 75,000 upon renewal of the agreement. The Company issued 150,000 shares in December 2019. The fair value of the shares of $28,500 was recorded as a non-cash general and administrative expense during the year ended December 31, 2019.
During the year ended December 31, 2020, the Company entered into various consulting agreements for which the fees were paid with common stock. These consulting services related to investor relations, new product and business development and digital marketing. In exchange for these services, the Company issued 12,700,000 shares of common stock with a fair value of $2,546,192. The fair value of the shares issued was recorded as a non-cash general and administrative expense during the year ended December 31, 2020.
PIPE Offering - On December 11, 2019, the Company entered into a Common Stock Purchase Agreement with certain investors for the sale by the Company in a private placement of an aggregate of up to 21,071,143 shares of its common stock at a purchase price of $0.14 per share. The Company has granted the purchasers indemnification rights with respect to its representations, warranties, covenants and agreements under the purchase agreement.
In connection with the agreement, the Company also entered into a registration rights agreement with the purchasers, pursuant to which the Company has agreed to file a registration statement with the SEC by April 30, 2020. To-date, the shares have not been registered.
During the year ended December 31, 2019, the Company issued 20,000,711 shares of common stock in conjunction with this offering and received $2,800,100 in cash proceeds.
On December 11, 2019, the Company entered into a common stock Purchase Agreement with certain investors for the sale by the Company in a private placement of an aggregate of up to 21,071,143 shares of its common stock at a purchase price of $0.14 per share. During the year ended December 31, 2020, the Company issued 1,071,428 shares of common stock in conjunction with this offering and received $150,000 in cash proceeds.
On August 6, 2020, the Company entered into a Securities Purchase Agreement in connection with the acquisition of UltraMIST, as discussed in Note 5, and issued 123,550,000 shares of common stock and accompanying Class E Warrants to purchase up to an additional 123,550,000 shares of common stock to certain investors for an aggregate purchase price of $0.20 per share of common stock and accompanying Warrant. It also issued Class E Warrants to a third-party placement agent to purchase up to 9,266,250 shares of common stock on the same terms as the Warrants. The Warrants have an exercise price of $0.25 per share and a three-year term. The private placement generated net proceeds of $21,456,468. The shares of common stock issued in the private placement have a par value of $0.001, resulting in an increase to common stock of $123,550. Since at the date of issuance the Company did not have a sufficient number of authorized shares to reserve for the number of warrants and conversion options outstanding, the Company recorded a liability of $7,306,165 for the fair value of the Warrants that were in excess of the available authorized shares. The Company recorded the residual amount of $12,682,516 from the net proceeds to stockholders’ equity.
Inducement Shares - During the year ended December 31, 2020, the Company issued 200,000 shares of common stock related to the June 5, 2020, Securities Purchase Agreement with LGH Investments, LLC, as described in Note 13.
Stock Option Exercise - During the year ended December 31, 2020, the Company issued 325,000 shares of common stock upon the exercise of stock options resulting in net proceeds of $48,250.
Litigation Settlement - During the year ended December 31, 2020, the Company issued 200,000 shares of restricted common stock upon the settlement of outstanding litigation. The fair value of the shares of $50,000 was recorded as a non-cash general and administrative expense during the year ended December 31, 2020.
19.
Contingencies
Litigation - From time to time, the Company is subject to various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts and intellectual property matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company believes that all pending claims, if adversely decided, would not have a material adverse effect on our business, financial position or results of operations.
20.
Related party transactions
On February 13, 2018, the Company entered into an Agreement for Purchase and Sale, Limited Exclusive Distribution and Royalties, and Servicing and Repairs with Premier Shockwave Wound Care, Inc., a Georgia Corporation (“PSWC”), and Premier Shockwave, Inc., a Georgia Corporation (“PS”). The agreement provides for the purchase by PSWC and PS of dermaPACE System and related equipment sold by the Company and includes a minimum purchase of 100 units over 3 years. The agreement grants PSWC and PS limited but exclusive distribution rights to provide dermaPACE Systems to certain governmental healthcare facilities in exchange for the payment of certain royalties to the Company. Under the agreement, the Company is responsible for the servicing and repairs of such dermaPACE Systems and equipment. The agreement also contains provisions whereby in the event of a change of control of the Company (as defined in the agreement), the stockholders of PSWC have the right and option to cause the Company to purchase all of the stock of PSWC, and whereby the Company has the right and option to purchase all issued and outstanding shares of PSWC, in each case based upon certain defined purchase price provisions and other terms. The agreement also contains certain transfer restrictions on the stock of PSWC. Each of PS and PSWC is owned by A. Michael Stolarski, a member of the Company’s board of directors and an existing shareholder of the Company.
For the year ended December 31, 2020, the Company recorded $45,019 in product revenue from this related party. The contract liabilities balance includes a balance of $69,772 from this related party. For the year ended December 31, 2019, the Company recorded $253,013 in product revenue from this related party. The contract liabilities balance at December 31, 2019 includes a balance of $117,152 from this related party.
21.
Stock-based compensation
On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Stock Incentive Plan”). The Stock Incentive Plan permits grants of awards to selected employees, directors and advisors of the Company in the form of restricted stock or options to purchase shares of common stock. Options granted may include non-statutory options as well as qualified incentive stock options. The Stock Incentive Plan is currently administered by the board of directors of the Company. The Stock Incentive Plan gives broad powers to the board of directors of the Company to administer and interpret the particular form and conditions of each option. The stock options granted under the Stock Incentive Plan are non-statutory options which generally vest over a period of up to three years and have a ten-year term. The options are granted at an exercise price determined by the board of directors of the Company to be the fair market value of the common stock on the date of the grant. As of December 31, 2020 and 2019, the Stock Incentive Plan reserved a total of 35,000,000 and 35,000,000, respectively, shares of common stock for grant.
The following is a summary of the activity of the Stock Incentive Plan for the years ended December 31, 2020 and 2019:
Options
Weighted
Average
Exercise Price
per share
Range of Option
Exercise Price
per share
Aggregate
Intrinsic Value
Weighted Average
Remaining
Contractural Life
(years)
Outstanding at December 31, 2018
31,703,385
$
0.29
$
0.04 - $2.00
$
2,085,866
7.40
Granted
2,700,000
0.15
Exercised
-
-
Forfeited or expired
(100,000
)
0.11
Outstanding at December 31, 2019
34,303,385
0.28
$
0.04 - $2.00
$
981,088
6.62
Granted
100,000
0.26
Exercised
(325,000
)
0.15
Forfeited or expired
(2,140,000
)
0.71
Outstanding at December 31, 2020
31,938,385
0.26
$
0.04 - $1.98
$
1,372,116
5.94
Vested and exercisable at December 31, 2020
31,588,385
$
0.28
$
0.04 - $1.98
$
1,368,616
5.94
On December 31, 2020, there were 3,061,615 shares of common stock available for grant under the Stock Incentive Plan.
During the year ended December 31, 2020, the Company granted to employees, members of the board of directors and members of the Company’s Medical Advisory Board options to purchase an aggregate of 100,000 shares of common stock under a previously issued incentive plan. The options have an exercise price of $0.26 per share for an aggregate grant date value of approximately $21,900. The options vested upon issuance and have a term of ten years.
During the year ended December 31, 2019, the Company granted to employees, members of the board of directors and members of the Company’s Medical Advisory Board options to purchase an aggregate of 2,700,000 shares of common stock under a previously issued incentive plan. The options have an exercise price between $0.14 and $0.18 per share for an aggregate grant date value of approximately $333,422. The options vested upon issuance and have a term of ten years.
The range of exercise prices for options was $0.04 to $1.98 for options outstanding at December 31, 2020 and $0.04 to $2.00 at December 31, 2019. The aggregate intrinsic value for outstanding options was $1,372,116 and $981,088 at December 31, 2020 and 2019, respectively. The aggregate intrinsic value for all vested and exercisable options was $1,368,616 and $981,088 at December 31, 2020 and 2019, respectively. The weighted average remaining contractual term for outstanding exercisable stock options is 5.94 years and 6.62 years as of December 31, 2020 and 2019, respectively.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions for the years ended December 31, 2020 and 2019:
Weighted average expected life in years
5.00
5.00
Weighted average volatility
124.38
%
131% - 189
%
Weighted average risk free interest rate
1.59
%
1.54% - 2.15
%
Expected dividend yield
0.0
%
0.0
%
For the years ended December 31, 2020 and 2019, the Company recognized $21,900 and $333,422, respectively, as compensation cost related to options granted. The compensation cost is included in operating expenses in the accompanying Consolidated Statements of Comprehensive Loss. As of December 31, 2020 and 2019, there are no unamortized compensation costs related to options granted.
22.
Joint ventures
On September 21, 2018, the Company entered into a joint venture agreement with Johnfk Medical Inc. (“FKS”) setting forth the terms of the operation, management and control of a joint venture entity, incorporated in the Republic of Singapore, for the manufacture, sale and distribution of the Company’s dermaPACE and orthoPACE devices. Under the terms of the agreement, FKS paid the Company a fee of $500,000 on June 22, 2018 for the initial distribution rights in Taiwan. An additional fee of $500,000 for initial distribution rights in the southeast Asia region was to be received in installments. The first two installments of $50,000 were received and the remaining $400,000 was expected to be received in April 2019. On June 4, 2019, the Company and FKS terminated their joint venture agreement. FKS paid the Company a fee of $50,000 for early termination of the agreement plus $63,275 in outstanding invoices for equipment delivered to FKS. The $400,000 fee the Company anticipated receiving from FKS under the terms of the agreement was not received. Pursuant to the termination agreement, FKS was to pay the outstanding amount of $63,275 for equipment delivered to FKS and a penalty fee of $50,000 for early termination of the joint venture agreement. The early termination fee was received in 2019. We credited the outstanding amount of $63,275 due for equipment upon the return of the equipment on September 6, 2019.
On December 13, 2019, the Company entered into a joint venture agreement (the “Agreement”) with Universus Global Advisors LLC, a limited liability company organized under the laws of the State of Delaware (“Universus”), Versani Health Consulting Consultoria em Gestão de Negócios EIRELI, an empresa individual de responsabilidade limitada organized under the laws of Brazil (“Versani”), Curacus Limited, a private limited company organized under the laws of England and Wales (“Curacus”), and certain individual citizens of Brazil and the Czech Republic (the individuals together with Curacus, the “IDIC Group”). The principal purpose of the joint venture company will be to manufacture, import, use, sell, and distribute, on an exclusive basis in Brazil, dermaPACE devices and wound kits consisting of a standard ultrasound gel and custom size sterile sleeves used for the treatment of various acute and chronic wounds using extracorporeal shockwave therapy technology. The joint venture company will also provide treatments related to the dermaPACE devices. The IDIC Group has agreed to pay to the Company a partnership fee in the total amount of $600,000 for the granting of exclusive territorial rights to the joint venture company to distribute the dermaPACE devices and wound kits in Brazil. The $600,000 joint venture fee was received and recognized as nonoperating income during the year ended December 31, 2020. The IDIC Group will also have the right to receive prioritized dividends until full reimbursement of the partnership fee and expenses incurred in the formation of the joint venture company, which are required to be paid by the IDIC Group.
23.
Income taxes
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. The Company is subject to United States federal and state income tax examinations by tax authorities for any years that have net operating losses open until the net operating losses are used.
The components of the net loss before income taxes for the years ended December 31, 2020 and 2019 are as follows:
Domestic
$
(30,945,249
)
$
(10,595,457
)
Foreign
8,216
165,618
Net loss before income taxes
$
(30,937,033
)
$
(10,429,839
)
In accordance with ASC Topic 740, Income Taxes (“ASC 740”), the Company accounts for income taxes utilizing the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the deferred tax assets, including loss carryforwards, when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
On March 27, 2020, the CARES Act was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increasing the limitation under Section 163(j) of the Internal Revenue Code of 1986, as amended (the “IRC”) for 2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimum tax credits. The CARES Act did not have a material impact on the Company.
The income tax provision (benefit) from continuing operations consists of the following at December 31, 2020 and 2019:
Current:
Federal
$
-
$
-
State
-
-
Foreign
-
-
-
-
Deferred:
Federal
(5,420,438
)
(2,300,997
)
State
(964,218
)
(409,313
)
Foreign
1,577
(3,676
)
Change in valuation allowance
6,383,079
2,713,986
$
-
$
-
At December 31, 2020 and 2019, the Company did not have any undistributed earnings of our foreign subsidiaries. As a result, no additional income or withholding taxes have been provided for. The Company does not anticipate any impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) and as such, the Company has not recorded any impact associated with either GILTI or BEAT.
The income tax provision (benefit) amounts differ from the amounts computed by applying the United States federal statutory income tax rate of 21% for the years ended December 31, 2020 and 2019 to pretax loss from operations as a result of the following for the years ended December 31, 2020 and 2019:
Tax expense (benefit) at statutory rate
$
(6,498,502
)
$
(2,071,322
)
Increase (reduction) in income taxes resulting from:
State income taxes (benefit), net of federal benefit
(913,233
)
(291,082
)
Non-deductible gain on warrant adjustment valuation
670,450
(47,810
)
Income from foreign subsidiaries
1,725
(2,595
)
Change in valuation allowance
6,383,079
2,713,986
Other
356,481
(301,177
)
Income tax expense (benefit)
$
-
$
-
The tax effects of temporary differences that give rise to the deferred tax assets at December 31, 2020 and 2019 are as follows:
Deferred tax assets:
Net operating loss carryforwards
$
28,047,903
$
23,727,093
Net operating loss carryforwards - foreign
18,649
20,227
Excess of tax basis over book value of property and equipment
7,754
4,240
Excess of tax basis over book value of intangible assets
1,811,264
73,705
Stock-based compensation
1,613,258
1,607,841
Accrued employee compensation
426,514
357,869
Captialized equity costs
49,471
49,471
Net change in reserve accounts
287,035
38,323
32,261,848
25,878,769
Valuation allowance
(32,261,848
)
(25,878,769
)
Net deferred tax assets
$
-
$
-
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realization of deferred tax assets, management considers, whether it is “more likely than not”, that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.
ASC 740 requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of December 31, 2020 and 2019.
The Company’s ability to use its net operating loss carryforwards could be limited and subject to annual limitations. Since a full analysis under Section 382 of the Internal Revenue Code has not been performed, the Company may realize a “more than 50% change in ownership” which could limit its ability to use its net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take advantage of all or portions of its net operating loss carryforwards for federal income tax purposes.
The federal and state net operating loss carryforwards of approximately $77.9 million from years ending December 31, 2005 through December 31, 2017 will begin to expire in 2025. The federal and state net operating loss carryforward for the years ended December 31, 2018 through 2020 of approximately $36.3 million will not expire. The foreign net operating loss carryforward at December 31, 2020 of $0.1 million will begin to expire in 2024.
A provision of ASC 740 specifies that companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions would “more-likely-than-not” be sustained if challenged by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s Consolidated Financial Statements as of December 31, 2020 and 2019. The Company does not expect any significant changes in the unrecognized tax benefits within twelve months of the reporting date.
The Company will recognize in income tax expense, interest and penalties related to income tax matters. For the years ended December 31, 2020 and 2019, the Company did not have any amounts recorded for interest and penalties.
24.
Subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
Cashless Warrant exercise - In February 2021, LGH made a partial exercise of its 35,000,000 LGH warrants outstanding. LGH exercised 11,400,000 warrants on a cashless basis which, in accordance with the terms of the LGH warrant agreement, resulted in the Company issuing 10,925,000 shares of its common stock to LGH.
Second SBA loan - On February 20, 2021, the Company received proceeds from a loan in the amount of $1,033,005 (the “Second PPP Loan”) from Northeast Bank, as lender, pursuant to the PPP under the CARES Act. The Second PPP Loan matures on February 20, 2026 and bears interest at a rate of 1% per annum. Commencing on April 20, 2025, the Company is required to pay the lender equal monthly payments of principal and interest. The Second PPP Loan is evidenced by a promissory note dated February 20, 2021, which contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties and covenants. The Second PPP Loan may be prepaid by the Company at any time prior to maturity with no penalties.
All or a portion of the Second PPP Loan may be forgiven by the SBA upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. The ultimate forgiveness of the Second PPP Loan is also contingent upon regulatory authorities concurring with management’s good faith assessment that the current economic uncertainty made the loan request necessary to support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company satisfied all eligibility requirements for the Second PPP Loan, the Company is later determined to have violated any applicable laws or regulations or it is otherwise determined that the Company was ineligible to receive the Second PPP Loan, the Company may be required to repay the Second PPP Loan in its entirety and/or be subject to additional penalties. In the event the Second PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. Under the terms of the Second PPP Loan, the Company may be eligible for full or partial loan forgiveness in the fourth quarter of 2021.
April 2021 Securities Purchase Agreement and Warrants- On April 20, 2021, the Company entered into a Securities Purchase Agreement (the “Leviston Purchase Agreement”), with Leviston Resources, LLC, an accredited investor (“Leviston”) for the sale by the Company in a private placement (the “Private Placement”) of (i) the Company’s future advance convertible promissory note in an aggregate principal amount of up to $3,402,000 (the “Leviston Note”) and (ii) a warrant to purchase an additional 16,666,667 shares of common stock of the Company (the “Leviston Warrant”). The Leviston Warrant has an exercise price of $0.18 per share and a four-year term. The closing of the Private Placement occurred on April 20, 2021 (the “Closing Date”).
As noted above, on April 20, 2021, the Company issued the Leviston Note to Leviston in an aggregate principal amount of up to $3,402,000 (the “Aggregate Amount”), which shall be advanced in disbursements by Leviston (“Disbursements”), as set forth in the Leviston Note. On April 21, 2021, Leviston advanced a Disbursement of $750,000. The remaining disbursements up to the Aggregate Amount are subject to the satisfaction of certain terms and conditions set forth in the Leviston Note. Disbursements bear an interest at a rate of five percent (5%) per annum and have a maturity date of twelve (12) months from the date of issuance. The Leviston Note is convertible at the option of the holder into shares of the Common Stock of the Company at a conversion price per share equal to the lesser of (i) $0.18, and (ii) ninety percent (90%) of the closing price for a share of Common Stock reported on the OTCQB on the effective date of the Registration Statement (as defined below).
The Leviston Note contains customary events of default and covenants, including limitations on incurrences of indebtedness and liens.
Pursuant to the Leviston Purchase Agreement, the Company has agreed within a reasonable period of time following the Closing Date, and in any event prior to any Disbursement under the Leviston Note subsequent to the initial Disbursement, to enter into a security agreement in favor of Leviston, securing the Company’s obligations under the Leviston Note.
The rights of Leviston to receive payments under the Leviston Note are subordinate to the rights of NH Expansion Credit Fund Holdings LP (“NH Expansion”) pursuant to a subordination agreement, that the Company and the Leviston entered into with NH Expansion on April 20, 2021, in connection with the Private Placement (the “Subordination Agreement”).
In connection with the Leviston Purchase Agreement, the Company entered into a registration rights agreement with the Leviston on April 20, 2021 (the “Registration Rights Agreement”) pursuant to which the Company agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission no later than thirty days following the Closing Date for the registration of 100% of the maximum number of the shares issuable upon conversion of the Leviston Note and exercise of the Leviston Warrants issued pursuant to the Leviston Purchase Agreement (the “Registrable Securities”). The Company shall use its best efforts to keep the Registration Statement continuously effective under the Securities Act of 1933, as amended, until all Registrable Securities have been sold, or may be sold without the requirement to be in compliance with Rule 144(c)(1) of the Securities Act and otherwise without restriction or limitation pursuant to Rule 144 of the Securities Act, as determined by the counsel to the Company. The Company has yet to file the Registration Statement and, under the terms of the Registration Rights Agreement, it is obligated to pay in cash a one-time aggregate amount of $250,000 to the holders of the Leviston Notes, plus 1% of the outstanding principal for each 30-day period during which the Company continues not to have in-place an effective Registration Statement.
Supplier disputes - In May 2021, the Company received notification that it is not in compliance with the License Agreement with Cellularity (see Note 5). The Company has responded and asserted that the Company is not in breach and that the supplier has breached various agreements. It is too early to determine the outcome of this matter. Any potential impact to the Company cannot be fully determined at this time.
As part of the Asset Purchase Agreement on August 6, 2020, the Company assumed obligations for a purchase order from Celularity related to purchases of UltraMist devices from its supplier, Minnetronix. This purchase order had a remaining purchase commitment of $1,058,170. The purchase order also calls for production delay fees of 1.25% of the committed inventory if the Company delays production. There is also a cancelation clause of 20% of the remaining balance in the event that the Company delays production for more than six months. On September 23, 2021, Minnetronix notified the Company that it was cancelling the purchase order for the Ultramist devices as a result of the Company delaying production of Ultramist systems more than six months. This notification includes fees and charges for the cancellation of the purchase order of an additional $319,746. The Company expects to be able to resume production upon paying this obligation. While the Company is disputing certain aspects of this termination notice and is continuing to engage with Minnetronix regarding resolution of this matter, including reinstatement of the purchase order, there is no guarantee that the dispute will be resolved in a manner beneficial to the Company or at all.
Non-payments of convertible notes payable issued in August 2020 and maturing August 2021 - As disclosed in Notes 11 and 12, the Company issued convertible notes payable on August 6, 2020 to related parties HealthTronics and A. Michael Stolarski (the “HealthTronics Note” and the “Stolarski Note,” respectively) as well as to Celularity (the “Seller Note”). The initial principal amounts of the Healthtronics, Stolarski and the Seller Notes were $$1,372,743, $223,511 and $4,000,000, respectively.
The HealthTronics Note matured on August 6, 2021 and was not repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the HealthTronics Note and, accordingly, it began accruing additional interest of 2.0% in addition to the 12.0% initial rate, as of the date of the default.
The Stolarski Note matured on August 6, 2021 and was not repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the Stolarski Note and, accordingly, it began accruing additional interest of 2.0% in addition to the 12.0% initial rate, as of the date of the default
The Seller Note matured on August 6, 2021 and was not repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the Seller Note and, accordingly, it began accruing additional interest of 5.0% in addition to the 12.0% initial rate, as of the date of the default.
August 2021 forgiveness of May 2020 SBA loan - The Company received a letter from the SBA dated August 27, 2021 forgiving $454,335 of the PPP Loan principal and $5,755 of interest related to the PPP Loan that originated in May 28, 2020.
Senior Secured note non-compliance - As disclosed in Note 12, as of December 31, 2020, the Company was not in compliance with the minimum cash balance provision related to the Senior Secured Notes. The Company remains in non-compliance with that provision.
September 2021 Securities Purchase Agreement and Warrants - On September 3, 2021, the Company entered into Securities Purchase Agreements (the “September 2021 Purchase Agreements”), with certain accredited investors (collectively, the “September 2021 Purchasers”) for the sale by the Company in a private placement (the “September 2021 Private Placement”) of (i) the Company’s future advance convertible promissory notes in an aggregate principal amount of up to $543,478 (the “September 2021 Notes”) and (ii) warrants to purchase an additional 2,777,779 shares of common stock of the Company (the “September 2021 Warrants”). The September 2021 Warrants have an exercise price of $0.18 per share and a five-year term. The closing of the Private Placement occurred on September 7, 2021 (the “Closing Date”) under the terms of the September 2021 Purchase Agreements an aggregate principal amount of up to $543,478 (the “Aggregate Amount”), may be advanced in disbursements by the September 2021 Purchasers (“Disbursements”), as set forth in the September 2021 Notes. Disbursements bear an interest at a rate of five percent (5%) per annum and have a maturity date of twelve (12) months from the date of issuance. Each September 2021 Note is convertible at the option of the holder into shares of common stock of the Company at a conversion price per share equal to (A) until the date of effectiveness of the Registration Statement, $0.18 and (B) after the date of effectiveness of the Registration Statement, the lesser of (i) $0.18, (ii) ninety percent (90%) of the closing price for a share of common stock reported on the OTCQB on the effective date of the Registration Statement and (iii) 75% of the lowest VWAP price for common stock during the ten trading days ending on, and including, the date of the notice of conversion, which shall be no lower than $0.01. The September 2021 Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens.
Pursuant to each September 2021 Purchase Agreement, the Company entered into a security agreement in favor of the applicable September 2021 Purchaser, securing the Company’s obligations under the applicable September 2021 Note. The rights of each Purchaser to receive payments under its Note are subordinate to the rights of NH Expansion pursuant to a subordination agreement, that the Company and such Purchaser entered into with NH Expansion on September 3, 2021, in connection with the September 2021 Private Placement (the “Subordination Agreement”).
In connection with each September 2021 Purchase Agreement, the Company entered into a registration rights agreement with the Purchasers on September 3, 2021 (the “Registration Rights Agreement”) pursuant to which the Company has agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission no later than ninety (90) days following the Closing Date for the registration of 100% of the maximum number of the Shares issuable upon conversion of the Notes and exercise of the September 2021 Warrants issued pursuant to such September 2021 Purchase Agreement (the “Registrable Securities”). The Company shall use its best efforts to keep the Registration Statement continuously effective under the Securities Act of 1933, as amended (the “Securities Act”), until all Registrable Securities have been sold, or may be sold without the requirement to be in compliance with Rule 144(c)(1) of the Securities Act and otherwise without restriction or limitation pursuant to Rule 144 of the Securities Act, as determined by the counsel to the Company.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not operating effectively as of December 31, 2020.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management, with the participation of the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013).
We previously reported three material weaknesses in our internal control over financial reporting process resulting from a lack of internal expertise and resources to analyze and properly apply generally accepted accounting principles to complex and non-routine transactions such as complex financial instruments and derivatives and complex sales distribution agreements, a lack of internal resources to analyze and properly apply generally accepted accounting principles to accounting for equity components of service agreements with select vendors and cybersecurity breaches from email spoofing in 2019. The company has remedied the cybersecurity breaches and email spoofing in 2020.
As of 2020 the company still has identified the following material weaknesses
•
Expertise and resources to analyze and properly apply generally accepted accounting principles to complex and non-routine transactions such as complex financial instruments and derivatives and complex sales distribution agreements.
•
A lack of internal resources to analyze and properly apply generally accepted accounting principles to accounting for financial instruments included in service agreements with select vendors.
•
The Company has failed to design and implement controls around all of its accounting and IT processes and procedures and, as such, it believes that all of its accounting and IT processes and procedures need to re-designed and tested for operating effectiveness.
As a result, management concluded that its internal control over reporting was not effective as of December 31, 2020.
Remediation Plan
During 2021, we engaged external consultants with appropriate experience applying GAAP technical accounting guidance, and we have hired additional accounting personnel both internal and external. We engaged external consultants to review revenue recognition for new products, lease agreements, internal controls and related procedures and review of documentation of internal controls in addition to new equity and debt financing arrangements. Accounting memos were produced for all technical issues during 2020 and reviewed with management. The Company will continue to implement and review new controls to address these issues.
We have also implemented cybersecurity training for all employees and redesign of procedures that cyber security breaches may impact and worked with our third party IT vendor to develop a training plan for all existing and new employees related to cyber and implemented related controls around information technology infrastructure. In addition, an additional employee was hired to assist with the management of IT controls and enhance internal IT resources. Going forward, this employee will monitor our third party IT vendor’s testing and monitoring efforts and where necessary implement new controls as the Company grows. These internal controls have been documented and procedures implemented.
There is no assurance that the measures described above will be sufficient to remediate the previously identified material weaknesses.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting, except as disclosed in “Remediation of Material Weaknesses” above.

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ITEM 9B. OTHER INFORMATION
Item 9B.
OTHER INFORMATION
None
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
MANAGEMENT
Below are the names and certain information regarding the Company’s executive officers and directors:
Name
Age
Position Held
Kevin A. Richardson, II
Director, Chairman and Chief Executive Officer
Lisa E. Sundstrom
Chief Financial Officer and Chief Talent Officer
Peter Stegagno
Chief Operating Officer
Iulian Cioanta, PhD
Chief Science and Technology Officer
John Schlechtweg
Chief Revenue Officer
John F. Nemelka
Director
A. Michael Stolarski
Director
Kevin A. Richardson, II joined the Company as chairman of the board of directors in October of 2009 and joined SANUWAVE, Inc. as chairman of the board of directors in August of 2005. In November 2012, upon the resignation of the Company’s former President and Chief Executive Officer, Christopher M. Cashman, Mr. Richardson assumed the role of Active Chief Executive Officer, in addition to remaining Chairman of the Board, through the hiring of Mr. Chiarelli in February 2013. In April 2014, Mr. Richardson assumed the role of Co-Chief Executive Officer. When Mr. Chiarelli departed the Company in 2014, Mr. Richardson again assumed the role as Acting Chief Executive Officer. In November 2018, Mr. Richardson was appointed as Chief Executive Officer. Mr. Richardson brings to our board of directors a broad array of financial knowledge for healthcare and other industries. Since 2004, Mr. Richardson served as managing partner of Prides Capital LLC, an investment management firm, until its liquidation in September 2015.
Lisa E. Sundstrom joined the Company as Controller in October of 2006, and in August of 2015, assumed the responsibilities of Interim Chief Financial Officer. In December 2015, Ms. Sundstrom was promoted to Chief Financial Officer. Ms. Sundstrom has extensive financial accounting experience with Automatic Data Processing (ADP) and Mitsubishi Consumer Electronics. During 2021 she also assumed the role of Chief Talent Officer. Ms. Sundstrom began her career with a small public accounting firm, Carnevale & Co., P.C., was Senior Accountant at Mitsubishi Consumer Electronics responsible for the close process and was Accounting Manager for the Benefit Services division of ADP and assisted in the documentation of internal controls for Sarbanes-Oxley compliance. Ms. Sundstrom holds a Bachelor of Science in Accounting from the State University of New York at Geneseo.
Peter Stegagno joined the Company as Vice President, Operations in March 2006. Mr. Stegagno brings to the Company sixteen years of experience in the medical device market encompassing manufacturing, design and development, quality assurance and international and domestic regulatory affairs. He most recently served as Vice President of Quality and Regulatory Affairs for Elekta, and other medical device companies including Genzyme Biosurgery. Before focusing on the medical field, Mr. Stegagno enjoyed a successful career encompassing production roles in the space industry, including avionics guidance systems for military applications and control computers for the space shuttle. Mr. Stegagno graduated from Tufts University with a Bachelor of Science degree in Chemical Engineering.
Iulian Cioanta, PhD joined the Company in June 2007 as Vice President of Research and Development. Dr. Cioanta most recently served as Business Unit Manager with Cordis Endovascular, a Johnson & Johnson company. Prior to that, Dr. Cioanta worked as Director of Development Engineering with Kensey Nash Corporation, Research Manager at ArgoMed Inc. and Project Manager and Scientist with the Institute for the Design of Research Apparatus. Dr. Cioanta also worked in academia at Polytechnic University of Bucharest in Romania, Leicester University in the United Kingdom and Duke University in the United States. Dr. Cioanta received a Master of Science degree in Mechanical Engineering and Technology form the Polytechnic University of Bucharest and he earned his PhD degree in Biomedical Engineering from Duke University in the field of extracorporeal shock wave lithotripsy.
John Schlechtweg joined the Company as Chief Revenue Officer in August 2020. Mr. Schlechtweg brings to the Company over fifteen years of experience in the biotech, pharmaceutical and medical device sales and marketing. He most recently served as Senior Director of Sales for Celularity, and other medical companies including Alliqua, Shire Regenerative Medicine, Accelecare, Organogenesis, Inc., and Merck Scherng-Plough. Mr. Schlechtweg graduated from Southern Connecticut State University with a Masters of Business Administration and from Utica College of Syracuse University with a Bachelor of Arts.
John F. Nemelka joined the Company as a member of the board of directors in October of 2009 and joined SANUWAVE, Inc. as a member of the board of directors in August of 2005. Mr. Nemelka founded NightWatch Capital Group, LLC, an investment management business, and served as its Managing Principal since its incorporation in July 2001 until its liquidation in December 2015. From 1997 to 2000, he was a Principal at Graham Partners, a private investment firm and affiliate of the privately-held Graham Group. From 2000 to 2001, Mr. Nemelka was a Consultant to the Graham Group. Mr. Nemelka brings to our board of directors a diverse background with both financial and operations experience. He holds a B.S. degree in Business Administration from Brigham Young University and an M.B.A. degree from the Wharton School at the University of Pennsylvania.
A. Michael Stolarski joined the Company as a member of the board of directors in April 2016. Mr. Stolarski founded Premier Shockwave, Inc. in October 2008 and has since served as its President & CEO. From 2005 to 2008, Mr. Stolarski was the Vice President of Business Development and, previously, Acting CFO of SANUWAVE, Inc. From 2001 to 2005, he was the President - Orthopedic Division and Vice President of Finance for HealthTronics Surgical Services, Inc. From 1994 to 2001, he was the CFO and Controller of the Lithotripsy Division, Internal Auditor, and Paralegal of Integrated Health Services, Inc. Mr. Stolarski brings to our board an in-depth understanding of the orthopedic and podiatric shock wave market. In addition to being a Certified Public Accountant in the state of Maryland (inactive), he holds a M.S. in Finance from Loyola College, Baltimore a B.S. in Accounting and a B.S. in Finance from the University of Maryland, College Park.
CORPORATE GOVERNANCE AND BOARD MATTERS
The Company adopted a formal Corporate Governance policy in January 2012 which included establishing formal board committees and a code of conduct for the board of directors and the Company.
The Board of Directors
Recent Developments
The Company’s current board of directors consists of three members, two of whom have been determined by the board to be “independent” as defined under the rules of the OTC stock market.
Board’s Leadership Structure
The Company’s board of directors elects the Company’s chief executive officer and its chairman, and each of these positions may be held by the same person or may be held by two persons. The chairman’s primary responsibilities are to manage the board and serve as the primary liaison between the board of directors and the chief executive officer, while the primary responsibility of the chief executive officer is to manage the day-to-day affairs of the Company, taking into account the policies and directions of the board of directors. Such an arrangement promotes more open and robust communication among the board, and provides an efficient decision making process with proper independent oversight. The Company’s board of directors has determined that it is currently in the best interest of the Company and its shareholders to combine the roles of chairman of the board and chief executive officer.
The Company believes, however, that there is no single leadership structure that is the best and most effective in all circumstances and at all times. Accordingly, the board of directors retains the authority to later combine these roles if doing so would be in the best interests of the Company and its shareholders.
The Company’s board of directors is authorized to have an audit committee, a compensation committee and a nominating and corporate governance committee, to assist the Company’s board of directors in discharging its responsibilities. The Company’s current board of directors consists of three members, two of whom has been determined by the board to be “independent” as defined under the rules of the OTC stock market. The board of directors has determined that Mr. Richardson is not independent under the applicable marketplace rules of the OTC stock market and Rule 10A-3 under the Exchange Act. Beginning in July 2021, the Company’s board of directors determined that all of its current members would also be members of each of the audit, compensation and corporate governance committees.
Board’s Role in Risk Oversight
While the Company’s management is responsible for the day-to-day management of risk to the Company, the board of directors has broad oversight responsibility for the Company’s risk management programs. The various committees of the board of directors assist the board of directors in fulfilling its oversight responsibilities in certain areas of risk. In particular, the audit committee focuses on financial and enterprise risk exposures, including internal controls, and discusses with management and the Company’s independent registered public accountants the Company’s policies with respect to risk assessment and risk management. The compensation committee is responsible for considering those risks that may be implicated by the Company’s compensation programs and reviews those risks with the Company’s board of directors and chief executive officer.
Audit Committee
The current members of the Company’s audit committee are John F. Nemelka (Chairperson), Kevin A. Richardson, II and A. Michael Stolarski. Mr. Nemelka and Mr. Stolarski are determined to be independent directors, pursuant to the rules of the OTC stock market. Mr. Nemelka, who chairs the committee, has been determined by the board of directors to be an audit committee financial expert as defined pursuant to the rules of the SEC.
The audit committee operates under a written charter adopted by the board of directors which is available on the Company’s website at www.sanuwave.com. The primary responsibility of the audit committee is to oversee the Company’s financial reporting process on behalf of the board of directors. Among other things, the audit committee is responsible for overseeing the Company’s accounting and financial reporting processes and audits of the Company’s financial statements, reviewing and discussing with the independent auditors the critical accounting policies and practices for the Company, engaging in discussions with management and the independent auditors to assess risk for the Company and management thereof, and reviewing with management the effectiveness of the Company’s internal controls and disclosure controls and procedures. The audit committee is directly responsible for the appointment, compensation, retention and oversight of the work of the Company’s independent auditors, currently Marcum LLP, including the resolution of disagreements, if any, between management and the auditors regarding financial reporting. In addition, the audit committee is responsible for reviewing and approving any related party transaction that is required to be disclosed pursuant to Item 404 of Regulation S-K promulgated under the Exchange Act.
Compensation Committee
The current chair of the Company’s compensation committee is A. Michael Stolarski, who is an independent director, pursuant to the rules of the OTC stock market. The other current members of the compensation committee are John F. Nemelka, who is also an independent director pursuant to the rules of the OTC stock market and Kevin A. Richardson, II. The primary purpose of the compensation committee is to discharge the responsibilities of the board of directors relating to compensation of the Company’s executive officers. Pursuant to the Company’s Compensation Committee Charter, the compensation committee is required to consist of at least two independent directors.
The compensation committee operates under a written charter adopted by the board of directors which is available on the Company’s website at www.sanuwave.com. Specific responsibilities of the compensation committee include reviewing and recommending approval of compensation of the Company’s named executive officers, administering the Company’s stock incentive plan, and reviewing and making recommendations to the Company’s board of directors with respect to incentive compensation and equity plans.
Nominating and Corporate Governance Committee
The current chair of the Company’s nominating and corporate governance committee is John F. Nemelka, who is an independent director, pursuant to the rules of the OTC stock market. The other current members of the nominating and governance committee are A. Michael Stolarski, who is also an independent director pursuant to the rules of the OTC stock market and Kevin A. Richardson, II. Pursuant to the Company’s Nominating and Corporate Governance Committee Charter, the nominating and corporate governance committee is required to consist of at least two independent directors.
The nominating and corporate governance committee operates under a written charter adopted by the board of directors which is available on the Company’s website at www.sanuwave.com. Specific responsibilities of the nominating and corporate governance committee include: identifying and recommending nominees for election to the Company’s board of directors; developing and recommending to the board of directors the Company’s corporate governance principles; overseeing the evaluation of the board of directors; and reviewing and approving compensation for non-employee members of the board of directors.
The nominating and corporate governance committee’s charter outlines how the nominating and corporate governance committee fulfills its responsibilities for assessing the qualifications and effectiveness of the current board members, assessing the needs for future board members, identifying individuals qualified to become members of the board and its committees, and recommending candidates for the board of director’s selection as director nominees for election at the next annual or other properly convened meeting of shareholders.
The nominating and corporate governance committee considers director candidates recommended by shareholders for nomination for election to the board of directors. The committee applies the same standards in considering director candidates recommended by the shareholders as it applies to other candidates. Any shareholder entitled to vote for the election of directors may recommend a person or persons for consideration by the committee for nomination for election to the board of directors. The Company must receive written notice of such shareholder’s recommended nominees(s) no later than January 31st of the year in which the shareholder wishes such recommendation to be considered by the committee in connection with the next meeting of shareholders at which the election of directors will be held. To submit a recommendation, a shareholder must give timely notice thereof in writing to the Secretary of the Company. A shareholder’s notice to the Secretary shall set forth: (i) the name and record address of the shareholder making such recommendation and any other shareholders known by such shareholder to be supporting such recommendation; (ii) the class and number of shares of the Company which are beneficially owned by the shareholder and by any other shareholders known by such shareholder to be supporting such recommendation; (iii) the name, age and five year employment history of such recommended nominee; (iv) the reasons why the shareholder believes the recommended nominee meets the qualifications to serve as a director of the Company; and (v) any material or financial interest of the shareholder and, if known, the recommended nominee in the Company.
Shareholder Communications with the Board of Directors
The board of directors has implemented a process for shareholders to send communications to the board of directors. Shareholders who wish to communicate directly with the board of directors or any particular director should deliver any such communications in writing to the Secretary of the Company. The Secretary will compile any communications they receive from shareholders and deliver them periodically to the board of directors or the specific directors requested. The Secretary of the Company will not screen or edit such communications, but will deliver them in the form received from the shareholder.
Code of Conduct and Ethics
It is the Company’s policy to conduct its affairs in accordance with all applicable laws, rules and regulations of the jurisdictions in which it does business. The Company has adopted a code of business conduct and ethics with policies and procedures that apply to all associates (all employees are encompassed by this term, including associates who are officers) and directors, including the chief executive officer, chief financial officer, controller, and persons performing similar functions.
The Company has made the code of business conduct and ethics available on its website at www.sanuwave.com. If any substantive amendments to the code of business conduct and ethics are made or any waivers are granted, including any implicit waiver, the Company will disclose the nature of such amendment or waiver on its website or in a report on Form 8-K.
No Family Relationships Among Directors and Officers
There are no family relationships between any director or executive officer of the Company and any other director or executive officer of the Company.
Director Independence
Our board of directors has determined that John F. Nemelka and A. Michael Stolarski qualify as independent directors based on the OTC stock market definition of “independent director.”
Limitation of Directors Liability and Indemnification
The Nevada Revised Statutes authorize corporations to limit or eliminate, subject to certain conditions, the personal liability of directors to corporations and their stockholders for monetary damages for breach of their fiduciary duties. Our certificate of incorporation limits the liability of our directors to the fullest extent permitted by Nevada law.
We have director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us, including matters arising under the Securities Act of 1933, as amended. Our certificate of incorporation and bylaws also provide that we will indemnify our directors and officers who, by reason of the fact that he or she is one of our officers or directors, is involved in a legal proceeding of any nature.
There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
DELINQUENT SECTION 16(a) REPORTS
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of our equity securities which are registered pursuant to Section 12 of the Exchange Act, to file with the SEC initial reports of ownership and reports of changes in ownership of our equity securities. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Except as set forth herein, based solely upon a review of the Forms 3, 4 and 5 (and amendments thereto) furnished to us for our fiscal year ended December 31, 2020, we have determined that our directors, officers and greater than 10% beneficial owners complied with all applicable Section 16 filing requirements.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.
EXECUTIVE COMPENSATION
Summary Compensation Table for Fiscal Years 2020 and 2019
The following table provides certain information concerning compensation earned for services rendered in all capacities by our named executive officers during the fiscal years ended December 31, 2020 and 2019.
Name and Principal Position
Year
Salary ($)
Option Awards ($)
(3)
All Other
Compensation
($)(4)
Total ($)
Kevin A. Richardson, II
$
335,417
(1)
-
$
37,180
$
372,596
Chairman of the Board and Chief Executive Officer (principal executive officer)
$
401,619
(2)
$
6,500
$
31,288
$
439,407
Shri P. Parikh (5)
$
305,301
-
$
23,699
$
329,000
President, Healthcare
$
311,000
$
6,500
$
30,960
$
348,460
Peter Stegano
$
188,333
-
$
28,905
$
217,239
Chief Operating Officer
$
231,295
$
6,500
$
21,519
$
259,314
Lisa E. Sundstrom
$
191,667
-
$
23,347
$
215,014
Chief Financial Officer (prinipal financial officer)
$
200,000
$
6,500
$
24,589
$
231,089
(1) Amounts reflect (i) the salary guaranteed by Mr. Richardson’s employment agreement with the Company and (ii) an aggregate amount of $60,000 for fees earned or paid in cash for Mr. Richardson’s service as a director in fiscal 2020 (which aggregate amount is also reflected in the Director Compensation Table, below).
(2) Amounts reflect (i) the salary guaranteed by Mr. Richardson’s employment agreement with the Company and (ii) an aggregate amount of $40,000 for fees earned or paid in cash for Mr. Richardson’s service as a director in fiscal 2019 (which aggregate amount is also reflected in the Director Compensation Table, below).
(3) Amounts shown in this column do not reflect dollar amounts actually received by our NEOs. Instead, these amounts reflect the aggregate grant date fair value of each stock or option award in the respective fiscal year, computed in accordance with the provisions of FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 18 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
(4) Includes health, dental, life and disability insurance premiums and 401(k) matching contributions.
(5) Mr. Parikh was named President, Healthcare of the Company effective May 31, 2018. On May 14, 2020, Mr. Parikh notified the Company of his decision to resign effective June 30, 2020.
Stock Incentive Plan
On October 24, 2006, SANUWAVE, Inc.’s board of directors adopted the 2006 Stock Incentive Plan of SANUWAVE, Inc. (the “2006 Plan”). On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (previously defined as the “Stock Incentive Plan”). The Stock Incentive Plan permits grants of awards to selected employees, directors and advisors of the Company in the form of restricted stock or options to purchase shares of common stock. Options granted may include nonstatutory options as well as qualified incentive stock options. The Stock Incentive Plan is currently administered by the board of directors of the Company. The Stock Incentive Plan gives broad powers to the board of directors of the Company to administer and interpret the particular form and conditions of each option. The stock options granted under the Stock Incentive Plan are nonstatutory options which vest over a period of up to three years and have a maximum ten-year term. The options are granted at an exercise price equal to the fair market value of the common stock on the date of the grant which is approved by the board of directors of the Company. The Stock Incentive Plan had 35,000,000 shares of common stock reserved for grant at December 31, 2020 and 2019, respectively.
The terms of the options granted under the Stock Incentive Plan expire as determined by individual option agreements (or on the tenth anniversary of the grant date), unless terminated earlier, on the first to occur of the following: (1) the date on which the participant’s service with the Company is terminated by the Company for cause; (2) 60 days after the participant’s death; or (3) 60 days after the termination of the participant’s service with the Company for any reason other than cause or the participant’s death; provided that, if during any part of such 60 day period the option is not exercisable solely because of specified securities law restrictions, the option will not expire until the earlier of the expiration date or until it has been exercisable for an aggregate period of 60 days after the termination of the participant’s service with the Company. The options vest as provided for in each individual’s option agreement and the exercise prices for the options are determined by the board of directors at the time the option is granted; provided that the exercise price shall in no event be less than the fair market value per share of the Company’s common stock on the grant date. In the event of any change in the common stock underlying the options, by reason of any merger or exchange of shares of common stock, the board of directors shall make such substitution or adjustment as it deems to be equitable to (1) the class and number of shares underlying such option, (2) the exercise price applicable to such option, or (3) any other affected terms of such option.
In the event of a change of control, unless specifically modified by an individual option agreement: (1) all options outstanding as of the date of such change of control will become fully vested; and (2) notwithstanding (1) above, in the event of a merger or share exchange, the board of directors may, in its sole discretion, determine that any or all options granted pursuant to the Stock Incentive Plan will not vest on an accelerated basis if the board of directors, the surviving corporation or the acquiring corporation, as the case may be, has taken such action that in the opinion of the board of directors is equitable or appropriate to protect the rights and interests of the participants under the Stock Incentive Plan.
On December 31, 2020, there were 3,061,615 shares of common stock available for grant under the Stock Incentive Plan. For the years ended December 31, 2020 and 2019, there were 0 and 250,000 options, respectively, granted to the Company’s executive officers under the Stock Incentive Plan.
Outstanding Equity Awards at 2020 Fiscal Year End
The following table provides certain information concerning the outstanding equity awards for each named executive officer as of December 31, 2020:
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options/
Warrants (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options/
Warrants (#)
Unexercisable
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Option/
Warrant
Exercise Price
($)
Option/
Warrant
Expiration
Date
Number of
Shares or
Units of Stock
That Have Not
Vested (#)
Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested (#)
Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Kevin A. Richardson, II
115,000
(1)
-
-
$
0.35
02/21/2023
-
-
-
-
Chairman of the Board and Chief Executive Officer (principal executive officer)
452,381
(3)
-
-
$
0.11
10/1/2025
-
-
-
-
297,619
(3)
-
-
$
0.06
10/1/2025
-
-
-
-
700,000
(4)
-
-
$
0.04
6/16/2026
-
-
-
-
594,300
(5)
-
-
$
0.18
11/9/2026
-
-
-
-
900,000
(6)
-
-
$
0.11
6/14/2027
-
-
-
-
1,100,000
(7)
-
-
$
0.21
9/20/2028
-
-
-
-
50,000
(9)
-
-
$
0.15
8/26/2029
-
-
-
-
Lisa E. Sundstrom
65,000
(1)
-
-
$
0.35
02/21/2023
-
-
-
-
Chief Financial Officer (principal financial officer)
25,000
(2)
-
-
$
0.55
5/7/2024
-
-
-
-
301,587
(3)
-
-
$
0.11
10/1/2025
-
-
-
-
198,413
(3)
-
-
$
0.06
10/1/2025
-
-
-
-
500,000
(4)
-
-
$
0.04
6/16/2026
-
-
-
-
424,500
(5)
-
-
$
0.18
11/9/2026
-
-
-
-
600,000
(6)
-
-
$
0.11
6/14/2027
-
-
-
-
750,000
(7)
-
-
$
0.21
9/20/2028
-
-
-
-
50,000
(9)
-
-
$
0.15
8/26/2029
-
-
-
-
Shri Parikh
2,000,000
(8)
-
-
$
0.42
5/31/2028
-
-
-
-
President, Healthcare
1,000,000
(7)
-
-
$
0.21
9/20/2028
-
-
-
-
50,000
(9)
-
-
$
0.15
8/26/2029
-
-
-
-
Peter Stegano
333,644
(1)
-
-
$
0.35
02/21/2023
-
-
-
-
Chief Operating Officer
50,000
(2)
-
-
$
0.55
5/7/2024
-
-
-
-
301,587
(3)
-
-
$
0.11
10/1/2025
-
-
-
-
198,413
(3)
-
-
$
0.06
10/1/2025
-
-
-
-
500,000
(4)
-
-
$
0.04
6/16/2026
-
-
-
-
424,500
(5)
-
-
$
0.18
11/9/2026
-
-
-
-
600,000
(6)
-
-
$
0.11
6/14/2027
-
-
-
-
750,000
(7)
-
-
$
0.21
9/20/2028
-
-
-
-
50,000
(9)
-
-
$
0.15
8/26/2029
-
-
-
-
(1) On February 21, 2013, the Company, by mutual agreement with all active employees and directors of the Company, cancelled options granted to the active employees and directors in the year ended December 31, 2011 and prior. In exchange for these options, the active employees and directors received new options to purchase shares of common stock at an exercise price of $0.35 per share. The Company cancelled all options which were previously granted to Mr. Richardson, Ms. Sundstrom and Mr. Stegagno. The Company granted Mr. Richardson 115,000 options, Ms Sundstrom 65,000 and Mr. Stegagno 333,644 options on February 21, 2013 which vest one-third at grant date, one-third on February 21, 2014 and one-third on February 21, 2015.
(2) The Company granted Ms. Sundstrom 25,000 and Mr. Stegagno 50,000 options on May 7, 2014 which vests one-third at grant date, one-third on May 7, 2015 and one-third on May 7, 2016.
(3) The Company granted Mr. Richardson 750,000 options, Ms. Sundsrom 500,000 and Mr. Stegagno 500,000 options on October 1, 2015 which vests at grant date.
(4) The Company granted Mr. Richardson 700,000 options, Ms. Sundstrom 500,000 and Mr. Stegagno 500,000 options on June 16, 2016 which vests at grant date.
(5) The Company granted Mr. Richardson 594,300 options, Ms. Sundstrom 424,500 options and Mr. Stegagno 424,500 options on November 9, 2016 which vests at grant date.
(6) The Company granted Mr. Richardson 900,000 options, Ms. Sundstrom 600,000 options and Mr. Stegagno 600,000 options on June 15, 2017 which vests at grant date.
(7) The Company granted Mr. Richardson 1,100,000 options, Ms. Sunstrom 750,000, Mr. Parikh 1,000,000 options, and Mr. Stegagno 750,000 options on September 20, 2018 which vests at grant date.
(8) The Company granted Mr. Parikh 2,000,000 options on May 31, 2018 which vests at grant date.
(9) The Company granted 50,000 options each to Mr. Richardson, Ms. Sundstrom, Mr. Parikh, and Mr. Stegagno on August 26, 2019 which vests at grant date.
Director Compensation Table for Fiscal Year 2020
The following table provides certain information concerning compensation for each director during the fiscal year ended December 31, 2020:
Name
Fees Earned or
Paid in Cash ($)
Option Awards($)(2)
Total ($)
Kevin A. Richardson, II (1)
$
60,000
$
-
$
60,000
John F. Nemelka
$
60,000
$
-
$
60,000
Alan L. Rubino (2)
$
60,000
$
-
$
60,000
A. Michael Stolarski
$
60,000
$
-
$
60,000
Maj-Britt Kaltoft (3)
$
60,000
$
-
$
60,000
Thomas Price, MD (4)
$
16,667
$
-
$
16,667
(1) Mr. Richardson has been the Company’s Chairman of the Board since the Company’s inception. On November 30, 2018 Mr. Richardson was named Chief Executive Officer of the Company. We continue to compensate Mr. Richardson as a director and as an executive officer.
(2) Mr. Rubino resigned from the Company’s Board of Directors effective June 3, 2021.
(3) Dr. Kaltoft resigned from the Company’s Board of Directors effective June 28, 2021.
(4) Dr. Price joined the Company’s Board of Directors on February 7, 2020 and resigned effective September 28, 2021.
Discussion of Director Compensation
Effective January 1, 2018, the Company began to compensate its directors at an annual rate of $40,000 each. On August 26, 2019, the Company issued an option to purchase 50,000 shares of the Company’s common stock at $0.15 per share to employee director Kevin A. Richardson II and to non-employee directors John F. Nemelka, Alan L. Rubino, A. Michael Stolarski and Maj-Britt Kaltoft. On September 20, 2018, the Company issued an option to purchase 1,100,000 shares of the Company’s common stock at $0.21 per share to non-employee director Kevin A. Richardson II and the Company issued options to purchase 350,000 shares of the Company’s common stock at $0.21 per share to non-employee directors John F. Nemelka, Alan L. Rubino, A. Michael Stolarski and Maj-Britt Kaltoft. On June 15, 2017, the Company issued an option to purchase 900,000 shares of the Company’s common stock at $0.11 per share to non-employee director Kevin A. Richardson II and the Company issued options to purchase 300,000 shares of the Company’s common stock at $0.11 per share to non-employee directors John F. Nemelka, Alan L. Rubino, A. Michael Stolarski and Maj-Britt Kaltoft. On November 9, 2016, the Company issued an option to purchase 594,300 shares of the Company’s common stock at $0.18 per share to director Kevin A. Richardson, II and the Company issued options to purchase 169,800 shares of the Company’s common stock at $0.18 per share to directors John F. Nemelka, Alan L. Rubino and A. Michael Stolarski. On June 16, 2016, the Company issued an option to purchase 700,000 shares of the Company’s common stock at $0.04 per share to director Kevin A. Richardson, II and the Company issued options to purchase 200,000 shares of the Company’s common stock at $0.04 per share to directors John F. Nemelka, Alan L. Rubino and A. Michael Stolarski. On October 1, 2015, the Company issued an option to purchase 452,381 shares of the Company’s common stock at $0.11 per share and an option to purchase 297,619 shares of the Company’s common stock at $0.50 per share to director Kevin A. Richardson, II and the Company issued options to purchase 150,795 shares of the Company’s common stock at $0.11 per share and options to purchase 99,205 shares of the Company’s common stock at $0.50 per share to directors John F. Nemelka and Alan L. Rubino. The options above issued at $0.50 per share were re-priced to $0.06 per share in March 2016 as the result of the public offering. On September 3, 2013, the Company issued an option to purchase 100,000 shares of the Company’s common stock at $0.65 per share to director Alan L. Rubino. On February 21, 2013, the Company, by mutual agreement with all the active employees and directors of the Company, cancelled options granted to the active employees and directors in the year ended December 31, 2011 and prior. In exchange for these options, the active employees and directors received new options to purchase shares of common stock at an exercise price of $0.35 per share. Kevin A. Richardson, II, and John F. Nemelka, each cancelled options to purchase 15,000 shares of the Company’s Common Stock and were each issued options to purchase 115,000 shares of the Company’s Common Stock at an exercise price of $0.35 per share.
The following are the aggregate number of option awards outstanding that have been granted to each of our non-employee directors as of December 31, 2020: Kevin A. Richardson, II - 4,209,300, John F. Nemelka - 1,434,800, Alan L. Rubino - 1,419,800, A. Michael Stolarski - 1,069,800 and Maj-Britt Kaltoft - 700,000

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of October 11, 2021, with respect to the beneficial ownership of the Company’s outstanding common stock by (i) any holder of more than five percent, (ii) each of the Company’s named executive officers and directors, and (iii) the Company’s directors and executive officers as a group.
Name of Beneficial Owner (1)
Number of Shares
Beneficially
Owned
Percent of
Shares
Outstanding (2)
A. Michael Stolarski (3)
18,331,290
3.8%
Kevin A. Richardson II (4)
16,795,993
3.5%
Peter Stegagno (5)
4,418,007
0.9%
Iulian Cioanta (6)
3,636,146
0.8%
Lisa E. Sundstrom (7)
3,364,500
0.7%
John F. Nemelka (8)
1,696,055
0.4%
All directors and executive officers as a group (6 persons)
48,241,991
10.0%
(1) Unless otherwise noted, each beneficial owner has the same address as us.
(2) Applicable percentage ownership is based on 481,619,621 shares of common stock outstanding as of October 11, 2021. “Beneficial ownership” includes shares for which an individual, directly or indirectly, has or shares voting or investment power, or both, and also includes options that are exercisable within 60 days of October 11, 2021. Unless otherwise indicated, all of the listed persons have sole voting and investment power over the shares listed opposite their names. Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 of the Exchange Act.
(3) Includes options to purchase up to 1,319,800 shares of common stock.
(4) Includes options to purchase up to 7,459,300 shares of common stock. In addition, this amount includes 1,324,723 shares of common stock owned directly by Prides Capital Fund I, L.P. Prides Capital Partners LLC is the general partner of Prides Capital Fund I, L.P. and Mr. Richardson is the controlling shareholder of Prides Capital Partners LLC; therefore, under certain provisions of the Exchange Act, he may be deemed to be the beneficial owner of such securities. Mr. Richardson has also been deputized by Prides Capital Partners LLC to serve on the board of directors of the Company. Mr. Richardson disclaims beneficial ownership of all such securities except to the extent of any indirect pecuniary interest (within the meaning of Rule 16a-1 of the Exchange Act) therein.
(5) Consists of options to purchase up to 3,658,144 shares of common stock.
(6) Consists of options to purchase up to 3,620,741 shares of common stock.
(7) Consists of options to purchase up to 3,364,500 shares of common stock.
(8) Includes options to purchase up to 1,684,800 shares of common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
Information on securities authorized for issuance under the Company’s equity compensation plans can be found in Item 5 under the same caption in this Annual Report on Form 10-K.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Other than as described below, since January 1, 2019, there have been no transactions with related persons required to be disclosed in this report.
On August 6, 2020, the Company entered into an agreement with HealthTronics, Inc., pursuant to which the Company paid off all outstanding debt due and owed to HealthTronics.
Pursuant to the HealthTronics Agreement, as consideration for the extinguishment of the debt due and owed to HealthTronics, (i) the Company paid to HealthTronics an amount in cash equal to $4,000,000, (ii) HealthTronics exercised all of its outstanding Class K Warrants to purchase 7,200,000 shares of Common Stock, (iii) the Company issued to HealthTronics a convertible promissory note in the principal amount of $1,372,743, and (iv) the Company and HealthTronics entered into a Securities Purchase Agreement dated August 6, 2020 pursuant to which the Company issued to HealthTronics an aggregate of 8,275,235 shares of Common Stock and an accompanying warrant to purchase up to an additional 8,275,235 shares of Common Stock. The HealthTronics Warrant has an exercise price of $0.25 per share and a three year term.
The HealthTronics Note has a maturity date of August 6, 2021 and accrues interest at a rate equal to 12.0% per annum. In the event that the HealthTronics Note has not been repaid prior to January 1, 2021, HealthTronics may elect to convert the outstanding principal amount plus any accrued by unpaid interest thereon into shares of Common Stock at a conversion price of $0.10 per share.
On August 6, 2020, the Company terminated that certain line of credit agreement with A. Michael Stolarski, a member of the Company’s board of directors, dated December 29, 2017 and as amended November 12, 2018, in the amount of $1,000,000. As consideration for the termination of the Stolarski Line of Credit, the Company issued to A. Michael Stolarski a convertible promissory note in the principal amount of $223,511.
The Stolarski Note has a maturity date of August 6, 2021 and accrues interest at a rate equal to 12.0% per annum. In the event that the Stolarski Note has not been repaid prior to January 1, 2021, the holder may elect to convert the outstanding principal amount plus any accrued by unpaid interest thereon into shares of Common Stock at a conversion price of $0.10 per share.
Director Independence
Our board of directors has determined that John F. Nemelka and A. Michael Stolarski qualify as independent directors based on the OTC stock market definition of “independent director.” Our board of directors has determined that our other director, Kevin A. Richardson II, does not qualify as an independent director based on the OTC stock market definition of “independent director.” There are no family relationships among any of the directors or executive officers of the Company.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table summarizes the fees that we have paid or accrued for audit and other services provided by our prior principal independent registered public accounting firm, Marcum LLP for the years ended December 31, 2020 and December 31, 2019:
Fee Category
Audit fees
$
573,000
$
184,000
Tax fees
25,000
18,000
Audit related fees
192,000
-
All other fees
-
-
Total fees
$
790,000
$
202,000
For purposes of the preceding table:
•
Audit fees consist of fees for the annual audit of our consolidated financial statements, the review of the interim financial statements included in our quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings and consents related to capital markets transactions and engagements for those fiscal years.
•
Tax fees consist of fees for tax compliance, tax advice and tax planning services for those fiscal years.
•
Audit related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review.
•
All other fees consist of fees for all other products and services.
The board of directors must pre-approve all audits and permitted non-audit services to be provided by our principal independent registered public accounting firm unless an exception to such pre-approval exists under the Exchange Act or the rules of the SEC. Each year, the board of directors approves the retention of the independent auditor to audit our consolidated financial statements, including the associated fee. At this time, the board of directors evaluates other known potential engagements of the independent auditor, including the scope of audit-related services, tax services and other services proposed to be performed and the proposed fees, and approves or rejects each service, taking into account whether the services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management.
Audit Committee Report
The audit committee oversees the accounting and financial reporting processes of the Company on behalf of the board of directors. Management has primary responsibility for the Company’s financial statements, financial reporting process and internal controls over financial reporting. The independent auditors are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). The audit committee’s responsibility is to select the independent auditors and monitor and oversee the accounting and financial reporting processes of the Company, including the Company’s internal controls over financial reporting, and the audits of the consolidated financial statements of the Company.
During the course of 2020 and the first half of 2021, the audit committee met and held discussions with management and the independent auditors. In the discussions related to the Company’s consolidated financial statements for fiscal year 2020, management represented to the audit committee that such consolidated financial statements were prepared in accordance with United States generally accepted accounting principles. The audit committee reviewed and discussed with management and the independent auditors the audited consolidated financial statements for fiscal year 2020.
In fulfilling its responsibilities, the audit committee discussed with the independent auditors the matters that are required to be discussed by the PCAOB and SEC. In addition, the audit committee received from the independent auditors the written disclosures and letter required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor’s communications with the audit committee concerning independence, and the audit committee discussed with the independent auditors that firm’s independence. In connection with this discussion, the audit committee also considered whether the provision of services by the independent auditors not related to the audit of the Company’s financial statements for fiscal year 2020 were compatible with maintaining the independent auditors’ independence. The audit committee’s policy requires that the audit committee approve any audit or permitted non-audit service proposed to be performed by its independent auditors in advance of the performance of such service.
Based upon the audit committee’s discussions with management and the independent auditors and the audit committee’s review of the representations of management and the written disclosures and letter of the independent auditors provided to the audit committee, the audit committee recommended to the board of directors that the audited consolidated financial statements for the year ended December 31, 2020 be included in the Company’s Annual Report on Form 10-K, for filing with the SEC.
The Audit Committee
John F. Nemelka (Chair)
Kevin A. Richardson, II
A. Michael Stolarski
October 21, 2021
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. All financial statements
The following financial statements are included in this Annual Report on Form 10-K in Item 8 of Part II:
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
2. Financial statement schedules
No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
3. Exhibits
The exhibits below are furnished or filed and, as applicable, are incorporated by reference herein as part of this Annual Report on Form 10-K.
Exhibit No.
Description
2.1
Agreement and Plan of Merger, dated as of September 25, 2009, by and between Rub Music Enterprises, Inc., RME Delaware Merger Sub, Inc. and SANUWAVE, Inc. (Incorporated by reference to Form 8-K filed with the SEC on September 30, 2009).
3.1
Articles of Incorporation (Incorporated by reference to the Form 10-SB filed with the SEC on December 18, 2007).
3.2
Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to Appendix A to the Definitive Schedule 14C filed with the SEC on October 16, 2009).
3.3
Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to Appendix A to the Definitive Schedule 14C filed with the SEC on April 16, 2012).
3.4
Bylaws (Incorporated by reference to the Form 10-SB filed with the SEC on December 18, 2007).
3.5
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of the Company dated March 14, 2014 (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
3.6
Certificate of Amendment to the Articles of Incorporation, dated September 8, 2015 (Incorporated by reference to the Form 10-K filed with the SEC on March 30, 2016).
3.7
Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock of the Company dated January 12, 2016 (Incorporated by reference to the Form 8-K filed with the SEC on January 19, 2016).
3.8
Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock of the Company dated January 31, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on February 6, 2020).
3.9
Certificate of designation of Series C Convertible Preferred Stock. (incorporated by reference to the Form 8-K filed with the SEC on February 6, 2020).
3.10
Certificate of Designation of Series D Convertible Preferred Stock. (incorporated by reference to the Form 8-K filed with the SEC on May 20, 2020).
3.11
Certificate of Amendment of the Articles of Incorporation. (incorporated by reference to the Form 8-K filed with the SEC on January 5, 2021).
4.1
Form of Class A Warrant Agreement (Incorporated by reference to Form 8-K filed with the SEC on September 30, 2009).
4.2
Form of Class B Warrant Agreement (Incorporated by reference to Form 8-K filed with the SEC on September 30, 2009).
4.3
Form of Class D Warrant Agreement (Incorporated by reference to Form 8-K filed with the SEC on October 14, 2010).
4.4
Form of Class E Warrant Agreement (Incorporated by reference to Form 8-K filed with the SEC on April 7, 2011).
4.5
Form of Series A Warrant (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
4.6
Form of Series B Warrant (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
4.7
Form of 18% Senior Secured Convertible Promissory Note issued by the Company to select accredited investors (Incorporated by reference to Form 8-K filed with the SEC on February 27, 2013).
4.8
Form of Convertible Promissory Note between the Company and accredited investors party thereto (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
4.9
Amendment No. 1 to the Convertible Note Agreement between the Company and accredited investors party thereto (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
4.10
Class K Warrant Agreement by and between the Company and HealthTronics, Inc., dated June 15, 2015 (Incorporated by reference to the Form 8-K filed with the SEC on June 18, 2015).
4.11
Amendment No. 1 to Class K Warrant Agreement by and between the Company and HealthTronics, Inc., dated June 28, 2016 (Incorporated by reference to the Form 10-Q filed with the SEC on August 15, 2016).
4.12
Form of Class L Warrant Common Stock Purchase Warrant (Incorporated by reference to the Form 8-K filed with the SEC on March 17, 2016).
4.13
Second Form of Class L Warrant Common Stock Purchase Warrant (Incorporated by reference to the Form 8-K filed with the SEC on August 24, 2016).
4.14
Registration Rights Agreement dated January 13, 2016 among the Company and the investors listed therein (Incorporated by reference to the Form 8-K filed with the SEC on January 19, 2016).
4.15
Class K Warrant Agreement dated as of August 3, 2017, between the Company and HealthTronics, Inc. (Incorporated by reference to Form 8-K filed with the SEC on August 4, 2017).
4.16
Form of Class N Warrant. (Incorporated by reference to Form 8-K filed with the SEC on November 9, 2017).
4.17
Letter to Series A Warrantholders, Class N Warrantholders and Class L Warrantholders, dated January 29, 2019. (Incorporated by reference to Form 8-K filed with the SEC on January 25, 2019).
4.18
Form of Class O Warrant. (Incorporated by reference to Form 8-K filed with the SEC on March 15, 2019).
4.19
Letter to Class N Warrantholders and Class O Warrantholders, dated March 14, 2019. (Incorporated by Reference to Form 8-K filed with the SEC on March 15, 2019).
4.20
Letter to Class N Warrant Holders, dated June 5, 2019 (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on June 7, 2019).
4.21
Letter to Class O Warrant Holders, dated June 5, 2019 (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on June 7, 2019).
4.22
Description of Registrant’s Common Stock. (incorporated by reference to the Form 10-K filed with the SEC on March 30, 2020
4.23
Form of Class E Warrant (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
4.24
Form of Secured Promissory Note issued to NH Expansion Credit Fund Holdings LP, dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
4.25
Warrant issued to NH Expansion Credit Fund Holdings LP, dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
4.26
Warrant issued to HealthTronics, Inc., dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
4.27
Warrant issued to Leviston Resources, LLC, dated April 20, 2021. (incorporated by reference to the Form 8-K filed with the SEC on April 27, 2020).
4.28
Future Advance Convertible Promissory Note issued to Leviston Resources, LLC, dated April 2020, 2021. (incorporated by reference to the Form 8-K filed with the SEC on April 27, 2020).
10.1∞
Amended and Restated 2006 Stock Option Incentive Plan of SANUWAVE Health, Inc. (Incorporated by reference to Form 8-K filed with the SEC on November 3, 2010).
10.2
Form of Securities Purchase Agreement, by and among the Company and the accredited investors party thereto, dated March 17, 2014 (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
10.3
Form of Registration Rights Agreement, by and among the Company and the holders party thereto, dated March 17, 2014 (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
10.4
Form of Subscription Agreement for the 18% Convertible Promissory Notes between the Company and the accredited investors a party thereto (Incorporated by reference to the Form 8-K filed with the SEC on March 18, 2014).
10.5
Amendment to certain Promissory Notes that were dated August 1, 2005, by and among the Company, SANUWAVE, Inc. and HealthTronics, Inc., dated June 15, 2015 (Incorporated by reference to the Form 8-K filed with the SEC on June 18, 2015.)
10.6
Security Agreement, by and between the Company and HealthTronics, Inc., dated June 15, 2015 (Incorporated by reference to the Form 8-K filed with the SEC on June 18, 2015).
10.7
Exchange Agreement dated January 13, 2016 among the Company and the investors listed therein (Incorporated by reference to the Form 8-K filed with the SEC on January 19, 2016).
10.8
Escrow Deposit Agreement dated January 25, 2016 among the Company, Newport Coast Securities, Inc. and Signature Bank (Incorporated by reference to the Form S-1/A filed with the SEC on February 3, 2016).
10.9
Second Amendment to Certain Promissory Notes entered into as of June 28, 2016 by and among the Company, SANUWAVE, Inc. and HealthTronics, Inc. (Incorporated by reference to the Form 10-Q filed with the SEC on August 15, 2016).
10.10
Form of Securities Purchase Agreement, by and among the Company and the accredited investors a party thereto, dated March 11, 2016 (Incorporated by reference to the Form 8-K filed with the SEC on March 17, 2016).
10.11
Form of Securities Purchase Agreement, by and between the Company and the accredited investors a party thereto, dated August 24, 2016 (Incorporated by reference to the Form 8-K filed with the SEC on J August 25, 2016).
10.12
Form of Registration Rights Agreement, by and between the Company and the holders a party thereto, dated August 24, 2016 (Incorporated by reference to the Form 8-K filed with the SEC on August 25, 2016).
10.13
Third Amendment to promissory notes entered into as of August 3, 2017 by and among the Company, SANUWAVE, Inc. and HealthTronics, Inc. (Incorporated by reference to Form 8-K filed with the SEC on August 4, 2017).
10.14#
Binding Term Sheet for Joint Venture Agreement between the Company and MundiMed Distribuidora Hospitalar LTDA effective as of September 25, 2017 (Incorporated by reference to Form 10-Q filed with the SEC on November 15, 2017).
10.15
Form of 10% Convertible Promissory Note, by and among the Company and the accredited investors a party thereto. (Incorporated by reference to Form 8-K filed with the SEC on November 9, 2017).
10.16
Form of Registration Rights Agreement, by and among the Company and the accredited investors a party thereto (Incorporated by reference to Form 8-K filed with the SEC on November 9, 2017).
10.17#
Agreement for Purchase and Sale, Limited Exclusive Distribution and Royalties, and Servicing and Repairs of dermaPACE Systems and Equipment among the Company, and Premier Shockwave Wound Care, Inc. and Premier Shockwave, Inc. dated as of February 13, 2018. (Incorporated by reference to Form 10-K filed with the SEC on March 29, 2018).
10.18
Agreement, dated June 14, 2018, by and among the Company and Johnfk Medical Inc. (Incorporated by reference to Form 8-K filed with the SEC on June 29, 2018).
10.19
Joint Venture Agreement, dated September 21, 2018, by and among the Company, Johnfk Medical Inc. and Holistic Health Institute Pte. Ltd. (Incorporated by reference to Form 8-K filed with the SEC on September 27, 2018).
10.20
Master Equipment Lease, dated January 26, 2018, by and among the Company and NFS Leasing, Inc. (Incorporated by reference to Form 8-K filed with the SEC on February 15, 2018).
10.21
Offer Letter, dated as of November 30, 2018, by and between SANUWAVE Health, Inc. and Kevin Richardson. (Incorporated by reference to Form 8-K filed with the SEC on December 4, 2018).
10.22
Offer Letter, dated as of April 15, 2018, by and between SANUWAVE Health, Inc,, and Shri Parikh. (Incorporated by reference to Form 8-K filed with the SEC on June 7, 2018).
10.23
Deed of Termination of Joint Venture Agreement, dated June 4, 2019, by and among the Company, Johnfk Medical Inc. and Holistic Wellness Alliance Pte. Ltd. (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on June 17, 2019).
10.24
Common Stock Purchase Agreement, by and among the Company and the accredited investors party thereto, dated December 11, 2019 (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on December 27, 2019).
10.25
Registration Rights Agreement, by and among the Company and the accredited investors party thereto, dated December 11, 2019 (incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on December 27, 2019).
10.26*β
Joint Venture Agreement, dated December 13, 2019, by and among the Company, Universus Global Advisors LLC, Versani Health Consulting Consultoria Em Gestao De Negocios Eireli, and the IDIC Group as set forth therein. (incorporated by reference to the Form 8-K filed with the SEC on January 28, 2020).
10.27
Separation Agreement and General Release, dated as of May 14, 2020 by and between SANUWAVE Health, Inc. and Shri P. Parikh. (incorporated by reference to the Form 8-K filed with the SEC on May 18, 2020)
10.28
Series D Preferred Stock Purchase Agreement, by and among the Company and the accredited investors party thereto, dated May 14, 2020. (incorporated by reference to the Form 8-K filed with the SEC on May 20, 2020).
10.29
Promissory Note by and between SANUWAVE Health, Inc. and Truist Bank, dated May 28, 2020. (incorporated by reference to the Form 8-K filed with the SEC on June 1, 2020).
10.30
Securities Purchase Agreement, dated as of June 5, 2020, by and between the Company and LGH Investments, LLC. (incorporated by reference to the Form 8-K filed with the SEC on June 11, 2020).
10.31
Convertible Promissory Note, dated as of June 5, 2020, issued by the Company to LGH Investments, LLC. (incorporated by reference to the Form 8-K filed with the SEC on June 11, 2020) .
10.32
Common Stock Purchase Warrant, dated as of June 5, 2020, issued by the Company to LGH Investments, LLC. (incorporated by reference to the Form 8-K filed with the SEC on June 11, 2020).
10.33
Asset Purchase Agreement by and between the Company and Celularity Inc., dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.34
License and Marketing Agreement by and between the Company and Celularity Inc., dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.35
Convertible Promissory Note issued to Celularity Inc., dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.36
Form of Securities Purchase Agreement by and among the Company and the accredited investors a party thereto, dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.37
Note and Warrant Purchase and Security Agreement by and among the Company, the noteholder party thereto and NH Expansion Credit Fund Holdings LP, as agent, dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.38
Letter Agreement by and between the Company and HealthTronics, Inc., dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.39
Convertible Promissory Note issued to HealthTronics, Inc., dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.40
Securities Purchase Agreement by and between the Company and HealthTronics, Inc., dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.41
Convertible Promissory Note issued to A. Michael Stolarski, dated August 6, 2020 (Incorporated by reference to the Form 8-K filed with the SEC on August 12, 2020).
10.42
Securities Purchase agreement by and between the Company and Leviston Resources, LLC, dated April 20, 2021. (incorporated by reference to the Form 8-K filed with the SEC on April 27, 2021).
10.43
Subordination Agreement by and among the Company, Leviston Resources, LLC and NH Expansion Credit Fund Holdings LP, dated April 20, 2021. (incorporated by reference to the Form 8-K filed with the SEC on April 27, 2021) .
10.44
Registration Rights Agreement by and between the Company and Leviston Resources, LLC, dated April 20, 2021. (incorporated by reference to the Form 8-K filed with the SEC on April 27, 2021).
14.1
Code of Business Conduct and Ethics of SANUWAVE Health, Inc. (Incorporated by reference to the Form 10-K filed with the SEC on March 30, 2016).
21.1*
List of subsidiaries
23.1*
Consent of Marcum LLP, independent registered public accountants.
24.1*
Power of Attorney (included on signature page).
31.1*
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2*
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1*
Section 1350 Certification of the Chief Executive Officer.
32.2*
Section 1350 Certification of the Chief Financial Officer.
101.INS**
XBRL Instance
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation
101.DEF**
XBRL Taxonomy Extension Definition
101.LAB**
XBRL Taxonomy Extension Labels
101.PRE**
XBRL Taxonomy Extension Presentation
∞ Indicates management contract or compensatory plan or arrangement.
* Filed herewith
# Confidential treatment has been requested as to certain portions of this exhibit, which portions have been omitted and submitted separately to the Securities and Exchange Commission.
β Confidential portions of this exhibit have been omitted as permitted by applicable regulations.
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Exchange Act and otherwise is not subject to liability under these sections.