Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2018
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from ________ to
Commission File Number 000-52985
SANUWAVE Health, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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20-1176000
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S. Employer
Identification No.)
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3360 Martin Farm Road, Suite 100
Suwanee, GA
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30024
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(Address
of principal executive offices)
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(Zip Code)
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(770) 419-7525
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act (Check one):
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Large accelerated filer ☐
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Accelerated filer
☐
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Non-accelerated filer ☐
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Smaller reporting company
☒
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(Do
not check if a smaller reporting company)
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Emerging growth company ☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). ☐
Yes ☒ No
As of August 10, 2018, there were issued and outstanding
154,644,203 shares of the registrant’s common stock,
$0.001 par value.
SANUWAVE Health,
Inc.
Table of Contents
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Page
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PART I – FINANCIAL INFORMATION
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Item
1.
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Financial
Statements (Unaudited)
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Condensed
Consolidated Balance Sheets as of June 30, 2018 and December 31,
2017
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3
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Condensed
Consolidated Statements of Comprehensive Loss for the three and
six
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months
ended June 30, 2018 and 2017
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4
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Condensed
Consolidated Statements of Cash Flows for the six months
ended
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June
30, 2018 and 2017
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5
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Notes
to Unaudited Condensed Consolidated Financial
Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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26
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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35
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Item
4.
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Controls
and Procedures
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36
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PART II – OTHER INFORMATION
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Item
6.
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Exhibits
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37
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SIGNATURES
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38
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Special Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. and its
subsidiaries (“SANUWAVE” or the “Company”)
contains forward-looking statements. All statements in this
Quarterly Report on Form 10-Q, including those made by the
management of the Company, other than statements of historical
fact, are forward-looking statements. Examples of forward-looking
statements include statements regarding the Company’s future
financial results, the Company’s near term cash requirements
and cash sources, clinical trial results, regulatory approvals,
operating results, business strategies, projected costs, products,
competitive positions, management’s plans and objectives for
future operations, and industry trends. These forward-looking
statements are based on management’s estimates, projections
and assumptions as of the date hereof and include the assumptions
that underlie such statements. Forward-looking statements may
contain words such as “may,” “will,”
“should,” “could,” “would,”
“expect,” “plan,” “anticipate,”
“believe,” “estimate,”
“predict,” “potential” and
“continue,” the negative of these terms, or other
comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and uncertainties
and other important factors, including those discussed in the
reports we file with the Securities and Exchange Commission (the
“SEC”), specifically the sections titled “Risk
Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in
the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017, filed on March 29, 2018 and in the
Company’s Quarterly Reports on Form 10-Q. Other risks and
uncertainties are and will be disclosed in the Company’s
prior and future SEC filings. These and many other factors could
affect the Company’s future financial condition and operating
results and could cause actual results to differ materially from
expectations based on forward-looking statements made in this
document or elsewhere by the Company or on its behalf. The Company
undertakes no obligation to revise or update any forward-looking
statements. The following information should be read in conjunction
with the financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017,
filed on March 29, 2018.
Except as otherwise indicated by the context, references in this
Quarterly Report on Form 10-Q to “we,” “us”
and “our” are to the consolidated business of the
Company.
PART I — FINANCIAL INFORMATION
Item1. FINANCIAL STATEMENTS (UNAUDITED)
SANUWAVE HEALTH,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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ASSETS
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CURRENT
ASSETS
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Cash and cash
equivalents
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$670,714
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$730,184
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Accounts
receivable, net of allowance for doubtful accounts
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of $31,453 in 2018
and $92,797 in 2017
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144,330
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152,520
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Contract assets
(Note 6)
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40,000
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-
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Inventory, net of
losses and obsolescence
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of $71,410 in 2018 and
$65,870 in 2017
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216,316
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231,532
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Prepaid
expenses
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144,816
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90,288
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TOTAL CURRENT
ASSETS
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1,216,176
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1,204,524
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PROPERTY AND
EQUIPMENT, net (Note 4)
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59,787
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60,369
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OTHER
ASSETS
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17,789
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13,917
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TOTAL
ASSETS
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$1,293,752
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$1,278,810
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LIABILITIES
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CURRENT
LIABILITIES
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Accounts
payable
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$951,034
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$1,496,523
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Accrued expenses
(Note 5)
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966,984
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673,600
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Accrued employee
compensation
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195,874
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1,680
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Contract
liabilities (Note 6)
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491,055
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-
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Advances from
related and unrelated parties (Note 7)
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144,000
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310,000
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Line of credit,
related parties (Note 8)
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517,279
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370,179
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Convertible
promissory notes, net (Note 9)
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2,648,548
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455,606
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Short term notes
payable (Note 11)
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85,041
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-
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Interest payable,
related parties (Note 12)
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842,653
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685,907
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Warrant liability
(Note 16)
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3,637,207
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1,943,883
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Notes payable,
related parties, net (Note 12)
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5,297,743
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5,222,259
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TOTAL CURRENT
LIABILITIES
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15,777,418
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11,159,637
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NON-CURRENT
LIABILITIES
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Contract
liabilities (Note 6)
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76,500
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-
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TOTAL NON-CURRENT
LIABILITIES
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76,500
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-
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TOTAL
LIABILITIES
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15,853,918
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11,159,637
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COMMITMENTS AND
CONTINGENCIES (Note 17)
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STOCKHOLDERS'
DEFICIT
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PREFERRED STOCK,
SERIES A CONVERTIBLE, par value $0.001,
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6,175 authorized;
6,175 shares issued and 0 shares outstanding
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in 2017 and 2016
(Note 15)
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-
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-
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PREFERRED STOCK,
SERIES B CONVERTIBLE, par value $0.001,
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293 authorized; 293
shares issued and 0 shares outstanding
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in 2017 and 2016,
respectively (Note 15)
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-
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PREFERRED STOCK -
UNDESIGNATED, par value $0.001, 4,993,532
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shares authorized;
no shares issued and outstanding (Note 15)
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COMMON STOCK, par
value $0.001, 350,000,000 shares authorized;
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151,852,757 and
139,300,122 issued and outstanding in 2018 and
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2017, respectively
(Note 14)
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151,853
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139,300
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ADDITIONAL PAID-IN
CAPITAL
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99,059,031
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94,995,040
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ACCUMULATED
DEFICIT
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(113,716,298)
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(104,971,384)
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ACCUMULATED OTHER
COMPREHENSIVE LOSS
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(54,752)
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(43,783)
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TOTAL STOCKHOLDERS'
DEFICIT
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(14,560,166)
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(9,880,827)
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TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
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$1,293,752
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$1,278,810
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The
accompanying notes to condensed consolidated
financial
statements are an integral part of these
statements.
SANUWAVE HEALTH, INC.
AND SUBSIDIARIES
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CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
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REVENUES
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$453,210
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$111,045
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$797,482
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$260,614
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COST OF
REVENUES (exclusive of depreciation shown
below)
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166,643
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24,695
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332,109
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79,839
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OPERATING
EXPENSES
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Research and
development
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368,337
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437,909
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717,781
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698,247
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General and
administrative
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2,030,799
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951,908
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2,976,405
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1,400,514
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Depreciation
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6,008
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5,958
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11,024
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12,078
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Loss on sale of
property and equipment
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3,170
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-
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3,170
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-
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TOTAL OPERATING
EXPENSES
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2,408,314
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1,395,775
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3,708,380
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2,110,839
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OPERATING
LOSS
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(2,121,747)
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(1,309,425)
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(3,243,007)
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(1,930,064)
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OTHER INCOME
(EXPENSE)
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Gain (loss) on
warrant valuation adjustment
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1,161,520
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35,410
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(1,812,162)
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358,633
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Interest expense,
net
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(1,929,755)
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(143,281)
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(3,674,722)
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(336,019)
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Gain (loss) on
foreign currency exchange
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1,723
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1,359
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(15,023)
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(2,019)
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TOTAL OTHER INCOME
(EXPENSE), NET
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(766,512)
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(106,512)
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(5,501,907)
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20,595
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NET
LOSS
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(2,888,259)
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(1,415,937)
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(8,744,914)
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(1,909,469)
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OTHER COMPREHENSIVE
INCOME
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Foreign currency
translation adjustments
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(11,904)
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(15,552)
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(10,969)
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(13,767)
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TOTAL COMPREHENSIVE
LOSS
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$(2,900,163)
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$(1,431,489)
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$(8,755,883)
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$(1,923,236)
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LOSS PER
SHARE:
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Net loss - basic
and diluted
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$(0.02)
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$(0.01)
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$(0.06)
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$(0.01)
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Weighted average
shares outstanding - basic and diluted
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148,582,386
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138,992,669
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144,168,215
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138,517,370
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The
accompanying notes to consolidated financial
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statements
are an integral part of these statements.
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SANUWAVE HEALTH, INC.
AND SUBSIDIARIES
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CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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CASH FLOWS FROM
OPERATING ACTIVITIES
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Net
loss
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$(8,744,914)
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$(1,909,469)
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Adjustments
to reconcile loss from continuing operations
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to
net cash used by operating activities
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Depreciation
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11,024
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12,078
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Change in allowance
for doubtful accounts
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(61,344)
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116,833
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Stock-based
compensation - employees, directors and advisors
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836,796
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482,295
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Loss (gain) on
warrant valuation adjustment
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1,812,162
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(358,633)
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Amortization of
debt issuance costs
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2,683,936
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-
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Amortization of
debt discount
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75,484
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57,349
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Stock issued for
consulting services
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106,500
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-
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Warrants issued for
consulting services
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737,457
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-
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Loss on sale of
fixed assets
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3,170
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-
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Changes in assets -
(increase)/decrease
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Accounts
receivable
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69,534
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152,034
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Contract
assets
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(40,000)
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-
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Inventory
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15,216
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33,175
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Prepaid
expenses
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(54,528)
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(7,918)
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Other
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(3,872)
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(191)
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Changes in
liabilities - increase/(decrease)
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Accounts
payable
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(425,489)
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475,495
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Accrued
expenses
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91,459
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95,497
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Accrued
employee compensation
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194,194
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294
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Contract
liabilties
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769,480
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-
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Accrued
interest
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168,787
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-
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Interest
payable, related parties
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156,746
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278,669
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NET CASH USED BY
OPERATING ACTIVITIES
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(1,598,202)
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(572,492)
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CASH FLOWS FROM
INVESTING ACTIVITIES
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Purchases of
property and equipment
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(13,612)
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-
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NET CASH USED BY
INVESTING ACTIVITIES
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(13,612)
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-
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CASH FLOWS FROM
FINANCING ACTIVITIES
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Proceeds from
convertible promissory notes, net
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1,159,785
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-
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Proceeds from line
of credit, related party
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280,500
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-
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Advances from
related parties
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156,000
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421,690
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Proceeds from note
payable, product, related party
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96,708
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-
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Proceeds from short
term note
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85,000
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-
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Proceeds from
warrant exercise
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38,528
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93,067
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Payment on line of
credit, related party
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(144,500)
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-
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Payments on note
payable, product, related party
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(96,708)
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-
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Payments on
advances from related parties
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(12,000)
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-
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NET CASH PROVIDED
BY FINANCING ACTIVITIES
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1,563,313
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514,757
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EFFECT OF EXCHANGE
RATES ON CASH
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(10,969)
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(13,767)
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NET DECREASE IN
CASH AND CASH EQUIVALENTS
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(59,470)
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(71,502)
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CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
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730,184
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133,571
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CASH AND CASH
EQUIVALENTS, END OF PERIOD
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$670,714
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$62,069
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SUPPLEMENTAL
INFORMATION
|
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Cash paid for
interest, related parties
|
$151,227
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$-
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NONCASH INVESTING
AND FINANCING ACTIVITIES
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Stock issued for
services
|
$106,500
|
$-
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|
Cashless exercise
of warrants
|
$118,838
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$56,740
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Advances from
related and unrelated parties converted to Convertible promissory
notes
|
$310,000
|
$-
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Accounts payable
converted to Convertible promissory notes
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$120,000
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$-
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Beneficial
conversion feature on 10% convertible promissory notes
|
709,827
|
-
|
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Beneficial
conversion feature on convertible promissory note
|
35,396
|
-
|
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Beneficial
conversion feature on convertible debt
|
$745,223
|
$-
|
|
|
|
|
|
Warrants issued
with 10% convertible promissory notes
|
$808,458
|
$-
|
|
Warrants issued
with convertible promissory note
|
36,104
|
-
|
|
Warrants issued for
debt
|
$844,562
|
$-
|
|
|
|
|
|
Conversion of 10% convertible
promissory notes to stock
|
$631,000
|
$-
|
|
|
|
The accompanying
notes to consolidated financial
|
|
statements are
an integral part of these statements.
|
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
1. Nature of
the Business
SANUWAVE Health,
Inc. and subsidiaries (the “Company”) is a shock wave technology company using a
patented system of noninvasive, high-energy, acoustic shock waves
for regenerative medicine and other applications. The
Company’s 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. The Company’s 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. Food and Drug Administration (the
“FDA”) notified the Company to permit the marketing of
the dermaPACE System for the treatment of diabetic foot ulcers in
the United States.
The Company’s 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. The Company intends to
apply its Pulsed Acoustic Cellular Expression
(PACE®)
technology in wound healing, orthopedic, plastic/cosmetic and
cardiac conditions. In 2018, the Company has started marketing the
dermaPACE System for sale 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.
2. Going Concern
The
Company does not currently generate significant recurring revenue
and will require additional capital during the third and fourth
quarters of 2018. As of June 30, 2018, the Company had an
accumulated deficit of $113,716,298 and cash and cash equivalents of $670,714. For
the six months ended June 30, 2018 and 2017, the net cash used by
operating activities was $1,598,202 and $572,492, respectively. The
Company incurred a net loss of $8,744,914 for the six months ended
June 30, 2018 and a net loss of $5,537,936 for the year ended
December 31, 2017. The operating losses and the events of default
on the Company's convertible promissory notes (see Note 9) and the
notes payable, related parties (see Note 12) create an uncertainty
about the Company’s ability to continue as a going
concern.
The continuation of the Company’s business
is dependent upon raising additional capital during the third and
fourth quarters of 2018 to fund operations. Management’s
plans are to obtain additional capital in 2018 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, including through
tender offers for the 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
the Company’s existing shareholders. Although no
assurances can be given, management of the Company believes that
potential additional issuances of equity or other potential
financing transactions as discussed above should provide the
necessary funding for the Company to continue as a going concern.
If these efforts are unsuccessful, the
Company may be forced to seek relief through a filing under the
U.S. Bankruptcy Code. The consolidated financial statements
do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
3.
Summary
of Significant Accounting Policies
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q
and Article 8-03 of Regulation S-X. Accordingly,
these condensed consolidated financial statements do not include
all the information and footnotes required by GAAP for complete
financial statements. The financial information as of June 30,
2018 and for the three and six months ended June 30, 2018 and 2017
is unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been
included. Operating results for the three and six month
periods ended June 30, 2018 are not necessarily indicative of the
results that may be expected for any other interim period or for
the year ending December 31, 2018.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
3.
Summary
of Significant Accounting Policies (continued)
The
condensed consolidated balance sheet at December 31, 2017 has
been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes
required by GAAP for complete financial statements.
Significant Accounting Policies
For
further information and a summary of significant accounting
policies, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2017, filed with the SEC
on March 29, 2018.
Recently Issued or Adopted 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.
In May
2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with
Customers (ASU 2014-09), which supersedes nearly all
existing revenue recognition guidance under GAAP. The core
principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that
reflects the consideration to which an entity expects to be
entitled for those goods or services. ASU 2014-09 defines a five
step process to achieve this core principle and, in doing so, more
judgment and estimates may be required within the revenue
recognition process than are required under existing GAAP. The
standard was declared effective for annual periods beginning after
December 15, 2017, and interim periods therein, using either of the
following transition methods: (i) a full retrospective method,
which requires the standard to be applied to each prior period
presented, or (ii) a modified retrospective method, which requires
the cumulative effect of adoption to be recognized as an adjustment
to the opening retained earnings in the period of adoption. In July
2015, the FASB confirmed a one-year delay in the effective date of
ASU 2014-09, making the effective date for the Company the first
quarter of fiscal 2018 instead of the previous effective date,
which was the first quarter of fiscal 2017. This one year deferral
was issued by the FASB in ASU 2015-14, Revenue from Contracts with Customers (Topic
606). The Company adopted the new standard on a modified
retrospective basis as of January 1, 2018. The Company completed an
assessment of customer contracts and concluded that the adoption of
this ASU did not have a material impact on its condensed,
consolidated financial statements; therefore, no cumulative
catch-up adjustment was recorded to prior periods. The disclosures
related to revenue recognition have been significantly expanded
under the standard, specifically around the quantitative and
qualitative information about performance obligations and
disaggregation of revenue. The expanded disclosure requirements are
included in this Quarterly Report on Form 10-Q (see Notes 6 and
18).
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires
lessees to recognize most leases on the balance sheet. The
provisions of this guidance are effective for the annual periods
beginning after December 15, 2018, and interim periods within those
years, with early adoption permitted. Management is evaluating the
requirements of this guidance and has not yet determined the impact
of the adoption on the Company’s financial position or
results of operations.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of
Certain Cash Receipts and Cash Payments (Topic 230). This
ASU makes eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash
flows. The ASU is effective for fiscal years beginning after
December 15, 2017. This standard requires adoption on a
retrospective basis unless it is impracticable to apply, in which
case it must be applied prospectively as of the earliest date
practicable. The new standard was adopted during the first quarter
of 2018 using a retrospective transition method. The adoption of
this guidance did not have a material impact on the Company's
financial statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
3.
Summary
of Significant Accounting Policies (continued)
In July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception. Part I of
this ASU addresses the complexity and reporting burden associated
with the accounting for freestanding and embedded instruments with
down round features as liabilities subject to fair value
measurement. Part II of this ASU addresses the difficulty of
navigating Topic 480. Part I of this ASU will be effective for
fiscal years beginning after December 15, 2018. Early adoption is
permitted for an entity in an interim or annual period. Management
is evaluating the requirements of this guidance and has not yet
determined the impact of the pending adoption on the
Company’s financial position or results of
operations.
In February 2018, the FASB issued ASU
2018-02, Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive
Income. This ASU requires
reclassification from accumulated other comprehensive income to
retained earnings for stranded tax effects resulting from the Tax
Cuts and Jobs Act (the “TCJA”). The amount of the
reclassification is the difference between the historical 35%
corporate income tax rate and the newly enacted 21% corporate
income tax rate. Because the amendments only relate to the
reclassification of the income tax effects of the TCJA, the
underlying guidance that requires that the effect of a change in
tax laws of rates be included in income from continuing operations
is not affected. This ASU is effective for fiscal years beginning
after December 15, 2018. Early adoption is permitted.
In addition, the TCJA caused deferred
taxes to be reduced using the lower 21% federal tax rate. The
impact of the newly enacted 21% corporate income tax rate of the
TCJA was a $11.1 million adjustment to the gross deferred tax
assets which was offset by the same adjustment to the valuation
allowance at December 31, 2017.
In June 2018, the FASB issued
ASU 2018-07, Compensation –
Stock Compensation (Topic 718) – Improvements to Nonemployee
Share-Based Payment Accounting. This ASU simplifies the
accounting for share-based payments to nonemployees by aligning it
with the accounting for share-based payments to employees. As a
result, share-based payments issued to nonemployees related to the
acquisition of goods and services will be accounted for similarly
to the accounting for share-based payments to employees, with
certain exceptions. This ASU is effective for fiscal years
beginning after December 15, 2018, including interim periods within
such fiscal years. Early adoption is permitted if financial
statements have not yet been issued. The Company is currently
evaluating the impact of the adoption of ASU 2018-07 on the
Company’s financial statements.
4.
Property
and equipment
Property and
equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Machines and
equipment
|
$240,295
|
$240,295
|
|
Office and computer
equipment
|
166,873
|
156,860
|
|
Devices
|
81,060
|
89,704
|
|
Software
|
38,126
|
34,528
|
|
Furniture and
fixtures
|
16,019
|
16,019
|
|
Other
assets
|
2,259
|
2,259
|
|
Total
|
544,632
|
539,665
|
|
Accumulated
depreciation
|
(484,845)
|
(479,296)
|
|
Net
property and equipment
|
$59,787
|
$60,369
|
Depreciation
expense was $6,008 and $5,958 for the three months ended June 30,
2018 and 2017, respectively and $11,024 and $12,078 for the six
months ended June 30, 2018 and 2017, respectively
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
Accrued
expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued outside
services
|
$249,250
|
$165,427
|
|
Deferred
revenue
|
201,924
|
13,317
|
|
Accrued executive
severance
|
127,000
|
118,000
|
|
Accrued board of
director's fees
|
100,000
|
125,000
|
|
Accrued audit and
tax preparation
|
86,150
|
73,800
|
|
Accrued
travel
|
69,926
|
39,926
|
|
Deferred
rent
|
48,745
|
51,191
|
|
Accrued legal
professional fees
|
47,451
|
61,890
|
|
Accrued clinical
study expenses
|
13,650
|
13,650
|
|
Accrued computer
equipment
|
5,757
|
-
|
|
Accrued
other
|
17,131
|
11,399
|
|
|
$966,984
|
$673,600
|
6.
Contract
assets and contract liabilities
As of
June 30, 2018, the Company has contract assets from contracts with
customers. The contract assets are due to the implementation of
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers
(ASU 2014-09) (see Note 18).
Contract assets
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
license
|
$40,000
|
$-
|
|
|
$40,000
|
$-
|
As of
June 30, 2018, the Company has contract liabilities from contracts
with customers. The contract liabilities are due to the
implementation of Accounting Standards Update No. 2014-09,
Revenue from Contracts with
Customers (ASU 2014-09) (see Note 18).
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
6.
Contract
assets and contract liabilities (continued)
Contract
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
license
|
$501,110
|
$-
|
|
Service
agreement
|
43,282
|
|
|
Initial
warranty
|
18,474
|
-
|
|
Refurbishment
license
|
2,461
|
-
|
|
Tiered
pricing
|
2,228
|
-
|
|
Total
Contract liabilities
|
567,555
|
-
|
|
Non-Current
|
(76,500)
|
-
|
|
Total
Current
|
$491,055
|
$-
|
Revenue
recognized that was included in deferred revenue balances at the
beginning of each period was $594 and $12,144 for the three
months ended June 30, 2018 and 2017, respectively, and
$3,281 and $24,782 for the six months ended June 30, 2018 and 2017,
respectively.
7.
Advances
from related and unrelated parties
The
Company has received cash advances from related parties and
accredited investors to help fund the Company’s operations.
As of June 30, 2018, the Company had received $144,000 from a
related party. As of December 31, 2017, the Company had received
$310,000 from related and unrelated parties as a part of an
agreement that the Company issue convertible promissory notes, and
on January 10, 2018, the outstanding balance of the $310,000 of
advances from related and unrelated parties was converted into two
10% Convertible Promissory Notes agreeements (see Note
9).
As of December 31, 2017, A. Michael Stolarski and
Kevin A. Richardson II, both members of the Company’s board
of directors and existing shareholders of the Company, had
subscribed $130,000 and $140,000, respectively, to the Company as
advances from related parties to be used to purchase 10%
Convertible Promissory Notes. The convertible promissory
notes for this balance were issued on January 10, 2018 (see Note
9).
8.
Line
of credit, related parties
On
December 29, 2017, the Company entered
into a line of credit agreement with A. Michael Stolarski, a
member of the Company's board of directors and an existing
shareholder of the Company. The line of credit is in the amount of
$370,000 with an annualized interest rate of 6%. The line of credit
may be called for payment upon demand of the holder. On June 21,
2018, the Company mad a payment of $144,500 on the line of
credit. On June 26, 2018, the amount of the line of credit
was increased by $280,500. As of June 30, 2018, $133,200 was
available for future borrowing under this agreement.
Interest expense on
line of credit, related parties totaled $5,550 and $0 for the three
months ended June 30, 2018 and 2017, respectively and $11,100 and
$0 for the six months ended June 30, 2018 and 2017,
respectively.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
9.
Convertible
promissory notes
On
March 27, 2017, the Company began
offering subscriptions for 10% convertible promissory notes (the
“10% Convertible Promissory Notes”) to selected
accredited investors. The Company intends to use the
proceeds from the 10% Convertible Promissory Notes for working
capital and general corporate purposes. The initial offering closed
on August 15, 2017, at which time $55,000 aggregate principal
amount of 10% Convertible Promissory Notes were issued and the
funds paid to the Company. Subsequent offerings were closed on
November 3, 2017, November 30, 2017, December 21, 2017, January 10,
2018 and February 2, 2018 at which times $1,069,440, $199,310,
$150,000, $1,496,000 and $100,000 respectively, aggregate principal
amounts of 10% Convertible Promissory Notes were issued and the
funds paid to the Company. On November 30, 2017, the outstanding
balance of $60,000 of a short term loan with Millennium Park
Capital LLC was converted into a 10% Convertible Promissory Notes
agreement. On January 10, 2018, the outstanding balance of $310,000
of advances from related and unrelated parties was converted into
two 10% Convertible Promissory Notes agreements (see Note
7).
The 10% Convertible Promissory Notes have a six
month term from the subscription date and the note holders can
convert the 10% Convertible Promissory Notes at any time during the
term to the number of shares of Company common stock, $0.001 par value (the
“Common Stock”), equal to the amount obtained by
dividing (i) the amount of the unpaid principal and interest on the
note by (ii) $0.11.
The 10% Convertible Promissory Notes include a
warrant agreement (the “Class N Warrant”) to purchase
Common Stock equal to the amount obtained by dividing the (i) sum
of the principal amount by (ii) $0.11. The Class N Warrants expire
March 17, 2019. On November 3, 2017, the Company issued
10,222,180 Class N Warrants in connection with the initial and
second closings of 10% Convertible Promissory Notes. On November
30, 2017, December 21, 2017, January 10, 2018, and February 2,
2018, the Company issued 2,357,364, 1,363,636, 13,599,999 and
909,091, respectively, Class N Warrants in connection with the
closings of 10% Convertible Promissory Notes.
Pursuant to the
terms of a Registration Rights Agreement (the “Registration
Rights Agreement”) that the Company entered with the
accredited investors in connection with the 10% Convertible
Promissory Notes, the Company is required to file a registration
statement that covers the shares of Common Stock issuable upon
conversion of the 10% Convertible Promissory Notes or upon exercise
of the Class N Warrants. The failure on the part of the Company to
satisfy certain deadlines described in the Registration Rights
Agreement may subject the Company to payment of certain monetary
penalties.
In
2018, the Company recorded $709,827 in debt discount for the
beneficial conversion feature of the promissory notes, $808,458 in
debt discount for the discount on the Class N Warrant agreement and
$77,715 in debt issuance costs to be amortized over the lives of
the 10% Convertible Promissory Notes. Additional debt issuance
costs will be incurred and amortized over the remaining lives of
the 10% Convertible Promissory Notes when Class N Warrants are
issued per the engagement letter with West Park
Capital.
In
2017, the Company recorded $820,681 in debt discount for the
beneficial conversion feature of the promissory notes, $620,748 in
debt discount for the discount on the Class N Warrant agreement and
$89,518 in debt issuance costs to be amortized over the lives of
the 10% Convertible Promissory Notes. Additional debt issuance
costs will be incurred and amortized over the remaining lives of
the 10% Convertible Promissory Notes when Class N Warrants are
issued per the engagement letter with West Park
Capital.
On June 29, 2018,
the Company issued 1,242,955 Class N Warrants to West Park Capital
per the engagement letter and $417,633 was expensed as interest
expense.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
9.
Convertible
promissory notes (continued)
A. Michael Stolarski, a member of the
Company’s board of directors and an existing shareholder of
the Company, was a purchaser in the 10% Convertible
Promissory Notes in the amounts of
$330,000 and $170,000 and was issued 3,000,000 and 1,545,455 Class
N Warrants on November 3, 2017 and January 10, 2018, respectively.
Kevin A. Richardson II, a member of the Company’s board of
directors and an existing shareholder of the Company, was a
purchaser in the 10% Convertible Promissory Notes in the
amount of $260,000 and was issued
2,363,636 Class N Warrants on January 10, 2018.
On
February 15, 2018, the Company defaulted on the 10% Convertible
Promissory Notes issued on August 15, 2017 and began accruing
interest at the default interest rate of 18%. On May 3, 2018, the
Company defaulted on the 10% Convertible Promissory Notes issued on
November 3, 2017 and began accruing interest at the default
interest rate of 18%. On May 30, 2018, the Company defaulted on the
10% Convertible Promissory Notes issued on November 30, 2017 and
began accruing interest at the default interest rate of 18%. On
June 22, 2018, the Company defaulted on the 10% Convertible
Promissory Notes issued on December 22, 2017 and began accruing
interest at the default interest rate of 18%.
On
January 29, 2018, the Company entered
into an additional 10% Convertible Promissory Note with an
accredited investor in the amount of $71,500 and issued 650,000
Class N Warrants in connection with such 10% Convertible Promissory
Note. The Company intends to use the proceeds from such 10%
Convertible Promissory Note for payment of services to an investor
relations company and the account of the attorney updating the
Registration Statement on Form S-1 of the Company filed under the
Securities Act of 1933, as amended, on January 3, 2017 (File No.
333-213774), which registration statement shall also register the
shares issuable upon conversion of such 10% Convertible Promissory
Note and issuable upon the exercise of a Class N Warrants issued
concurrently with the issuance of such 10% Convertible Promissory
Note.
The 10% Convertible Promissory Note has a six
month term from the subscription date and the note holders can
convert the 10% Convertible Promissory Note at any time during the
term 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) $0.11.
The 10% Convertible Promissory Note includes a
warrant agreement (the “Class N Warrant”) to purchase
Common Stock equal to the amount obtained by dividing the (i) sum
of the principal amount by (ii) $0.11. The Class N Warrant expires
on March 17, 2019. On January 29, 2018, the Company issued
650,000 Class N Warrants in connection with this 10%Convertible
Promissory Note.
The
Company recorded $35,396 debt discount for the beneficial
conversion feature of the 10% Convertible Promissory Note and
$36,104 in debt discount for the discount on the Class N Warrant
agreement to be amortized over the life of the 10% Convertible
Promissory Note.
The
Convertible Promissory Note had an aggregate outstanding principal
balance of $2,648,548, net of $80,404 beneficial conversion
feature, warrant discount and debt issuance costs at June 30,
2018. The 10% Convertible Promissory Notes had an aggregate
outstanding principal balance of $455,606, net of $1,099,861
beneficial conversion feature, warrant discount and debt issuance
costs at December 31, 2017.
Interest expense on
the 10% Convertible Promissory Note totaled $1,710,280 and $0 for
the three months ended June 30, 2018 and 2017, respectively, and
$3,259,215 and $0 for the six months ended June 30, 2018 and 2017,
respectively.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
10.
Notes
payable, product, related party
On
January 26, 2018, the Company entered into a Master Equipment Lease
with NFS Leasing Inc. 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 credit 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.
On
March 1, 2018, the Company entered into the first drawdown of the
Master Equipment Lease in the amount of $96,708.
Interest expense on
note payable, product totaled $19,639 and $0 for the three months
ended June 30, 2018 and 2017, respectively and $20,909 and $0 for
the six months ended June 30, 2018 and 2017,
respectively.
As of
February 27, 2018, we were in default of Master Equipment Lease due
to the sale of equipment purchased under the Master Lease Agreement
to a third party, and as a result, and the note was callable by NFS
Leasing, Inc. or NFS Leasing, Inc. could have notified the Company
to assemble all equipment for pick up. The notes payable, product
was paid in full on June 27, 2018.
11.
Short
term notes payable
On June
26, 2018 and June 29, 2018, the Company entered into short term
notes payable with two individuals in the principal amount of
$42,500 each with an interest rate of 5% per annum. The principal
and accrued interest are due and payable six months from the date
of issuance.
Interest expense on
short term notes payable totaled $41 and $0 for the three and six
months ended June 30, 2018 and 2017, respectively.
12.
Notes
payable, related parties
The
notes payable, related parties were issued in conjunction with the
Company’s purchase of the orthopedic division of
HealthTronics, Inc. on August 1, 2005. The notes payable, related
parties bear interest at 6% per annum. Quarterly interest through
June 30, 2010, was accrued and added to the principal balance.
Interest was paid quarterly in arrears beginning September 30,
2010. All remaining unpaid accrued interest and principal was
originally due August 1, 2015.
On June
15, 2015, the Company and HealthTronics, Inc. entered into an
amendment (the “Note Amendment”) to amend certain
provisions of the notes payable, related parties. The Note Amendment provides for the extension of
the due date to January 31, 2017. In connection with the
Note Amendment, the Company entered into a security agreement with
HealthTronics, Inc. to provide a first security interest in the
assets of the Company. The notes payable,
related parties bear interest at 8% per annum effective August 1,
2015 and during any period when an Event of Default occurs, the
applicable interest rate shall increase by 2% per annum. Events of
Default under the notes payable, related parties have occurred and
are continuing on account of the failure of SANUWAVE, Inc., a
Delaware corporation, a wholly owned subsidiary of the Company and
the borrower under the notes payable, related parties, to make the
required payments of interest which were due on December 31, 2016,
March 31, 2017, June 30, 2017, September 30, 2017, December 31,
2017 and June 30, 2018 (collectively, the “Defaults”).
As a result of the Defaults, the notes payable, related parties
have been accruing interest at the rate of 10% per annum since
January 2, 2017 and continue to accrue interest at such rate. The
Company will be required to make mandatory prepayments of principal
on the notes payable, related parties equal to 20% of the proceeds
received by the Company through the issuance or sale of any equity
securities in cash or through the licensing of the Company’s
patents or other intellectual property rights.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
12.
Notes
payable, related parties (continued)
On June
28, 2016, the Company and HealthTronics, Inc. entered into a second
amendment (the “Second Amendment”) to amend certain
provisions of the notes payable, related parties. The Second
Amendment provided for the extension of the due date to January 31,
2018.
On
August 3, 2017, the Company and HealthTronics, Inc. entered into a
third amendment (the “Third Amendment”) to amend
certain provisions of the notes payable, related parties. The Third
Amendment provides for the extension of the due date to December
31, 2018, revision of the mandatory prepayment provisions and the
future issuance of additional warrants to HealthTronics upon
certain conditions.
The
notes payable, related parties had an aggregate outstanding
principal balance of $5,297,743, net of $75,000 debt discount at
June 30, 2018 and $5,222,259, net of $150,484 debt discount at
December 31, 2017, respectively.
In
addition, the Company, in connection with the Note Amendment,
issued to HealthTronics, Inc. on June 15, 2015, a total of
3,310,000 warrants (the “Class K Warrants”) to purchase
shares of Common Stock, at an exercise price of $0.55 per share,
subject to certain anti-dilution protection. Each Class K Warrant
represents the right to purchase one share of Common Stock. The
warrants vested upon issuance and expire after ten years.
The fair value of these warrants on
the date of issuance was $0.0112 and $36,989 was recorded as a debt
discount to be amortized over the life of the
amendment.
In
addition, the Company, in connection with the Second Amendment,
issued to HealthTronics, Inc. on June 28, 2016, an additional
1,890,000 Class K Warrants to purchase shares of the
Company’s Common Stock at an exercise price of $0.08 per
share, subject to certain anti-dilution protection. The exercise
price of the 3,310,000 Class K Warrants issued on June 15, 2015 was
decreased to $0.08 per share. The fair
value of these warrants on the date of issuance was $0.005 and
$9,214 was recorded as a debt discount to be amortized over the
life of the amendment.
In
addition, the Company, in connection with the Third Amendment,
issued to HealthTronics, Inc. on August 3, 2017, an additional
2,000,000 Class K Warrants to purchase shares of the
Company’s Common Stock at an exercise price of $0.11 per
share, subject to certain anti-dilution protection. The fair value of these warrants on the date of
issuance was $0.10 per warrant and $200,000 was recorded as a debt
discount to be amortized over the life of the
amendment.
Accrued
interest currently payable totaled $842,653 at June 30, 2018 and
$685,907 at December 31, 2017. Interest expense on notes payable,
related parties totaled $194,246 and $143,281 for the three months
ended June 30, 2018 and 2017, respectively, and $383,457 and
$283,459 for the six months ended June 30, 2018 and 2017,
respectively.
As of
January 2, 2017, we are in default with our interest payment and
the note is callable by HealthTronics, Inc. The notes payable,
related parties are shown as a current liability.
The
Company files income tax returns in the United States federal
jurisdiction and various state and foreign jurisdictions. The
Company is no longer subject to United States federal and state and
non-United States income tax examinations by tax authorities for
years before 2014.
At June
30, 2018, the Company had federal net operating loss
(“NOL”) carryforwards for tax years through the year
ended December 31, 2017, that will begin to expire in 2025. The use
of deferred tax assets, including federal NOLs, is limited to
future taxable earnings. Based on the required analysis of future
taxable income under the provisions of ASC 740, Income Taxes, the Company’s
management believes that there is not sufficient evidence at June
30, 2018 indicating that the results of operations will generate
sufficient taxable income to realize the net deferred tax asset in
years beyond 2018. As a result, a valuation allowance was provided
for the entire net deferred tax asset related to future years,
including NOL carryforwards.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
13.
Income
taxes (continued)
The
Company’s ability to use its NOL carryforwards could be
limited and subject to annual limitations. In connection with
future offerings, the Company may realize a “more than 50%
change in ownership” which could further limit its ability to
use its NOL carryforwards accumulated to date to reduce future
taxable income and tax liabilities. Additionally, because United
States tax laws limit the time during which NOL 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
NOL carryforwards for federal income tax purposes.
Conversion of 10% Convertible Promissory Notes
On May
9, 2018, the Company issued 5,335,919 shares of restricted Common
Stock upon the conversion of 10% Convertible Promissory Notes in
the amount of $571,000 plus accrued interest of $15,951 at the
conversion price of $0.11 per share per the 10% Convertible
Promissory Notes agreement.
On
April 16, 2018, the Company issued 560,808 shares of restricted
Common Stock upon the conversion of 10% Convertible Promissory
Notes in the amount of $60,000 plus accrued interest of $1,689 at
the conversion price of $0.11 per share per the 10% Convertible
Promissory Notes agreement.
Warrant Exercise
On
April 20, 2018, the Company issued 227,273 shares of restricted
Common Stock upon the exercise of 227,273 Class N Warrants to
purchase shares of stock for $0.11 per share under the terms of the
Class N Warrant agreement.
On
March 23, 2018, the Company issued 75,666 shares of restricted
Common Stock upon the exercise of 75,666 Series A Warrants to
purchase shares of stock for $0.0334 per share under the terms of
the Series A Warrant agreement.
On
February 23, 2018, the Company issued 100,000 shares of restricted
Common Stock upon the exercise of 100,000 Class O Warrants to
purchase shares of stock for $0.11 per share under the terms of the
Class O Warrant agreement.
Cashless Warrant Exercise
On
June 22, 2018, the Company issued 80,164 shares of Common Stock
upon the cashless exercise of 100,000 Class L Warrants to purchase
shares of stock for $0.08 per share based on a current market value
of $0.4033 per share as determined under the terms of the Class L
Warrant agreement.
On
June 5, 2018, the Company issued 322,687 shares of Common Stock
upon the cashless exercise of 400,000 Class L Warrants to purchase
shares of stock for $0.08 per share based on a current market value
of $0.3339 per share as determined under the terms of the Class L
Warrant agreement.
On
April 13, 2018, the Company issued 3,241,395 shares of Common Stock
upon the cashless exercise of 3,733,167 Class L Warrants to
purchase shares of stock for $0.08 per share based on a current
market value of $0.6073 per share as determined under the terms of
the Class L Warrant agreement.
On
April 10, 2018, the Company issued 90,142 shares of Common Stock
upon the cashless exercise of 106,667 Class L Warrants to purchase
shares of stock for $0.08 per share based on a current market value
of $0.5164 per share as determined under the terms of the Class L
Warrant agreement.
On
April 9, 2018, the Company issued 59,020 shares of Common Stock
upon the cashless exercise of 70,000 Class L Warrants to purchase
shares of stock for $0.08 per share based on a current market value
of $0.51 per share on the date of exercise as determined under the
terms of the Class L Warrant agreement.
On
April 9, 2018, the Company issued 813,267 shares of Common Stock
upon the cashless exercise of 990,500 Class L Warrants to purchase
shares of stock for $0.08 per share based on a current market value
of $0.4471 per share on the date of exercise as determined under
the terms of the Class L Warrant agreement.
On
March 28, 2018, the Company issued 84,314 shares of Common Stock
upon the cashless exercise of 100,000 Class L Warrants to purchase
shares of stock for $0.08 per share based on a current market value
of $0.51 per share as determined under the terms of the Class L
Warrant agreement.
On
March 2, 2018, the Company issued 407,461 shares of Common Stock
upon the cashless exercise of 600,000 Class L Warrants to purchase
shares of stock for $0.08 per share based on a current market value
of $0.2493 per share as determined under the terms of the Class L
Warrant agreement.
On
February 14, 2018, the Company issued 229,515 shares of Common
Stock upon the cashless exercise of 400,000 Class L Warrants to
purchase shares of stock for $0.08 per share based on a current
market value of $0.1877 per share as determined under the terms of
the Class L Warrant agreement.
On
March 9, 2018, the Company issued 251,408 shares of Common Stock
upon the cashless exercise of 271,000 Series A Warrants to purchase
shares of stock for $0.0334 per share based on a current market
value of $0.462 per share as determined under the terms of the
Series A Warrant agreement.
On
January 11, 2018, the Company issued 50,432 shares of Common Stock
upon the cashless exercise of 59,000 Series A Warrants to purchase
shares of stock for $0.0334 per share based on a current market
value of $0.23 per share as determined under the terms of the
Series A Warrant agreement.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
14.
Equity
transactions (continued)
Consulting Agreement
In
November 2017, the Company entered into a three month consulting
agreement with a vendor 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 calculated by dividing the amount of
the fee to be paid with Common Stock of $4,000 by the Company stock
price at the close of business on the eighth business day of each
month. The Company issued 26,667, 23,529 and 18,182 shares,
respectively in each of the three months of the agreement. The
$4,000 was recorded as a non-cash general and administrative
expense for each of the three months of the agreement. In April
2018, the Company verbally entered into a month-to-month consulting
agreement with the same vendor 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 calculated by dividing the amount
of the fee to be paid with Common Stock of $4,000 by the Company
stock price at the close of business on the eighth business day of
each month. The Company issued 56,532 shares for services performed
from February through June 2018. The $20,000 was recorded as a
non-cash general and administrative expense upon issuance in June
2018.
In May
2017, the Company entered into a consulting agreement with another
vendor 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 calculated by dividing the amount of the fee to be paid
with Common Stock of $7,500 by the Company’s stock price at
the close of business on the eighth business day of each month. On
March 27, 2018, the Company issued 533,450 shares for services
rendered May 2017 through February 2018. On June 28, 2018, the
Company issued 15,000 shares for services rendered in March 2018.
Non-cash general and administrative expense of $22,500 and $60,000
was recorded in 2018 and 2017, respectively.
The
Company’s Articles of Incorporation authorize the issuance of
up to 5,000,000 shares of “blank check” preferred stock
with designations, rights and preferences as may be determined from
time to time by the board of directors. On January 12,
2016, the Company filed a Certificate of Designation of
Preferences, Rights and Limitations for Series B Convertible
Preferred Stock of the Company (the “Certificate of
Designation”) with the Nevada Secretary of State. The
Certificate of Designation amended the Company’s Articles of
Incorporation to designate 293 shares of preferred stock, par value
$0.001 per share, as Series B Convertible Preferred Stock. The
Series B Convertible Preferred Stock has a stated value of $1,000
per share. On January 13, 2016, in connection with the Series A
Warrant Conversion, the Company issued 293 shares of Series B
Convertible Preferred Stock.
On
April 29, 2016, the holders of Series B Convertible Preferred Stock
converted the outstanding 293 shares of Series B Convertible
Preferred Stock into 3,657,278 shares of common stock. As of April
29, 2016, there were no outstanding shares of Series B Convertible
Preferred Stock.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
15.
Preferred
Stock (continued
On
March 14, 2014, the Company filed a Certificate of Designation of
Preferences, Rights and Limitations for Series A Convertible
Preferred Stock of the Company (the “Certificate of
Designation”) with the Nevada Secretary of State. The
Certificate of Designation amends the Company’s Articles of
Incorporation to designate 6,175 shares of preferred stock, par
value $0.001 per share, as Series A Convertible Preferred Stock.
The Series A Convertible Preferred Stock has a stated value of
$1,000 per share. On March 17, 2014, in connection with a Private
Placement, the Company issued 6,175 shares of Series A Convertible
Preferred Stock. As of January 6, 2015, there were no outstanding
shares of Series A Convertible Preferred Stock.
A
summary of the warrant activity as of June 30, 2018 and December
31, 2017, and the changes during the six months ended June 30,
2018, is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class F
Warrants
|
300,000
|
-
|
-
|
(300,000)
|
-
|
|
Class G
Warrants
|
1,503,409
|
-
|
-
|
-
|
1,503,409
|
|
Class H
Warrants
|
1,988,095
|
-
|
-
|
-
|
1,988,095
|
|
Class I
Warrants
|
1,043,646
|
-
|
-
|
-
|
1,043,646
|
|
Class K
Warrants
|
7,200,000
|
-
|
-
|
-
|
7,200,000
|
|
Class L
Warrants
|
63,898,173
|
-
|
(6,500,334)
|
-
|
57,397,839
|
|
Class N
Warrants
|
13,943,180
|
15,752,045
|
(227,273)
|
-
|
29,467,952
|
|
Class O
Warrants
|
6,540,000
|
1,509,091
|
(100,000)
|
-
|
7,949,091
|
|
Series A
Warrants
|
1,561,348
|
-
|
(405,666)
|
-
|
1,155,682
|
|
|
97,977,851
|
17,261,136
|
(7,233,273)
|
(300,000)
|
107,705,714
|
A
summary of the warrant exercise price per share and expiration date
is presented as follows:
|
|
|
Expiration
|
|
|
|
date
|
|
|
|
|
|
Class G
Warrants
|
$0.80
|
July
2018
|
|
Class H
Warrants
|
$0.80
|
July
2018
|
|
Class I
Warrants
|
$0.85
|
September
2018
|
|
Class K
Warrants
|
$0.08
|
June
2025
|
|
Class K
Warrants
|
$0.11
|
August
2027
|
|
Class L
Warrants
|
$0.08
|
March
2019
|
|
Class N
Warrants
|
$0.11
|
March
2019
|
|
Class O
Warrants
|
$0.11
|
March
2019
|
|
Series A
Warrants
|
$0.03
|
March
2019
|
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
The
exercise price and the number of shares covered by the warrants
will be adjusted if the Company has a stock split, if there is a
recapitalization of the Company’s common stock, or if the
Company consolidates with or merges into another
company.
The
exercise price of the Class K Warrants and the Series A Warrants
are subject to a “down-round” anti-dilution adjustment
if the Company issues or is deemed to have issued certain
securities at a price lower than the then applicable exercise price
of the warrants. The exercise price of the Series A Warrants
was adjusted to $0.0334 due to the 2016 Equity Offering. The Class
K Warrants may be exercised on a physical settlement or on a
cashless basis. The Series A Warrants may be exercised on a
physical settlement basis if a registration statement underlying
the warrants is effective. If a registration statement is not
effective (or the prospectus contained therein is not available for
use) for the resale by the holder of the Series A Warrants, then
the holder may exercise the warrants on a cashless
basis.
In
August 2017, the Company, in connection with the Third Amendment
(see Note 10), issued to HealthTronics, Inc., an additional
2,000,000 Class K Warrants to purchase shares of the
Company’s Common Stock at an exercise price of $0.11 per
share, subject to certain anti-dilution protection. The warrants vested upon issuance and expire after
ten years.
On
November 30, 2017, the Company issued Class O Warrant Agreements to
a vendor to purchase 2,500,000 shares of common stock at an
exercise price of $0.11 per share. Each Class O Warrant represents the right to
purchase one share of Common Stock. The estimated fair value of the
Class O Warrants at the grant date was $174,731 and was recorded as
general and administrative expense and an increase to additional
paid-in capital. The warrants vested upon issuance and expire on
March 17, 2019.
On
December 6, 2017, the Company issued Class O Warrant Agreements to
a vendor to purchase 100,000 shares of common stock at an exercise
price of $0.11 per share. Each Class O
Warrant represents the right to purchase one share of Common Stock.
The estimated fair value of the Class O Warrants at the grant date
was $8,125 and was recorded as general and administrative expense
and an increase to additional paid-in capital. The warrants vested
upon issuance and expire on March 17, 2019.
On
December 11, 2017, the Company issued Class O Warrant Agreements to
active employees, independent contractors, members of the board of
directors and members of the medical advisory boards to purchase
3,940,000 shares of common stock at an exercise price of $0.11 per
share. Each Class O Warrant represents
the right to purchase one share of Common Stock. The estimated fair
value of the Class O Warrants at the grant date was $285,810 and
was recorded as research and development expense in the amount of
$98,655 and general and administrative expense in the amount of
$187,155 and an increase to additional paid-in capital for the full
amount of $285,810. The warrants vested upon issuance and expire on
March 17, 2019. Kevin A. Richardson II and A. Michael Stolarski,
both members of the Company’s board of directors and existing
shareholders of the Company, were issued 640,000 and 200,000
warrants, respectively. John Nemelka, Alan Rubino and Maj-Britt
Kaltoft, members of the Company’s board of directors, were
each issued 200,000 warrants. Lisa E. Sundstrom, an officer of the
Company was issued 440,000 warrants as well as other employees of
the Company.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
On
January 6, 2018, the Company granted Class O Warrant Agreements to
a vendor to purchase 100,000 shares of common stock at an exercise
price of $0.11 per share. Each Class O
Warrant represents the right to purchase one share of Common Stock.
The estimated fair value of the Class O Warrants at the grant date
was $13,870 and was recorded as general and administrative expense
and an increase to additional paid-in capital in June 2018 when the
warrants were formally issued. The warrants vested upon issuance
and expire on March 17, 2019.
On
January 26, 2018, the Company granted Class O Warrant Agreements to
a vendor to purchase 909,091 shares of common stock at an exercise
price of $0.11 per share. Each Class O
Warrant represents the right to purchase one share of Common Stock.
The estimated fair value of the Class O Warrants at the grant date
was $160,455 and was recorded as general and administrative expense
and an increase to additional paid-in capital in June 2018 when the
warrants were formally issued. The warrants vested upon issuance
and expire on January 25, 2022.
On
February 6, 2018, the Company granted Class O Warrant Agreements to
a vendor to purchase 100,000 shares of common stock at an exercise
price of $0.11 per share. Each Class O
Warrant represents the right to purchase one share of Common Stock.
The estimated fair value of the Class O Warrants at the grant date
was $11,200 and was recorded as general and administrative expense
and an increase to additional paid-in capital in June 2018 when the
warrants were formally issued. The warrants vested upon issuance
and expire on March 17, 2019.
On June
28, 2018, the Company issued Class O Warrant Agreements to a vendor
to purchase 400,000 shares of common stock at an exercise price of
$0.11 per share. Each Class O Warrant
represents the right to purchase one share of Common Stock. The
estimated fair value of the Class O Warrants at the grant date was
$134,360 and was recorded as general and administrative expense and
an increase to additional paid-in capital. The warrants vested upon
issuance and expire on March 17, 2019.
The
Class K Warrants, the Series A Warrants and the Series B Warrants
are derivative financial instruments. The estimated fair value of
the Class K Warrants at the date of grant was $36,989 and recorded
as debt discount, which is accreted to interest expense through the
maturity date of the related notes payable, related parties. The
estimated fair values of the Series A Warrants and the Series B
Warrants at the date of grant were $557,733 for the warrants issued
in conjunction with the 2014 Private Placement and $47,974 for the
warrants issued in conjunction with the 18% Convertible Promissory
Notes. The fair value of the Series A Warrants and Series B
Warrants were recorded as equity issuance costs in 2014, a
reduction of additional paid-in capital. The Series B Warrants
expired unexercised in March 2015.
The
estimated fair values were determined using a binomial option
pricing model based on various assumptions. The
Company’s derivative liabilities are adjusted to reflect
estimated fair value at each period end, with any decrease or
increase in the estimated fair value being recorded in other income
or expense accordingly, as adjustments to the fair value of
derivative liabilities. Various factors are considered in the
pricing models the Company uses to value the warrants, including
the Company’s current common stock price, the remaining life
of the warrants, the volatility of the Company’s common stock
price, and the risk-free interest rate. In addition, as of
the valuation dates, management assessed the probabilities of
future financing and other re-pricing events in the binominal
valuation models.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
A
summary of the changes in the warrant liability as of June 30, 2018
and December 31, 2017, and the changes during the three months
ended March 31, 2018 and June 30, 2018, is presented as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
as of December 31, 2017
|
$1,616,000
|
$327,883
|
$1,943,883
|
|
Issued
|
-
|
-
|
-
|
|
Redeemed
|
-
|
(118,838)
|
(118,838)
|
|
Change in fair
value
|
2,628,000
|
345,682
|
2,973,682
|
|
Warrant liability
as of March 31, 2018
|
4,244,000
|
554,727
|
4,798,727
|
|
Issued
|
-
|
-
|
-
|
|
Redeemed
|
-
|
-
|
-
|
|
Change in fair
value
|
(1,076,000)
|
(85,520)
|
(1,161,520)
|
|
Warrant liability
as of June 30, 2018
|
$3,168,000
|
$469,207
|
$3,637,207
|
17.
Commitments
and contingencies
Rent
expense for the three months ended June 30, 2018 and 2017 was
$36,138 and $33,120, respectively, and for the six months ended
June 30, 2018 and 2017 was $72,020 and $66,227, respectively.
Minimum future lease payments under the operating lease consist of
the following:
|
Year ending
December 31,
|
|
|
|
|
|
Remainder of
2018
|
$70,431
|
|
2019
|
143,318
|
|
2020
|
147,617
|
|
2021
|
152,046
|
|
Total
|
$513,412
|
Contingency
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") that 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. See Note 19 for
further information regarding this agreement.
Litigation
The
Company is a defendant 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. We believe
that all pending claims, if adversely decided, would not have a
material adverse effect on our business, financial position or
results of operations.
There
are no material proceedings known to us to be contemplated by any
governmental authority.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
17.
Commitments
and contingencies (continued)
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.
The
Company began accounting for revenue in accordance with Topic 606,
which we adopted beginning January 1, 2018, using the modified
retrospective method. Under the new revenue standard for
arrangements that are determined to be within the scope of Topic
606, the Company recognizes revenue when a customer obtains control
of the promised goods. To achieve this core principle, 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. We do not have significant costs to obtain contracts
with customers.
2.
Identify the
performance obligation(s) in the contract. Our contracts include
multiple performance obligations to be completed. Our performance
obligations to deliver medical devices and related components are
completed when shipment of these items has been made to the
customer. Other performance obligations are completed over a period
of time. Limited warranties are provided and extended warranties
are offered, under which we typically accept returns and provide
either replacement parts or refunds.
3.
Determine the
transaction price. Payment by the customer is due under customary
fixed payment terms, and we evaluate if collectability is
reasonably assured. The methodology for which we estimate and
recognize variable consideration is consistent with the
requirements of ASC 606. Revenue is recorded at the net sales
prices, which includes estimates of variable consideration such as
initial warranty, tiered volume pricing, and other adjustments as
noted in customer contracts. The estimates of variable
consideration are based on historical and projected sales data and
current contract sales terms.
4.
Allocate the
transaction price to the performance obligations in the contract.
Our contracts include multiple performance obligations to be
completed. We recognize revenue upon shipment of medical devices
and related components to the customer. We recognize revenue for
services over the period of time of the service.
5.
Recognize revenue
when (or as) the Company satisfies a performance obligation. We
satisfy performance obligations at a point in time upon shipment of
goods. We satisfy service related performance obligations over a
period of time. Each performance obligation is satisfied in
accordance with the terms of each contract with the
customer.
There
were changes to judgments that affect the determination of the
amount and timing of revenue from the adoption of the new guidance.
As a result of the adoption of ASC 606, the Company has recorded
Contract assets and Contract liabilities. Contract assets primarily
represent the difference between the revenue that was earned but
not billed on refurbishment license fees and timing difference on
revenue from distribution license that is recognized on a
straight-line basis but paid in accordance with the terms of the
customer contract. Contract liabilities are primarily related to
warranties, service contracts, distribution license and tiered
volume pricing on medical devices and refurbishment license fee.
The revenue recognized under ASC 606 was immaterially different
from the revenue recognized under ASC 605.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
Disaggregation of Revenue
The
disaggregation of revenue is based on type of product and
geographical region. The following table presents revenue from
contracts with customers for the three and six months ended June
30, 2018 and 2017:
|
|
Three
months ended June 30, 2018
|
Three
months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices
|
$16,893
|
$73,160
|
$90,053
|
$-
|
$-
|
$-
|
|
Applicators - new
and refurbished
|
2,000
|
119,138
|
121,138
|
-
|
72,044
|
72,044
|
|
Distribution
license
|
-
|
170,000
|
170,000
|
-
|
-
|
-
|
|
License
fees
|
6,250
|
27,507
|
33,757
|
6,250
|
17,300
|
23,550
|
|
Warranty and
repair
|
-
|
3,418
|
3,418
|
-
|
3,718
|
3,718
|
|
Other
|
-
|
25,575
|
25,575
|
-
|
4,661
|
4,661
|
|
Freight
billed
|
-
|
9,269
|
9,269
|
-
|
7,072
|
7,072
|
|
|
$25,143
|
$428,067
|
$453,210
|
$6,250
|
$104,795
|
$111,045
|
|
|
Six
months ended June 30, 2018
|
Six
months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices
|
$133,340
|
$106,190
|
$239,530
|
$-
|
$62,210
|
$62,210
|
|
Applicators - new
and refurbished
|
2,000
|
207,077
|
209,077
|
-
|
144,083
|
144,083
|
|
Distribution
license
|
-
|
233,334
|
233,334
|
-
|
-
|
-
|
|
License
fees
|
12,500
|
42,039
|
54,539
|
12,500
|
17,300
|
29,800
|
|
Warranty and
repair
|
-
|
13,688
|
13,688
|
-
|
6,524
|
6,524
|
|
Other
|
-
|
29,027
|
29,027
|
-
|
4,359
|
4,359
|
|
Freight
billed
|
-
|
18,287
|
18,287
|
-
|
13,638
|
13,638
|
|
|
$147,840
|
$649,642
|
$797,482
|
$12,500
|
$248,114
|
$260,614
|
19.
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 PSWC and 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.
During
the period ended June 30, 2018, the Company recorded $135,340 in
revenue from this related party. The Contract liabilities balance
includes a balance of $53,682 and the Accrued expenses balance
includes a balance of $130,478 from this related
party.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
20.
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 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. At June 30, 2018 and December 31, 2017, the Stock
Incentive Plan reserved 32,500,000 and 22,500,000 shares of common
stock for grant, respectively.
On June
18, 2018, the Company granted to a new employee options to purchase
30,000 shares of the Company’s common stock at an exercise
price of $0.40 per share and vested upon issuance. Using the
Black-Scholes option pricing model, management has determined that
the options had a fair value per share of $0.3882 resulting in
compensation expense of $11,646. Compensation cost was recognized
upon grant.
On May
31, 2018, the Company granted to a new employee options to purchase
2,000,000 shares of the Company’s common stock at an exercise
price of $0.42 per share and vested upon issuance. Using the
Black-Scholes option pricing model, management has determined that
the options had a fair value per share of $0.3879 resulting in
compensation expense of $775,800. Compensation cost was recognized
upon grant.
On
April 1, 2018, the Company granted to a new employee options to
purchase 100,000 shares of the Company’s common stock at an
exercise price of $0.11 per share and vested upon issuance. Using
the Black-Scholes option pricing model, management has determined
that the options had a fair value per share of $0.4932 resulting in
compensation expense of $49,350. Compensation cost was recognized
upon grant.
On June
15, 2017, the Company granted to the active employees, members of
the board of directors and members of the Company’s Medical
Advisory Board options to purchase 5,550,000 shares each of the
Company’s common stock at an exercise price of $0.11 per
share and vested upon issuance. Using the Black-Scholes option
pricing model, management has determined that the options had a
fair value per share of $0.0869 resulting in compensation expense
of $482,295. Compensation cost was recognized upon
grant.
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 six months ended June 30, 2018
and the year ended December 31, 2017:
|
|
|
|
|
Weighted average
expected life in years
|
5.0
|
5.0
|
|
Weighted average
risk free interest rate
|
2.84%
|
1.76%
|
|
Weighted average
volatility
|
134.00%
|
120.00%
|
|
Forfeiture
rate
|
0.0%
|
0.0%
|
|
Expected dividend
yield
|
0.0%
|
0.0%
|
The
Company recognized as compensation cost for all outstanding stock
options granted to employees, directors and advisors, $836,796 and
$482,295 for the three months ended June 30, 2018 and 2017,
respectively, and $836,796 and $482,295 for the six months ended
June 30, 2018 and 2017, respectively. There is no
unrecognized compensation expense for unvested
options.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
20.
Stock-based
compensation (continued)
A
summary of option outstanding as of June 30, 2018 and December 31,
2017, and the changes during the three and six months ended June
30, 2018, is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2017
|
21,593,382
|
$0.31
|
|
Granted
|
-
|
$-
|
|
Exercised
|
-
|
$-
|
|
Forfeited or
expired
|
-
|
$-
|
|
Outstanding at
March 31, 2018
|
21,593,382
|
$0.31
|
|
Granted
|
2,130,000
|
$0.41
|
|
Exercised
|
-
|
$-
|
|
Forfeited or
expired
|
-
|
$-
|
|
Outstanding at June
30, 2018
|
23,723,382
|
$0.32
|
|
|
|
|
|
|
|
|
|
Vested and
exercisable at June 30, 2018
|
23,723,382
|
$0.32
|
The
range of exercise prices for options was $0.04 to $2.00 for options
outstanding at June 30, 2018 and December 31, 2017, respectively.
The aggregate intrinsic value for all vested and exercisable
options was $5,499,071 and $2,073,641 at June 30, 2018 and December
31, 2017, respectively.
The
weighted average remaining contractual term for outstanding
exercisable stock options was 7.14 and 7.37 years as of June 30,
2018 and December 31, 2017, respectively.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
21.
Earnings
(loss) per share
The Company calculates net income (loss) per share
in accordance with ASC 260, Earnings Per
Share. Under the
provisions of ASC 260, basic net income (loss) per share is
computed by dividing the net income (loss) attributable to common
stockholders for the period by the weighted average number of
shares of common stock outstanding for the
period. Diluted net income (loss) per share is computed
by dividing the net income (loss) attributable to common
stockholders by the weighted average number of shares of common
stock and dilutive common stock equivalents then
outstanding. To the extent that securities are
“anti-dilutive,” they are excluded from the calculation
of diluted net income (loss) per share.
As a
result of the net loss for the six months ended June 30, 2018 and
2017, all potentially dilutive shares were anti-dilutive and
therefore excluded from the computation of diluted net loss per
share. The anti-dilutive equity securities totaled 129,986,141
shares and 97,388,222 shares at June 30, 2018 and 2017,
respectively.
Conversion of 10% Convertible Promissory Notes
On August 6, 2018, the Company issued
683,042 shares of restricted common stock upon the conversion of
10% Convertible Promissory Notes in the amount of $71,500 plus
accrued interest of $3,635 at the conversion price of $0.11 per
share per the 10% Convertible Promissory Notes
agreement.
On July
20, 2018, the Company issued 954,545 shares of restricted common
stock upon the conversion of 10% Convertible Promissory Notes in
the amount of $100,000 plus accrued interest of $5,000 at the
conversion price of $0.11 per share per the 10% Convertible
Promissory Notes agreement.
On July
20, 2018, the Company issued 500,000 shares of common stock upon
the partial conversion of 10% Convertible Promissory Notes in the
amount of $55,000 at the conversion price of $0.11 per share per
the 10% Convertible Promissory Notes agreement.
Cashless Warrant Exercise
On
July 2, 2018, the Company issued 653,859 shares of common stock
upon the cashless exercise of 909,091 Class N Warrants to purchase
shares of stock for $0.11 per share based on a current market value
of $0.3918 per share as determined under the terms of the Class N
Warrant agreement.
Short term notes
payable
On July
2, 2018 and July 30, 2018, the Company entered into short term
notes payable with four individuals in the total principal amount
of $99,750 with an interest rate of 5% per annum. The principal and
accrued interest are due and payable six months from the date of
issuance.
- 25 -
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
unaudited condensed consolidated financial statements and the
related notes appearing elsewhere in this report, and together with
our audited consolidated financial statements, related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” as of and for the year
ended December 31, 2017 included in our Annual Report on Form
10-K, filed with the SEC on March 29, 2018.
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. Food and Drug Administration (the
“FDA”) notified the Company to permit the marketing of
the dermaPACE System for the treatment of diabetic foot ulcers in
the United States.
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.
In 2018, we have started marketing our dermaPACE System for sale 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.
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 PMA
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. Our lead product candidate for the global wound
care market, dermaPACE, has received the CE Mark allowing for
commercial use on acute and chronic defects of the skin and
subcutaneous soft tissue.
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 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.
Recent Developments
On
December 28, 2017, the FDA notified the Company to permit the
marketing of the dermaPACE system for the treatment of diabetic
foot ulcers in the United States.
On September 27, 2017, we entered into a binding
term sheet with MundiMed Distribuidora Hospitalar LTDA
(“MundiMed”), effective as
of September 25, 2017, for a joint venture for the manufacture,
sale and distribution of our dermaPACE device. Under the binding
term sheet, MundiMed will pay the Company an initial upfront
distribution fee, with monthly upfront distribution fees payable
thereafter over the following eighteen months. Profits from the
joint venture are distributed as follows: 45% to the Company, 45%
to MundiMed and 5% each to LHS Latina Health Solutions Gestão
Empresarial Ltda. and Universus Global Advisors LLC, who acted as
advisors in the transaction. The initial upfront distribution fee
was received on October 6, 2017. Monthly upfront distribution
fee payments have been received through May
2018.
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.
On June
26, 2018, the Company entered into an Agreement with Johnfk Medical Inc. (“FKS”),
effective as of June 14, 2018, pursuant to which the Company and
FKS will enter into a joint venture for the manufacture, sale and
distribution of the Company’s dermaPACE and orthoPACE
devices. The Agreement provides that the parties will work together
to enter into a definitive agreement over the next five months.
Under the Agreement, FKS paid the Company a fee of $500,000 for
initial distribution rights in Taiwan on June 22, 2018, with an
additional fee of $500,000 for initial distribution rights in
Singapore, Malaysia, Brunie, Cambodia, Myanmar, Laos, Indonesia,
Thailand, Philippines and Vietnam (the “SEA Region”) to
be paid in the third quarter of 2018.
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.
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.
The dermaPACE device completed its initial Phase
III, IDE clinical trial in the United States for the treatment of
diabetic foot ulcers in 2011 and a PMA application was filed with
the FDA in July 2011. The patient enrollment for the second,
supplemental clinical trial began in June 2013. We completed
enrollment for the 130 patients in this second trial in November
2014 and suspended further enrollment at that time.
The
only significant difference between the two studies was the number
of applications of the dermaPACE device. Study one (DERM01; n=206)
prescribed four (4) device applications/treatments over a two-week
period, whereas, study two (DERM02; n=130) prescribed up to eight
(8) device applications (4 within the first two weeks of
randomization, and 1 treatment every two weeks thereafter up to a
total of 8 treatments over a 10-week period). If the wound was
determined closed by the PI during the treatment regimen, any
further planned applications were not performed.
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).
A total
of 336 patients were enrolled in the dermaPACE studies at 37 sites.
The patients in the studies were followed for a total of 24 weeks.
The studies’ primary endpoint, wound closure, was defined as
“successful” if the skin was 100% re-epithelialized at
12 weeks without drainage or dressing requirements confirmed at two
consecutive study visits.
A
summary of the key study findings were as follows:
●
Patients treated
with dermaPACE showed a strong positive trend in the primary
endpoint of 100% wound closure. Treatment with dermaPACE increased
the proportion of diabetic foot ulcers that closed within 12 weeks,
although the rate of complete wound closure between dermaPACE and
sham-control at 12 weeks in the intention-to-treat (ITT) population
was not statistically significant at the 95% confidence level used
throughout the study (p=0.320). There were 39 out of 172 (22.67%)
dermaPACE subjects who achieved complete wound closure at 12 weeks
compared with 30 out of 164 (18.29%) sham-control
subjects.
●
In addition to the
originally proposed 12-week efficacy analysis, and in conjunction
with the FDA agreement to analyze the efficacy analysis carried
over the full 24 weeks of the study, we conducted a series of
secondary analyses of the primary endpoint of complete wound
closure at 12 weeks and at each subsequent study visit out to 24
weeks. The primary efficacy endpoint of complete wound closure
reached statistical significance at 20 weeks in the ITT population
with 61 (35.47%) dermaPACE subjects achieving complete wound
closure compared with 40 (24.39%) of sham-control subjects
(p=0.027). At the 24 week endpoint, the rate of wound closure in
the dermaPACE® cohort was 37.8% compared to 26.2% for the
control group, resulting in a p-value of 0.023.
●
Within 6 weeks
following the initial dermaPACE treatment, and consistently
throughout the 24-week period, dermaPACE significantly reduced the
size of the target ulcer compared with subjects randomized to
receive sham-control (p<0.05).
●
The proportion of
patients with wound closure indicate a statistically significant
difference between the dermaPACE and the control group in the
proportion of subjects with the target-ulcer not closed over the
course of the study (p-value=0.0346). Approximately 25% of
dermaPACE® subjects reached wound closure per the study
definition by day 84 (week 12). The same percentage in the control
group (25%) did not reach wound closure until day 112 (week 16).
These data indicate that in addition to the proportion of subjects
reaching wound closure being higher in the dermaPACE® group,
subjects are also reaching wound closure at a faster rate when
dermaPACE is applied.
●
dermaPACE
demonstrated superior results in the prevention of wound expansion
(≥ 10% increase in wound size), when compared to the control,
over the course of the study at 12 weeks (18.0% versus 31.1%;
p=0.005, respectively).
●
At 12 and 24 weeks,
the dermaPACE group had a higher percentage of subjects with a 50%
wound reduction compared to the control (p=0.0554 and p=0.0899,
respectively). Both time points demonstrate a trend towards
statistical significance.
●
The mean wound
reduction for dermaPACE subjects at 24 weeks was 2.10cm2 compared
to 0.83cm2 in the control group. There was a statistically
significant difference between the wound area reductions of the two
cohorts from the 6 week follow-up visit through the end of the
study.
●
Of the subjects who
achieved complete wound closure at 12 weeks, the recurrence rate at
24 weeks was only 7.7% in the dermaPACE group compared with 11.6%
in the sham-control group.
●
Importantly, there
were no meaningful statistical differences in the adverse event
rates between the dermaPACE treated patients and the sham-control
group. There were no issues regarding the tolerability of the
treatment which suggests that a second course of treatment, if
needed, is a clinically viable option.
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.
We are
actively marketing the dermaPACE to the European Community, Canada
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 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 $8,744,914
for the six months ended June 30, 2018 and $5,537,936 for the year
ended December 31, 2017. These operating losses create uncertainty
about our ability to continue as a going concern.
The continuation of our business is dependent upon
raising additional capital during the third and fourth quarters of
2018 to fund operations. Management’s plans are to obtain
additional capital in 2018 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, including through tender
offers for the 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. 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
forced to seek relief through a filing under the U.S. Bankruptcy
Code. 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 June 30, 2018, we had an accumulated deficit of $113,716,298.
Although the size and timing of our future operating losses are
subject to significant uncertainty, we expect that operating losses
may continue over the next few years as we prepare for the
commercialization of the dermaPACE System for the treatment of
diabetic foot ulcers but if we are able to successfully
commercialize, market and distribute the dermaPACE System, then we
hope to partially or completely offset these losses within the next
few years. Although no assurances can be given, we believe that
potential additional issuances of equity, debt or other potential
financing, as discussed above, will 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 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;
●
the cost and timing
associated with establishing reimbursement for our
products;
●
the effects of
competing technologies and market developments; and
●
the industry demand
and patient wellness behavior.
Any
failure to complete the development of our product candidates in a
timely manner, or any failure to successfully market and
commercialize our product candidates, would have a material adverse
effect on our operations, financial position and liquidity. A
discussion of the risks and uncertainties associated with us and
our business are set forth under the section entitled “Risk
Factors – Risks Related to Our Business” in our Annual
Report on Form 10-K for the year ended December 31, 2017, filed
with the SEC on March 29, 2018.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations are based on our condensed consolidated financial
statements, which have been prepared in accordance with United
States generally accepted accounting principles. The preparation of
our condensed consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses.
On an ongoing
basis, we evaluate our estimates and judgments, including those
related to the recording of the allowances for doubtful accounts,
estimated reserves for inventory, estimated useful life of property
and equipment, the determination of the valuation allowance for
deferred taxes, the estimated fair value of the warrant liability,
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 2 to our consolidated financial statements filed with our
Annual Report on Form 10-K for the year ended December 31, 2017,
filed with the SEC on March 29, 2018, 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
Sales
of medical devices, including related applicators and applicator
kits, are recognized when shipped to the customer. Shipments under
agreements with distributors are invoiced at a fixed price, are not
subject to return, and payment for these shipments is not
contingent on sales by the distributor. We recognize revenues on
shipments to distributors in the same manner as with other
customers. The initial warranty and extended warranty on the sale
of medical devices will be deferred and recognized over time as the
performance obligation is satisfied. Fees from services performed
are recognized when the service is performed. License fee for
refurbishment of applicators will be recognized at the time the
customer is granted the license to refurbish the applicators.
Revenue will be calculated using the transaction price that
represents the most likely consideration to be received for the
license times the number of licenses issued. Fees for upfront
distribution license agreements will be recognized on a straight
line basis based on the payment schedule in the
contract.
Research and Development Costs
We
expense costs associated with research and development activities
as incurred. We evaluate payments made to suppliers, research
collaborators and other vendors and determine the appropriate
accounting treatment based on the nature of the services provided,
the contractual terms, and the timing of the obligation. Research
and development costs include payments to third parties that
specifically relate to our products in clinical development, such
as payments to contract research organizations and collaborators,
clinical investigators, clinical monitors, clinical related
consultants and insurance premiums for clinical studies. In
addition, employee costs (salaries, payroll taxes, benefits and
travel) for employees of the regulatory affairs, clinical affairs,
quality assurance, and research and development departments are
classified as research and development costs.
Inventory Valuation
Inventory is
carried at the lower of cost or market, which is valued using the
first in, first out (FIFO) method, and consists primarily of
devices and the component material for assembly of finished
products, less reserves for obsolescence. We regularly review
existing inventory quantities and expiration dates of existing
inventory to evaluate a provision for excess, expired, obsolete and
scrapped inventory based primarily on our historical usage and
anticipated future usage. Although we make every effort to ensure
the accuracy of our forecasts of future product demand, any
significant unanticipated change in demand or technological
developments could have an impact on the value of our inventory and
our reported operating results.
Liabilities Related to Warrants Issued
We
record certain common stock warrants we issued at fair value and
recognize the change in the fair value of such warrants as a gain
or loss, which we report in the Other Income (Expense) section in
our Consolidated Statements of Comprehensive Loss. We report these
warrants at fair value and they are classified as liabilities
because they contain certain down-round provisions allowing for
reduction of their exercise price. We estimate the fair value of
these warrants using a binomial options pricing model.
Warrants Related to Debt Issued
We
record a warrant discount related to warrants issued with debt at
fair value and recognize the cost using the straight-line method
over the term of the related debt as interest expense, which we
report in the Other Income (Expense) section in our Consolidated
Statements of Comprehensive Loss. We report this warrant discount
as a reduction of the related debt liability.
Beneficial Conversion Feature on Convertible Debt
We
record a beneficial conversion feature related convertible debt at
fair value and recognize the cost using the straight-line method
over the term of the related debt as interest expense, which we
report in the Other Income (Expense) section in our Consolidated
Statements of Comprehensive Loss. We report this beneficial
conversion feature as a reduction of the related debt
liability.
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, Accounting for Stock-Based 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.
Income Taxes
We
account for income taxes utilizing the asset and liability method
prescribed by the provisions of ASC
740, Income
Taxes, Accounting for Income
Taxes. 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.
We account for uncertain tax
positions in accordance with the related provisions of ASC 740,
Income Taxes, Accounting
for Uncertainty in Income Taxes (FIN 48). ASC 740 specifies the way
public 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 our 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.
Results of Operations for the Three Months ended June 30, 2018 and
2017 (Unaudited)
Revenues and Cost of Revenues
Revenues for the
three months June 30, 2018 were $453,210, compared to $111,045 for
the same period in 2017, an increase of $342,165, or 308%. Revenues
resulted primarily from sales in the United States and Europe of
our dermaPACE and orthoPACE devices and related applicators. The
increase in revenues for 2018 was due to the higher sale of devices
and both new and refurbished applicators in the United States and
Europe as compared to the same period in 2017.
Cost of
revenues for the three months ended June 30, 2018 were $166,643,
compared to $24,695 for the same period in 2017. Gross profit as a
percentage of revenues was 63% for the three months ended June 30,
2018, compared to 78% for the same period in 2017. The decrease in
gross profit as a percentage of revenues in 2018 was due to the
higher number of devices sold in 2018, which have a lower gross
margin than building new and refurbishing applicators.
Research and Development Expenses
Research and
development expenses for the three months ended June 30, 2018 were
$368,377, compared to $437,909 for the same period in 2017, a
decrease of $69,572, or 16%. Research and development costs include
payments to third parties that relate to our products in clinical
development and employee costs (salaries, payroll taxes, benefits,
and travel) for employees of the regulatory affairs, quality
assurance, and research and development departments. The decrease
in research and development expenses was due to lower stock-based
compensation expense and to lower consultant costs related to the
FDA submission and follow up which was partially offset by the
hiring of a full-time software engineers and an accrual of bonus
for 2018.
General and Administrative Expenses
General
and administrative expenses for the three months ended June 30,
2018 were $2,030,799, as compared to $951,908 for the same period
in 2017, an increase of $1,078,891, or 113%. The increase in
general and administrative expenses was due to the hiring of a
president and human resources director and the related stock-based
compensation expense for stock options issued, higher travel costs,
accrual of bonus, higher public company costs related to investor
relations, higher costs related to leasing of product, and higher
consultant fees related to the commercialization of
dermaPACE.
Other Income (Expense)
Other
income (expense) was a net expense of $766,512 the three months
ended June 30, 2018, as compared to a net expense of
$106,512 for the same period in 2017, an increase in other
expense of $660,000. The increase in other expense for 2018 was
mainly due to interest expense related to convertible promissory
notes and was partially offset by gain on warrant valuation
adjustment.
Provision for Income Taxes
At June
30, 2018, we had federal net operating loss carryforwards through
the year ended December 31, 2017 that will begin to expire in 2025.
Our ability to use these net operating loss carryforwards to reduce
our future federal income tax liabilities could be subject to
annual limitations. In connection with possible future equity
offerings, we may realize a “more than 50% change in
ownership” which could further limit our ability to use our
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, we may not be able to take advantage of our net
operating loss carryforwards for federal income tax
purposes.
Net Loss
Net
loss for the three months ended June 30, 2018 was $2,888,259, or
($0.02) per basic and diluted share, compared to a net loss of
$1,415,937, or ($0.01) per basic and diluted share, for the same
period in 2017, an increase in the net loss of $1,472,322. The
increase in the net loss for 2018 was primarily due to higher
general and administrative expenses as noted above as well as
higher interest expense related to convertible promissory notes and
gain on warrant valuation adjustment.
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, we hope to partially or
completely offset these losses in the future.
Results of Operations for the Six Months ended June 30, 2018 and
2017 (Unaudited)
Revenues and Cost of Revenues
Revenues for the
six months June 30, 2018 were $797,482, compared to $260,614 for
the same period in 2017, an increase of $536,868, or 206%. Revenues
resulted primarily from sales in the United States and Europe of
our dermaPACE and orthoPACE devices and related applicators. The
increase in revenues for 2018 was due to the higher sale of devices
and both new and refurbished applicators in the United States and
Europe as compared to the same period in 2017.
Cost of
revenues for the six months ended June 30, 2018 were $332,109,
compared to $79,839 for the same period in 2017. Gross profit as a
percentage of revenues was 58% for the six months ended June 30,
2018, compared to 69% for the same period in 2017. The decrease in
gross profit as a percentage of revenues in 2018 was due to the
higher number of devices sold in 2018, which have a lower gross
margin than building new and refurbishing applicators.
Research and Development Expenses
Research and
development expenses for the six months ended June 30, 2018 were
$717,781, compared to $698,247 for the same period in 2017, an
increase of $19,534, or 3%. Research and development costs include
payments to third parties that relate to our products in clinical
development and employee costs (salaries, payroll taxes, benefits,
and travel) for employees of the regulatory affairs, quality
assurance, and research and development departments. The increase
in research and development expenses was due to the hiring of two
full-time software engineers, stock based compensation expense for
stock options issued, accrual of bonus, and consulting fees related
to reimbursement strategy which was partially offset by lower
consultant costs related to the FDA submission and follow
up.
General and Administrative Expenses
General
and administrative expenses for the six months ended June 30, 2018
were $2,976,405, as compared to $1,400,514 for the same period in
2017, an increase of $1,575,891, or 113%. The increase in general
and administrative expenses was due to the hiring of a president
and human resources director and the related stock-based
compensation expense for stock options issued, higher travel costs,
accrual of bonus, recruiting fees for open positions, higher legal
and accounting fees related to SEC filings and higher consultant
fees related to the commercialization of dermaPACE.
Other Income (Expense)
Other
income (expense) was a net expense of $5,501,907 the six months
ended June 30, 2018, as compared to a net income of
$20,595 for the same period in 2017, an increase in other
expense of $5,522,502. The increase in other expense for 2018 was
mainly due to interest expense related to convertible promissory
notes and loss on warrant valuation adjustment.
Provision for Income Taxes
At June
30, 2018, we had federal net operating loss carryforwards through
the year ended December 31, 2017 that will begin to expire in 2025.
Our ability to use these net operating loss carryforwards to reduce
our future federal income tax liabilities could be subject to
annual limitations. In connection with possible future equity
offerings, we may realize a “more than 50% change in
ownership” which could further limit our ability to use our
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, we may not be able to take advantage of our net
operating loss carryforwards for federal income tax
purposes.
Net Loss
Net
loss for the six months ended June 30, 2018 was $8,744,914, or
($0.06) per basic and diluted share, compared to a net loss of
$1,909,469, or ($0.01) per basic and diluted share, for the same
period in 2017, an increase in the net loss of $6,835,445. The
increase in the net loss for 2018 was primarily due to higher
general and administrative expenses as noted above as well as
higher interest expense related to convertible promissory notes and
loss on warrant valuation adjustment.
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, we hope to partially or
completely offset these losses in the future.
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
non-medical uses of the PACE technology, both of which will require
additional capital resources. We incurred a net loss of $8,744,914
for the six months ended June 30, 2018 and $5,537,936 for the year
ended December 31, 2017. These operating losses create uncertainty
about our ability to continue as a going concern.
On December 29, 2017, the Company entered into a
line of credit agreement with A. Michael Stolarski, a member of the
Company's board of directors and an existing shareholder of the
Company. The agreement established a line of credit in the amount
of $370,000 with an annualized interest rate of 6%. On June 21,
2018, the Company made a payment of $144,500 on the line of credit.
On June 26, 2018, the amount of the line of credit was increased by
$280,500. The line of credit may be called for payment upon
demand. As of June 30, 2018, $133,200 was available for
future borrowing under this agreement.
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. As of February 27,
2018, we were in default of Master Equipment Lease due to the sale
of equipment purchased under the Master Lease Agreement to a third
party, and as a result, and the note is callable by NFS or NFS
could have notified the Company to assemble all equipment for pick
up. The Master Equipment Lease was paid in full on June 27,
2018.
On June 26, 2018,
the Company entered into an Agreement with Johnfk Medical Inc. (“FKS”),
effective as of June 14, 2018, pursuant to which the Company and
FKS will enter into a joint venture for the manufacture, sale and
distribution of the Company’s dermaPACE and orthoPACE
devices. Under this Agreement, FKS paid the Company a fee of
$500,000 on June 22, 2018 for initial distribution rights in
Taiwan. We expect to receive an additional fee of $500,000 for
initial distribution rights in the SEA Region in the third quarter
of 2018 under this Agreement. We have also recently entered into
short term notes payable with various individuals to fund our
operations. As of June 30, 2018, we had entered into short term
notes payable in the principal amount of $42,500, each with an
interest rate of 5% per annum and with principal and accrued
interest due and payable six months from the date of
issuance.
The continuation of our business is dependent upon
raising additional capital during the third and fourth quarters of
2018 to fund operations. Management’s plans are to obtain
additional capital in 2018 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, including through tender
offers for the 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. 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
forced to seek relief through a filing under the U.S. Bankruptcy
Code. 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 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
and cash equivalents decreased by $59,470 for the six months ended
June 30, 2018 and decreased by $71,502 for the six months ended
June 30, 2017. For the six months ended June 30, 2018 and 2017, net
cash used by operating activities was $1,598,202 and $572,492,
respectively, primarily consisting of compensation costs, research
and development activities and general corporate operations. The
increase of $1,025,710 in the use of cash for operating activities
for the six months ended June 30, 2018, as compared to the same
period for 2017, was primarily due to the increased operating
expenses and decreased payables in 2018. Net cash used by investing
activities for the six months ended June 30, 2018 consisted of
purchase of property and equipment of $13,612. Net cash provided by
financing activities for the six months ended June 30, 2018 was
$1,563,313, which consisted of $1,159,785 from the issuance of
convertible promissory notes, $38,528 from the exercise of
warrants, $136,000 net increase in line of credit, $85,000 from the
issuance of short term notes payable and $144,000 from an advance
from related party. Net cash provided by financing activities for
the six months ended June 30, 2017 was $514,757, which consisted of
$421,690 from advances from related parties and $93,067 from
exercise of warrants.
Segment and Geographic 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.
Contractual Obligations
Our
major outstanding contractual obligations relate to our operating
lease for our facility, purchase and supplier obligations for
product component materials and equipment, and our notes payable,
related parties. We have disclosed these obligations in our most
recent Annual Report on Form 10-K for the year ended December 31,
2017, as filed with the SEC on March 29, 2018.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not
required under Regulation S-K for “smaller reporting
companies”.
Item 4. 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 Acting 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 June 30, 2018. Based on this
evaluation, the Acting Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
not operating effectively as of June 30, 2018. As disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2017, as
filed with the SEC on March 29, 2018, our disclosure controls and
procedures were not effective as of December 31, 2017 because of
the “material weakness” described below. Such material
weaknesses have not yet been fully remediated and continue to
impact the effectiveness of our disclosure controls and
procedures.
A
“material weakness” is defined under SEC rules as a
deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable
possibility that a material misstatement of a company’s
annual or interim financial statements will not be prevented or
detected on a timely basis by the company’s internal
controls. As disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2017, as filed with the SEC on March 29,
2018, as of December 31, 2017, management concluded that we had
three material weaknesses in our internal control over financial
reporting process. The first material weakness was due to the 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. The second material
weakness was due to the lack of internal resources to analyze and
properly apply generally accepted accounting principle to
accounting for equity components of service agreements with select
vendors. The third material weakness was due to the lack of
internal expertise and resources to ensure that generally accepted
accounting principle disclosures are complete and accurate. As a
result, management concluded that our internal control over
reporting was not effective as of December 31, 2017 and June 30,
2018.
Management
believes the material weaknesses identified above were due to the
complex and non-routine nature of the Company’s complex
financial instruments and derivatives and complexity of new sales
distribution agreements, as well as lack of internal resources and
expertise.
Management’s Plan to Remediate Material
Weaknesses
Management
will develop an updated remediation plan to address the material
weaknesses related to its processes and procedures surrounding the
accounting for complex financial instruments and derivatives,
accounting for complex sales distribution agreements, accounting
for equity component of service agreements and ensuring that
generally accepted accounting principle disclosures are complete
and accurate. The updated remediation plan could consist of, among
other things, redesigning the procedures to enhance their
identification, capture, review, approval and recording of terms
and components of complex financial instruments and derivatives,
complex sales distribution agreements, and any equity components of
service agreements as well as identify necessary disclosures.
Management will research where to obtain additional interpretive
guidance on identifying and accounting for these identified areas
of material weakness as well as engage, as necessary, an outside
consultant to assist in the application of United States GAAP to
these areas. The updated remediation plan will be reviewed by the
Board of Director’s and be implemented upon the board’s
approval. These measures are intended both to address the
identified material weaknesses and to enhance our overall internal
control environment.
Changes in Internal Control over Financial Reporting
There
have been changes in our internal control over financial reporting
that occurred during the period covered by this report that
materially affect, or are reasonably likely to materially affect,
our internal control over financial reporting. Management is in the
process of designing updated changes to its controls as discussed
above in “Management’s Plan to Remediate Material
Weaknesses.”
PART II — OTHER INFORMATION
For a
description of our material legal proceedings, see
“Litigation” in Note 17 “Commitments and
Contingencies” in the notes to our condensed consolidated
financial statements, which is incorporated herein by
reference.
Item 6. EXHIBITS
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Exhibit
No.
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Description
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Offer Letter, dated as
of April 15, 2018, by and between SANUWAVE Health, Inc. and Shri
Parikh (Incorporated by reference to the Company's Current Report
on Form 8-K filed with the SEC on June 7, 2018).
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Agreement, dated June 14, 2018, by and among the Company and Johnfk
Medical Inc. (Incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on June 29,
2018).
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Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive
Officer.
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Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
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Section 1350 Certification of the Principal Executive
Officer.
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Section 1350 Certification of the Chief Financial
Officer.
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101.INS*†
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XBRL Instance.
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101.SCH*†
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XBRL Taxonomy Extension Schema.
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101.CAL*†
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XBRL Taxonomy Extension Calculation.
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101.DEF*†
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XBRL Taxonomy Extension Definition.
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101.LAB*†
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XBRL Taxonomy Extension Labels.
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101.PRE*†
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XBRL Taxonomy Extension Presentation.
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______________________________________________________________
*
Filed herewith.
**
Furnished herewith.
† XBRL-related documents are not deemed filed for purposes of
section 11 of the Securities Act of 1933, as amended, section 18 of
the Securities Exchange Act of 1934, as amended, or otherwise
subject the liabilities of these sections, and are not part of any
registration statement to which they relate.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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SANUWAVE
HEALTH, INC.
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Dated: August 14,
2018
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By:
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/s/ Kevin A.
Richardson, II
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Name:
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Kevin
A. Richardson, II |
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Title:
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Acting
Chief Executive Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated:
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Signatures
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Capacity
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Date
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By: /s/
Kevin A.
Richardson, II
Name:
Kevin A. Richardson, II
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Acting Chief Executive Officer and Chairman of the Board of
Directors
(principal executive officer)
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August
14, 2018
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By: /s/
Lisa E.
Sundstrom
Name:
Lisa E. Sundstrom
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Chief Financial Officer (principal financial and accounting
officer)
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August
14, 2018
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