SANUWAVE Health, Inc. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to

 

Commission File Number 000-52985

 

SANUWAVE Health, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada	20-1176000
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3360 Martin Farm Road, Suite 100 Suwanee, GA	30024
(Address of principal executive offices)	(Zip Code)

 

(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 every Interactive Data File required to be submitted 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 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):

 

Large accelerated filer  ☐	Accelerated filer  ☐
Non-accelerated filer  ☒	Smaller reporting company    ☒
	Emerging growth company    ☐

 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

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001	SNWV	OTCQB

 

 As of August 13, 2020, there were issued and outstanding 326,619,428 shares of the registrant’s common stock, $0.001 par value.

    

  

 SANUWAVE Health, Inc.

 

Table of Contents

 

	PART I – FINANCIAL INFORMATION	Page
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019	5
	Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2020 and 2019	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
SIGNATURES		28

 

 

 

Special Note Regarding Forward-Looking Statements

 

 

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

 

                                                                                                                                                    SANUWAVE HEALTH, INC. AND SUBSIDIARIES

	June 30,	December 31,
	2020	2019
ASSETS	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$430,606	$1,760,455
Accounts receivable, net of allowance for doubtful accounts
of $255,503 in 2020 and $72,376 in 2019	110,501	75,543
Inventory	651,344	542,955
Prepaid expenses and other current assets	227,086	125,405
TOTAL CURRENT ASSETS	1,419,537	2,504,358
PROPERTY AND EQUIPMENT, net	591,064	512,042
RIGHT OF USE ASSETS, net	243,251	323,661
DEPOSITS	1,110,000	-
OTHER ASSETS	43,096	41,931
TOTAL ASSETS	$3,406,948	$3,381,992
LIABILITIES
CURRENT LIABILITIES
Accounts payable	$1,799,630	$1,439,413
Accrued expenses	1,221,214	1,111,109
Accrued employee compensation	2,010,610	1,452,910
Contract liabilities	551,755	66,577
Operating lease liability	179,524	173,270
Finance lease liability	181,371	121,634
Convertible promissory notes, net	705,980	-
SBA Loans	142,514	-
Line of credit, related parties	222,164	212,388
Short term notes payable	210,000	587,233
Advances from related parties	-	18,098
Notes payable, related parties, net	5,372,743	5,372,743
Accrued interest, related parties	2,229,713	1,859,977
TOTAL CURRENT LIABILITIES	14,827,218	12,415,352
NON-CURRENT LIABILITIES
Contract liabilities	53,782	573,224
SBA loans	471,821	-
Operating lease liability	92,889	185,777
Finance lease liability	333,771	271,240
TOTAL NON-CURRENT LIABILITIES	952,263	1,030,241
TOTAL LIABILITIES	15,779,481	13,445,593
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, SERIES C CONVERTIBLE, par value $0.001,
90 designated; 90 shares issued and outstanding in 2020	2,250,000	-
REDEEMABLE PREFERRED STOCK, SERIES D CONVERTIBLE, par value $0.001,
8 designated; 8 shares issued and outstanding in 2020	200,000	-
STOCKHOLDERS' DEFICIT
PREFERRED STOCK, par value $0.001, 5,000,000
shares authorized; 6,175 and 293 shares designated Series A and	-	-
Series B, respectively
COMMON STOCK, par value $0.001, 600,000,000 shares authorized (See Note 18);
302,119,428 and 293,780,400 issued and outstanding in 2020 and
2019, respectively	302,119	293,781
ADDITIONAL PAID-IN CAPITAL	117,326,629	115,457,808
ACCUMULATED DEFICIT	(132,387,124)	(125,752,956)
ACCUMULATED OTHER COMPREHENSIVE LOSS	(64,157)	(62,234)
TOTAL STOCKHOLDERS' DEFICIT	(14,822,533)	(10,063,601)
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' DEFICIT	$3,406,948	$3,381,992

 

  The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 

 

 

	Three Months Ended	Three Months Ended	Six Months Ended	Six Months Ended
	June 30,	June 30,	June 30,	June 30,
	2020	2019	2020	2019
REVENUES
Product	$69,341	$220,667	$143,900	$285,232
License fees	-	66,808	10,000	173,058
Other revenue	13,960	29,501	77,993	36,649
TOTAL REVENUES	83,301	316,976	231,893	494,939
COST OF REVENUES
Product	24,825	178,458	103,740	243,570
Other	1,522	7,423	11,484	36,164
TOTAL COST OF REVENUES	26,347	185,881	115,224	279,734
GROSS MARGIN	56,954	131,095	116,669	215,205
OPERATING EXPENSES
Research and development	264,907	307,273	551,661	567,922
Selling and marketing	433,151	407,477	1,041,001	565,559
General and administrative	2,566,793	1,426,405	4,474,710	2,943,860
Depreciation	64,766	9,455	117,789	17,812
TOTAL OPERATING EXPENSES	3,329,617	2,150,610	6,185,161	4,095,153
OPERATING LOSS	(3,272,663)	(2,019,515)	(6,068,492)	(3,879,948)
OTHER INCOME (EXPENSE)
Gain on warrant valuation adjustment	-	195,310	-	227,669
Interest expense	(168,941)	(790,178)	(187,673)	(938,439)
Interest expense, related party	(187,172)	(112,984)	(369,736)	(332,671)
Loss on foreign currency exchange	(4,244)	(7,064)	(8,267)	(8,359)
TOTAL OTHER INCOME (EXPENSE), NET	(360,357)	(714,916)	(565,676)	(1,051,800)
NET LOSS	(3,633,020)	(2,734,431)	(6,634,168)	(4,931,748)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments	(6,551)	1,489	(1,923)	(909)
TOTAL COMPREHENSIVE LOSS	$(3,639,571)	$(2,732,942)	$(6,636,091)	$(4,932,657)
LOSS PER SHARE:
Net loss - basic and diluted	$(0.01)	$(0.02)	$(0.02)	$(0.03)
Weighted average shares outstanding - basic and diluted	299,497,960	174,730,747	297,856,870	165,921,811

 

  The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 

 

	Preferred Stock		Common Stock
	Number of Shares Issued and Outstanding	Par Value	Number of Shares Issued and Outstanding	Par Value	Additional Paid-in Capital	Accumulated Deficit	Accumulated Other Comprehensive Loss	Total
Balances as of Janaury 1, 2019	-	$-	155,665,138	$155,665	$101,153,882	$(116,602,778)	$(62,868)	$(15,356,099)
Net loss	-	-	-	-	-	(2,197,317)	-	(2,197,317)
Cashless warrant exercises	-	-	704,108	704	(704)	-	-	-
Proceeds from warrant exercise	-	-	620,000	620	52,580	-	-	53,200
Conversion of short term notes and convertible notes payable	-	-	3,333,334	3,334	263,333	-	-	266,667
Reclassification of warrant liability to equity due to adoption of ASU 2017-11	-	-	-	-	262,339	1,279,661	-	1,542,000
Foreign currency translation adjustment	-	-	-	-	-	-	(2,398)	(2,398)
Balances as of March 31, 2019	-	$-	160,322,580	$160,323	$101,731,430	$(117,520,434)	$(65,266)	$(15,693,947)
Net loss	-	-	-	-	-	(2,734,431)	-	(2,734,431)
Cashless warrant exercises	-	-	2,997,375	2,997	13,003	-	-	16,000
Proceeds from warrant exercise	-	-	17,051,769	17,052	1,333,005	-	-	1,350,057
Other warrant exercise	-	-	5,804,167	5,804	451,697			457,501
Conversion of short term notes and convertible notes payable	-	-	2,475,000	2,475	177,525	-	-	180,000
Stock-based compensation	-	-	-	-	31,758	-	-	31,758
Warrants issued for consulting services	-	-	-	-	36,067	-	-	36,067
Foreign currency translation adjustment	-	-	-	-	-	-	1,489	1,489
Balances as of June 30, 2019	-	$-	188,650,891	$188,651	$103,774,485	$(120,254,865)	$(63,777)	$(16,355,506)
Balances as of Janaury 1, 2020	-	$-	293,780,400	$293,781	$115,457,808	$(125,752,956)	$(62,234)	$(10,063,601)
Net loss	-	-	-	-	-	(3,001,148)	-	(3,001,148)
Proceeds from warrant exercise	-	-	1,000,000	1,000	9,000	-	-	10,000
Shares issued for services	-	-	1,000,000	1,000	199,000	-	-	200,000
Stock-based compensation	-	-	-	-	21,900	-	-	21,900
Conversion of short term notes	-	-	1,820,461	1,820	262,164	-	-	263,984
Conversion of advances from related parties	-	-	62,811	63	2,035	-	-	2,098
Foreign currency translation adjustment	-	-	-	-	-	-	4,826	4,826
Balances as of March 31, 2020	-	$-	297,663,672	$297,664	$115,951,907	$(128,754,104)	$(57,408)	$(12,561,941)
Net loss	-	-	-	-	-	(3,633,020)	-	(3,633,020)
Proceeds from PIPE	-	-	1,071,428	1,071	148,929	-	-	150,000
Proceeds from stock option exercise	-	-	225,000	225	44,025	-	-	44,250
Beneficial conversion feature on convertible debt	-	-	-	-	560,682	-	-	560,682
Shares issued for services	-	-	2,200,000	2,200	515,300	-	-	517,500
Conversion of short term notes	-	-	759,328	759	89,986	-	-	90,745
Conversion of advances from related parties	-	-	200,000	200	15,800	-	-	16,000
Foreign currency translation adjustment	-	-	-	-	-	-	(6,749)	(6,749)
Balances as of June 30, 2020	-	$-	302,119,428	$302,119	$117,326,629	$(132,387,124)	$(64,157)	$(14,822,533)

 

  The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 

 

	Six Months Ended	Six Months Ended
	June 30,	June 30,
	2020	2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(6,634,168)	$(4,931,748)
Adjustments to reconcile net loss
to net cash used by operating activities
Depreciation	117,789	17,812
Bad debt expense	183,127	25,248
Share-based payment	739,400	67,825
Amortization of debt issuance costs	69,862	-
Accrued interest	84,072	936,658
Interest payable, related parties	369,736	332,671
Amortization of operating leases	(6,224)	(3,471)
Waived proceeds from warrant exercise	-	16,000
Gain on warrant valuation adjustment	-	(227,669)
Changes in operating assets and liabilities
Accounts receivable - trade	(218,085)	34,485
Inventory	(108,389)	(66,112)
Prepaid expenses	(101,681)	(126,505)
Due from related parties	-	1,228
Other assets	(1,165)	(7,070)
Operating leases	-	44,623
Accounts payable	360,217	(135,916)
Accrued expenses	110,105	106,178
Accrued employee compensation	557,700	525,487
Contract liabilties	(34,264)	3,642
NET CASH USED BY OPERATING ACTIVITIES	(4,511,968)	(3,386,634)
CASH FLOWS FROM INVESTING ACTIVITIES
	(1,110,000)	-
Purchases of property and equipment	(4,855)	(25,839)
NET CASH USED BY INVESTING ACTIVITIES	(1,114,855)	(25,839)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of convertible preferred stock	2,450,000	-
Proceeds from convertible promissory note	1,100,000	-
Proceeds from SBA loan	614,335	-
Proceeds from PIPE offering	150,000	-
Proceeds from stock option exercise	44,250	-
Proceeds from short term note	-	1,215,000
Proceeds from warrant exercise	10,000	1,403,257
Advances from related parties	-	585,022
Payments of principal on finance leases	(69,688)	-
NET CASH PROVIDED BY FINANCING ACTIVITIES	4,298,897	3,203,279
EFFECT OF EXCHANGE RATES ON CASH	(1,923)	(909)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(1,329,849)	(210,103)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,760,455	364,549
CASH AND CASH EQUIVALENTS, END OF PERIOD	$430,606	$154,446
NONCASH INVESTING AND FINANCING ACTIVITIES
Conversion of short term notes payable to equity	$354,729	$724,168
Conversion of advances from related parties to equity	$18,098	$180,000
Additions to right of use assets from new finance lease liabilities	$127,611	$-
Beneficial conversion feature on convertible debt	$560,682	$-
Reclassification of warrant liability to equity	$-	$262,339

 

  The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 

 

SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

 

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. FDA granted the Company’s request to classify the dermaPACE System as a Class II device via the de novo process.  As a result of this decision, the Company was able to immediately market the product for the treatment of Diabetic Foot Ulcers (DFU) as described in the De Novo request, subject to the general control provisions of the FD&C Act and the special controls identified in this order.

 

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 is marketing its dermaPACE System for treatment usage in the United States and is able to generate revenue from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia, and Asia/Pacific. The Company generates revenue streams from dermaPACE treatments, product sales, licensing transactions and other activities.

 

In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. The primary impact of the COVID-19 pandemic has been seen in our dermaPACE System placements in the United States as our treatment is not widely recognized as an “essential” service. In addition, stay-at-home policies deployed to combat the spread of COVID-19 has greatly constrained visits to wound care centers, doctor’s offices and hospitals since late March 2020 and continuing as of this filing and have therefore delayed placements of new devices that were included in our revenue forecast. The future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. It is difficult at this time to predict the impact that COVID-19 will have on the Company’s business, financial position and operating results in future periods due to numerous uncertainties. The Company is closely monitoring the impact of the pandemic on all aspects of its business and operations.

 

On August 6, 2020 the Company entered into an asset purchase agreement with Celularity Inc.(“Celularity”) pursuant to which the Company acquired Celularity’s UltraMIST assets, as more fully described in Note 18 to the Company’s condensed consolidated financial statements.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America 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 U.S. GAAP for complete financial statements. The financial information as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 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 months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2020.

 

The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2020 (the “2019 Annual Report”).

 

2. Going Concern

 

The Company does not currently generate significant recurring revenue and will require additional capital during 2020. As of June 30, 2020, the Company had cash and cash equivalents of $430,606. For the six months ended June 30, 2020, the net cash used by operating activities was $4,511,968. The Company incurred a net loss of $6,634,168 for the six months ended June 30, 2020. The operating losses and the events of default on the Company’s short term notes payable (see Note 6) and the notes payable, related parties (see Note 9) raised substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the filing of this report. Management is currently evaluating the impact on cash flows of the Company’s acquisition of certain assets of Celularity Inc., as more fully described in Note 18.

 

The continuation of the Company’s business is dependent upon raising additional capital to fund operations. Management’s plans are to obtain additional capital through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through 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 condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

 

 

 

The significant accounting policies followed by the Company are summarized below and should be read in conjunction with the 2019 Annual Report:

 

Principles of consolidation - The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Estimates – These condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of condensed consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These condensed consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein. Significant estimates include the recording of allowances for doubtful accounts, estimate of the net realizable value of inventory, the determination of the valuation allowances for deferred taxes, and the estimated fair value of stock-based compensation, debt discounts and warrants.

 

Inventory - Inventory consists of finished medical equipment and parts and is stated at the lower of cost, which is valued using the first in, first out (“FIFO”) method, or net realizable value less allowance for selling and distribution expenses. The Company analyzes its inventory levels and writes down inventory that has, or is expected to, become obsolete. As of June 30, 2020, inventory consists of goods of $367,988 and parts of $283,356 for a total inventory of $651,344. As of December 31, 2019, inventory consisted of goods of $357,264 and parts of $185,691 for a total inventory of $542,955.

 

Preferred stock – The Company evaluates Preferred Stock issuances for liability or equity classification in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity, and determines appropriate equity or liability accounting treatment. Additionally, the Company determines, if classified as equity, whether it would be recorded as permanent or temporary equity.

 

Sequencing policy – The Company has granted certain options and warrants which, upon settlement, may exceed the limit on the authorized number of shares of common stock. The Company follows a sequencing policy for which in the event partial reclassifications of contracts subject to ASC 815-40-25 is necessary, due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of earliest issuance date of potentially dilutive instruments with the earliest grants receiving first allocation of shares. The Company evaluated such instruments and determined that there was no impact to the Company’s condensed consolidated financial statements.

 

 

Accrued expenses consist of the following:

 

	June 30, 2020	December 31, 2019
Accrued board of director's fees	$416,667	$400,000
Accrued legal and professional fees	200,000	134,970
Accrued executive severance	313,000	154,000
Accrued travel	120,000	120,000
Accrued outside services	106,233	108,033
Accrued inventory	50,275	167,050
Accrued clinical study expenses	13,650	13,650
Accrued other	1,389	13,406
	$1,221,214	$1,111,109

 

 

 

 

 

As of June 30, 2020, the Company has contract assets and liabilities from contracts with customers (see Note 14).

 

Contract liabilities consist of the following:

 

	June 30, 2020	December 31, 2019
Service agreement	$91,746	$133,510
License fees	500,000	500,000
Other	13,791	6,291
Total Contract liabilities	605,537	639,801
Non-Current	(551,755)	(573,224)
Total Current	$53,782	$66,577

 

The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the satisfaction of performance obligations, the Company records a contract liability (deferred revenue) until the performance obligations are satisfied. Of the aggregate contract liability balances as of June 30, 2020, the Company expects to satisfy its remaining performance obligations associated with $551,755 and $53,782 of contract liability balances within the next twelve months and following thirty-two months, respectively. Of the aggregate contract liability balances as of December 31, 2019, the Company expects to satisfy its remaining performance obligations associated with $66,577 and $573,224 of contract liability balances within the next twelve months and following thirty-eight months, respectively.

 

 

During the six months ended June 30, 2020, the Company converted $354,729 of the short-term notes payable into 2,579,789 shares of Company common stock, $0.001 par value (the “Common Stock”).

 

 

On June 5, 2020, the Company entered into a Securities Purchase Agreement with investor LGH Investments LLC (the “Investor”) for (i) a Promissory Note (the “Convertible Promissory Note”) in the original principal amount of $1,210,000, convertible into shares of Common Stock, (ii) warrants entitling the Investor to acquire 1,000,000 shares of Common Stock (the “Warrants”) and (iii) 200,000 restricted common shares in the Company as an inducement grant (the “Inducement Shares”). Such note contained certain default provisoins, as defined.  As part of the Securities Purchase Agreement, the Company established a reserve of shares of its authorized but unissued and unreserved Common Stock in the amount of 11,000,000 shares for purposes of exercise of the Warrant or conversion of the Convertible Promissory Note.

 

 

The Company recorded a debt discount and original issuance discount aggregating $670,682 to be amortized over the life of the Convertible Promissory Note.

 

The Convertible Promissory Note had an aggregate outstanding principal balance of $705,980, net of $600,820 beneficial conversion feature, warrant discount and original issuance discount costs at June 30, 2020.  As of the date of this report, the note was repaid in full (See Note 18).

 

Interest expense on the Convertible Promissory Note totaled $166,663 for the six months ended June 30, 2020.

 

 

SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

 

 

 

All or a portion of the PPP Loan may be forgiven by the U.S. Small Business Administration (“SBA”) upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. The ultimate forgiveness of the PPP Loan is also predicated upon regulatory authorities concurring with management’s good faith assessment that the current economic uncertainty made the loan request necessary to support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company satisfied all eligibility requirements for the PPP Loan, the Company is later determined to have violated any applicable laws or regulations or it is otherwise determined that the Company was ineligible to receive the PPP Loan, the Company may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal.

 

Under the terms of the PPP Loan, the Company may be eligible for full or partial loan forgiveness in the third quarter of 2020, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the PPP Loan.

 

As of June 30, 2020, $132,514 is classified as current and $321,821 as non-current.

 

On June 10, 2020, the Company secured a loan offered by the U.S. Small Business Administration (SBA) under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of COVID-19 pandemic on the Company’s business. The principal amount of this loan of $150,000. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning June 10, 2021. The balance of principal and interest is payable 30 years from the date of the EIDL. The EIDL is secured by a security interest on all of the Company’s assets (See Note 9).

 

As of June 30, 2020, $150,000 is classified as non-current.

 

 

The notes payable, related parties as amended were issued in conjunction with the Company’s purchase of the orthopedic division of HealthTronics, Inc. The notes payable, related parties bear interest at 8% per annum, as amended. All remaining unpaid accrued interest and principal was due on December 31, 2018, as amended. HealthTronics, Inc. is a related party because it is a shareholder in the Company and has a security agreement with the Company detailed below.

 

The Company is a party to a security agreement with HealthTronics, Inc. to provide a first security interest in the assets of the Company. During any period when an Event of Default occurs, the applicable interest rate shall increase by 2% per annum. An Event of Default under the notes payable, related parties occurred on December 31, 2016 (“Default”). As a result of the Default, 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. For the three months ended June 30, 2020, additional mandatory prepayments of principal and interest on the notes payable, related parties were due on June 30, 2020. The Company has not made the mandatory prepayments of principal to HealthTronics, Inc. on the notes payable, related parties as amended from proceeds received through the issuance or sale of any equity securities in cash through June 30, 2020.

 

The notes payable, related parties had an aggregate outstanding principal balance of $5,372,743 at June 30, 2020 and December 31, 2019.

 

Accrued interest, related parties currently payable totaled $2,229,713 at June 30, 2020 and $1,859,977 at December 31, 2019. Interest expense on notes payable, related parties totaled $187,172 and $112,984 for the three months ended June 30, 2020 and 2019, respectively and $369,736 and $332,671 for the six months ended June 30, 2020 and 2019, respectively.

 

As of June 30, 2020, we are in default under the notes, as amended, and as a result HealthTronics, Inc. could, among other rights and remedies, exercise its rights under its first priority security interest in our assets.  The Company entered into a letter agreement with HealthTronics, Inc., pursuant to which the Company paid off all outstanding debt due and owed to HealthTronics (see Note 18).

 

 

 

 

 

On February 6, 2020, the Company entered into a Series C Preferred Stock Purchase Agreement (the “Series C Purchase Agreement”) with certain accredited investors for the sale by the Company in a private placement of an aggregate of 90 shares of the Company’s Series C Convertible Preferred Stock, par value $0.001 per share at a stated value equal to $25,000 per share (the “Series C Preferred Stock”), for an aggregate total purchase price of $2,250,000.

 

On January 31, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series C Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate 90 shares of our preferred stock as Series C Convertible Preferred Stock. On May 14, 2020, the Company entered into a Series D Preferred Stock Purchase Agreement (the “Series D Purchase Agreement”) with certain accredited investors for the sale by the Company in a private placement of an aggregate of eight shares of the Company’s Series D Convertible Preferred Stock, par value $0.001 per share at a stated value equal to $25,000 per share (the “Series D Preferred Stock”), for an aggregate total purchase price of $200,000. On May 14, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series D Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate eight shares of our preferred stock as Series D Convertible Preferred Stock.

 

Subject to the terms of the Certificates of Designation, each share of Series C Preferred Stock and Series D Preferred Stock is convertible into shares of Common Stock of the Company at a rate equal to the stated value of such share of Series C Preferred Stock and Series D Preferred Stock of $25,000, divided by the conversion price of $0.14 per share (subject to adjustment from time to time upon the occurrence of certain events as described in the Certificate of Designation). The Certificates of Designation became effective upon filing with the Secretary of State of the State of Nevada. If all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were converted into Common Stock at the original conversion rate, such shares would convert into an aggregate of 17,500,000 shares of Common Stock.

 

Notwithstanding the foregoing, the Series C Preferred Stock and Series D Preferred Stock is not currently convertible into shares of Common Stock because the Company does not currently have sufficient authorized and unissued shares of its Common Stock to permit conversion in full of all issued and outstanding shares of Series C Preferred Stock and Series D Preferred Stock. Accordingly, the Certificate of Designation provides that the Series C Preferred Stock and Series D Preferred Stock is only convertible into Common Stock once the Company amends its Articles of Incorporation to increase its authorized and unissued Common Stock to an amount sufficient to permit such conversion of the Series C Preferred Stock and Series D Preferred Stock. Each investor has agreed in the Purchase Agreement that such investor will, within five business days following such amendment to the Articles of Incorporation, convert all of such investor’s shares of Series C Preferred Stock and Series D Preferred Stock into shares of Common Stock.

 

The Certificate of Designation provides that if the Company has not obtained the approval of its shareholders to amend the Company’s Articles of Incorporation to increase the authorized shares of Common Stock sufficient to permit such conversion, or if such amendment has not otherwise been filed with the Nevada Secretary of State on or before December 31, 2020 (either such event, an “Authorization Failure”), then the Company shall be required to redeem all outstanding shares of Series C Preferred Stock and Series D Preferred Stock for a per-share redemption price, payable in cash in a single installment not later than thirty (30) days following the date of such Authorization Failure, equal to the greater of (a) two hundred percent (200%) of the stated value of such share, and (b)(i) the volume-weighted average sale price of a share of Common Stock reported on the trading market on which the Common Stock is then traded for the thirty (30) consecutive trading days immediately preceding the date of such Authorization Failure, multiplied by (ii) the number of shares of Common Stock such share of Series C Preferred Stock and Series D Preferred Stock would otherwise be convertible into as of such date had such Authorization Failure not occurred. The closing of the private placements occurred on February 6, 2020 and May 14, 2020, respectively, and the preferred stock was recorded in temporary equity on the related condensed consolidated balance sheet at an aggregate value of $2,250,000 and $200,000 respectively. Ninety shares of the Series C Preferred Stock and eight shares of Series D Preferred Stock have been issued as of June 30, 2020. The Company has obtained the approval of its shareholders to amend the Company’s Articles of Incorporation to increase the authorized shares of Common Stock and effected such increase subsequent to June 30, 2020 (see Note 18).

 

 

 

 

Warrant Exercises

 

During the three and six months ended June 30, 2020, the Company issued 1,000,000 shares of Common Stock upon the exercise of 1,000,000 Class P Warrants to purchase shares of stock and an exercise price of $0.01 per share under the terms of the respective warrant agreement.

 

Conversion of liabilities

 

During the six months ended June 30, 2020, the Company issued 2,579,789 shares of Common Stock upon the conversion of short term notes payable in the principal and accrued interest amount of $354,729 with the receipt of notices of Class L warrant exercises, all pursuant to the terms of the short term notes payable.

Conversion of advances from related parties

 

During the six months ended June 30, 2020, the Company issued 262,811 shares of Common Stock upon the conversion of advances from related parties in the amount of $18,098 with the receipt of notice of Series A Warrant exercise to purchase shares of stock under the terms of the respective warrant agreement.

 

Consulting Agreement

 

In January 2020, the Company entered into a six month consulting agreement for which the fee for the services was to be paid with Common Stock. The number of shares to be paid with Common Stock was 1,000,000 earned upon signing and an additional 1,000,000 upon agreement by both consultant and the Company no later than May 1, 2020. The Company issued 1,000,000 shares in March 2020 and 1,000,000 shares in April 2020. The fair value of the shares of $380,000 was recorded as a non-cash general and administrative expense during the six months ended June 30, 2020.

 

The consulting agreement was extended to November 30, 2020 with an additional 2,000,000 Common Stock shares to be issued for services. The Company issued 1,000,000 shares to the consultant in June 2020. The fair value of the shares of $287,500 was recorded as a non-cash general and administrative expense during the six months ended June 30, 2020.

 

 

 

PIPE Offering

 

On December 11, 2019, the Company entered into a Common Stock Purchase Agreement with certain investors for the sale by the Company in a private placement of an aggregate of up to 21,071,143 shares of its common stock at a purchase price of $0.14 per share.

 

During the six months ended June 30, 2020, the Company issued 1,071,428 shares of Common Stock in conjunction with this offering and received $150,000 in cash proceeds.

 

Stock Option Exercise

 

During the six months ended June 30, 2020, the Company issued 225,000 shares of Common Stock upon the exercise of stock options resulting in net proceeds of $44,250.

 

Litigation Settlement

 

During the six months ended June 30, 2020, the Company issued 200,000 shares of restricted Common Stock upon the settlement of outstanding litigation. The fair value of the shares of $50,000 was recorded as a non-cash general and administrative expense during the six months ended June 30, 2020.

 

 

A summary of the warrant activity during the six months ended June 30, 2020 is presented as follows:

 

Warrant class	Outstanding as of December 31, 2019	Issued	Exercised	Expired	Outstanding as of June 30, 2020
Class K Warrants	7,200,000	-	-	-	7,200,000
Class O Warrants	909,091	-	-	-	909,091
Class P Warrants	1,365,000	-	(1,000,000)	(100,000)	265,000
Common Stock Purchase Warrants	-	1,000,000	-	-	1,000,000
	9,474,091	1,000,000	(1,000,000)	(100,000)	9,374,091

 

A summary of the warrant exercise price per share and expiration date is presented as follows:

 

	Exercise price/share	Expiration date
Class K Warrants	$0.08	June 2025
Class K Warrants	$0.11	August 2027
Class O Warrants	$0.11	January2022
Class P Warrants	$0.20	June 2024
Common Stock Purchase Warrants	$0.35	June 2025

 

The fair value of the Common Stock Purchase Warrants is estimated on the date of grant using the Black-Scholes option pricing model which approximates the binomial model using the following weighted average assumptions for the six months ended June 30, 2020:

                            

 

 

 

 

Operating Leases

 

The Company is a party to certain operating leases. The Company has entered into a lease agreement, as amended, for office space for office, research and development, quality control, production and warehouse space which expires on December 31, 2021. Under the terms of the lease, the Company pays monthly rent of $14,651, subject to a 3% adjustment on an annual basis.

 

For leases where the Company is the lessee, ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date (except we used the practical expedients and recorded the outstanding operating lease at January 1, 2019) based on the present value of lease payments over the lease term. As the Company’s lease did not provide an implicit interest rate, the Company used the equivalent borrowing rate for a secured financing with the term of that equal to the remaining life of the lease at inception. The lease terms used to calculate the ROU asset and related lease liability did not include options to extend or termination of the lease; there are none and there is no reasonable certainty that the Company would extend the lease at expiration. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. The Company has lease agreements which require payments for lease and non-lease components and has elected to account for these as separate lease components. Non-leasing components are not included in the ROU asset.

 

Right of use assets and Lease liability – right of use consist of the following:

 

 

	June 30, 2020
Right of use assets	$243,251

	June 30, 2020
Lease liability - right of use
Current portion	$173,270
Long term portion	99,142
	$272,412

 

As of June 30, 2020, the maturities of the Company’s lease liability – right of use which have initial or remaining lease terms in excess of one year consist of the following:

 

Year ending December 31,	Amount
2020 (remainder)	$97,041
2021	197,462
Total lease payments	294,503
Less: Present value adjustment	(22,090)
Lease liability - right of use	$272,413