SANUWAVE HEALTH, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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☒
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 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)
Securities registered pursuant
to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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N/A
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N/A
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.☐
Yes
☒
No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.☐ Yes
☒
No
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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form
10-K.
☒
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
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.
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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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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
The aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant (assuming, for purposes of
this calculation only, that the registrant’s directors,
executive officers and greater than 10% shareholders are affiliates
of the registrant), based upon the closing sale price of the
registrant’s common stock on June 30, 2018, the last business
day of the registrant’s most recently completed second fiscal
quarter, was $63.4 million.
As of March 28, 2019, there were issued and outstanding
160,322,580 shares of the registrant’s
common stock.
SANUWAVE Health,
Inc.
Table of Contents
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Page
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PART I
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19
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37
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37
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37
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37
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PART
II
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38
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39
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49
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49
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50
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50
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51
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PART
III
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52
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57
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61
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62
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63
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PART
IV
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65
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67
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2
PART I
Special Note Regarding Forward-Looking Statements
This
Annual Report on Form 10-K of SANUWAVE Health, Inc. and its
subsidiaries (“SANUWAVE” or the “Company”)
contains forward-looking statements. All statements in this Annual
Report on Form 10-K, 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 this
report, including the sections titled “Risk Factors”
and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Other risks and
uncertainties are and will be disclosed in the Company’s
prior and future Securities and Exchange Commission (the
“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.
Except as otherwise indicated by the context, references in this
Annual Report on Form 10-K to “we,” “us”
and “our” are to the consolidated business of the
Company.
3
I
tem 1. BUSINESS
Overview
We are
a shock wave technology company using a patented system of
noninvasive, high-energy, acoustic shock waves for regenerative
medicine and other applications. Our initial focus is regenerative
medicine – utilizing noninvasive, acoustic shock waves to
produce a biological response resulting in the body healing itself
through the repair and regeneration of tissue, musculoskeletal and
vascular structures. Our lead regenerative product in the United
States is the dermaPACE
®
device, used
for treating diabetic foot ulcers, which was subject to two
double-blinded, randomized Phase III clinical studies and was
cleared by the U.S. Food and Drug Administration (FDA) on December
28, 2017.
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 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.
Our
lead product candidate for the global wound care market, dermaPACE,
has received FDA clearance for commercial use to treat diabetic
foot ulcers in the United States and the CE Mark allowing for
commercial use on acute and chronic defects of the skin and
subcutaneous soft tissue. We believe we have demonstrated that our
patented technology is safe and effective in stimulating healing in
chronic conditions of the foot and the elbow through our United
States FDA Class III PMA approved OssaTron
®
device, and in
the stimulation of bone and chronic tendonitis regeneration in the
musculoskeletal environment through the utilization of our
orthoPACE
®
, OssaTron, and
Evotron
®
devices in
Europe and Asia.
We
are focused on developing our Pulsed Acoustic Cellular Expression
(PACE) technology to activate healing in:
●
wound
conditions, including diabetic foot ulcers, venous and arterial
ulcers, pressure sores, burns and other skin eruption
conditions;
●
orthopedic
applications, such as eliminating chronic pain in joints from
trauma, arthritis or tendons/ligaments inflammation, speeding the
healing of fractures (including nonunion or delayed-union
conditions), improving bone density in osteoporosis, fusing bones
in the extremities and spine, and other potential sports injury
applications;
●
plastic/cosmetic
applications such as cellulite smoothing, graft and transplant
acceptance, skin tightening, scarring and other potential aesthetic
uses; and
●
cardiac
applications for removing plaque due to atherosclerosis improving
heart muscle performance.
In
addition to healthcare uses, our high-energy, acoustic pressure
shock waves, due to their powerful pressure gradients and localized
cavitational effects, may have applications in secondary and
tertiary oil exploitation, for cleaning industrial waters 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.
We
were formed as a Nevada corporation in 2004. We maintain a public
internet site at www.sanuwave.com. The information on our websites
is not part of this Annual Report on Form 10-K.
Pulsed Acoustic Cellular Expression (PACE) Technology for
Regenerative Medicine
Our
PACE product candidates, including our lead product candidate,
dermaPACE, deliver high-energy acoustic pressure waves in the shock
wave spectrum to produce compressive and tensile stresses on cells
and tissue structures. These mechanical stresses at the cellular
level have been shown in pre-clinical work to promote angiogenic
and positive inflammatory responses, and quickly initiate the
healing cascade. This has been shown in pre-clinical work to result
in microcirculatory improvement, including increased perfusion and
blood vessel widening (arteriogenesis), the production of
angiogenic growth factors, enhanced new blood vessel formation
(angiogenesis) and the subsequent regeneration of tissue such as
skin, musculoskeletal and vascular structures. PACE procedures
trigger the initiation of an accelerated inflammatory response that
speeds wounds into proliferation phases of healing and subsequently
returns a chronic condition to an acute condition to help
reinitiate the body’s own healing response. We believe that
our PACE technology is well suited for various applications due to
its activation of a broad spectrum of cellular events critical for
the initiation and progression of healing.
4
High-energy, acoustic pressure shock waves are the
primary component of our previously developed product,
OssaTron
®
,
which was approved by the FDA and marketed in the United States for
use in chronic plantar fasciitis of the foot in 2000 and for elbow
tendonitis in 2003. Previously, acoustic pressure shock waves have
been used safely at much higher energy and pulse levels in the
lithotripsy procedure (breaking up kidney stones) by urologists for
over 25 years and has reached the care status of “golden
standard” for the treatment of kidney
stones.
We
research, design, manufacture, market and service our products
worldwide and believe we have already demonstrated that our
technology is safe and effective in stimulating healing in chronic
musculoskeletal conditions of the foot and the elbow through our
United States FDA Class III PMA approved OssaTron device, and in
the stimulation of bone and chronic tendonitis regeneration in the
musculoskeletal environment through the utilization of our
orthoPACE, Evotron and OssaTron devices in Europe, Asia and
Asia/Pacific.
We
believe our experience from our preclinical research and the
clinical use of our predecessor legacy devices in Europe and Asia,
as well as our OssaTron device in the United States, demonstrates
the safety, clinical utility and efficacy of these products. In
addition, we have preclinical programs focused on the development
and better understanding of treatments specific to our target
applications.
Currently,
there are limited biological or mechanical therapies available to
activate the healing and regeneration of skin, musculoskeletal
tissue and vascular structures. As baby boomers age, the incidence
of their targeted diseases and musculoskeletal injuries and
ailments will be far more prevalent. We believe that our
pre-clinical and clinical studies suggest that our PACE technology
will be effective in targeted applications. We anticipate that
future clinical studies should lead to regulatory approval of our
regenerative product candidates in the Americas, Middle East and
Africa. If approved by the appropriate regulatory authorities, we
believe that our product candidates will offer new, effective and
noninvasive (extracorporeal) treatment options in wound healing,
orthopedic injuries, plastic/cosmetic uses and cardiovascular
procedures, improving the quality of life for millions of patients
suffering from injuries or deterioration of tissue, bones and
vascular structures.
dermaPACE – Our Lead Product Candidate
The FDA
granted approval of our Investigational Device Exemption (IDE) to
conduct two double-blinded, randomized clinical trials utilizing
our lead device product for the global wound care market, the
dermaPACE device, in the treatment of diabetic foot
ulcers.
The
dermaPACE system was evaluated using two studies under IDE G070103.
The studies were designed as prospective, randomized, double-blind,
parallel-group, sham-controlled, multi-center 24-week studies at 39
centers. A total of 336 subjects were enrolled and treated with
either dermaPACE plus conventional therapy or conventional therapy
(a.k.a. standard of care) alone. Conventional therapy included, but
was not limited to, debridement, saline-moistened gauze, and
pressure reducing footwear. The objective of the studies was to
compare the safety and efficacy of the dermaPACE device to
sham-control application. The prospectively defined primary
efficacy endpoint for the dermaPACE studies was the incidence of
complete wound closure at 12 weeks post-initial application of the
dermaPACE system (active or sham). Complete wound closure was
defined as skin re-epithelialization without drainage or dressing
requirements, confirmed over two consecutive visits within
12-weeks. If the wound was considered closed for the first time at
the 12 week visit, then the next visit was used to confirm closure.
Investigators continued to follow subjects and evaluate wound
closure through 24 weeks.
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.
5
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 1cm
2
and 16cm
2
, 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.
6
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.
Clinical Studies
A
dosage study has been developed for launch in Poland to optimize
dermaPACE system treatment dosage for producing a more rapid
reduction in size of a diabetic foot ulcer
(“DFU”). The focus will be on increasing the
number of shock waves delivered per treatment, as a function of
DFUs area. To determine the dosage necessary, three new
distinctive regimens will be assessed during the study. This
study is expected to start in April 2019 and to be finalized late
in the third quarter of 2019.
A
post-market pilot study to evaluate the effects of high energy
acoustic shock wave therapy on local skin perfusion and healing of
DFUs will be conducted at two sites: one in New Jersey and
one in California. The intent of this trial is to quantify the
level of increased perfusion and oxygenation during and after
treatment with the dermaPACE system. Enrollment and first patient
treatment is expected in April 2019.
Growth Opportunity in Wound Care Treatment
We are focused on the development of products that
treat unmet medical needs in large market opportunities. Our FDA
approval in the United States for our lead product candidate,
dermaPACE, is the first step in providing an option to a currently
unmet need in the treatment of diabetic foot ulcers.
Diabetes is common, disabling and deadly. In the United States,
diabetes has reached epidemic proportions. Based on our
research, foot ulcerations are one of the leading causes of
hospitalization in diabetic patients and lead to billions of
dollars in health care expenditures annually.
According to a 2015 report by the Centers for
Disease Control and Prevention, approximately 30.3 million people
(diagnosed and undiagnosed), roughly 9.4% of the United States
population, have diabetes and
1.5
million new cases of diabetes were diagnosed in people aged 18
years or older in 2015. According to the same study,
approximately
25% of diabetics will develop a DFU during
their lifetime.
Foot ulcers
are a significant complication of diabetes mellitus and often
precede lower-extremity amputation. The most frequent underlying
etiologies are neuropathy, trauma, deformity, high plantar
pressures, and peripheral arterial disease.
Over 50% of DFUs
will become infected, resulting in high rates of hospitalization,
increased morbidity and potential lower extremity amputation.
Diabetic foot infections (“DFI”) are one of the most
common diabetes related cause of hospitalization in the United
States, accounting for 20% of all hospital admissions. Readmission
rates for DFI patients are approximately 40% and nearly one in six
patients die within 1 year of their infection. In a large
prospective study of patients with DFU, the presence of infection
increased the risk of a minor amputation by 50% compared to ulcer
patients without infection. DFUs account for more than half of the
non-traumatic lower-extremity amputations in the world. In June
2006, Advanced Medical Technology Association
(“AdvaMed”) estimated that chronic leg wounds (ulcers)
account for the loss of many workdays per year, at a cost of
approximately $20.8 billion in lost productivity. Advanced,
cost-effective treatment modalities for diabetes and its
comorbidities, including diabetic foot ulcers, are in great need
globally, yet in short supply. According to the International
Diabetes Federation 2017 Global Fact Sheet, 1 in 11 adults has
diabetes (approximately 425 million people) and 12% of global
health expenditure is spent on diabetes (approximately $727
billion).
A
majority of challenging wounds are non-healing chronic wounds and
in addition, chronic diabetic foot ulcers and pressure ulcers are
often slow-to-heal wounds, which often fail to heal for many
months, and sometimes, for several years. These wounds often
involve physiologic, complex and multiple complications such as
reduced blood supply, compromised lymphatic systems or immune
deficiencies that interfere with the body’s normal wound
healing processes. These wounds often develop due to a
patient’s impaired vascular and tissue repair capabilities.
Wounds that are difficult to treat do not always respond to
traditional therapies, which include hydrocolloids, hydrogels and
alginates, among other treatments. We believe that physicians and
hospitals need a therapy that addresses the special needs of these
chronic wounds with high levels of both clinical and cost
effectiveness.
7
We
believe we are developing a safe and advanced technology in the
wound healing and tissue regeneration market with PACE. dermaPACE
is noninvasive and does not require anesthesia, making it a
cost-effective, time-efficient and painless approach to wound care.
Physicians and nurses look for therapies that can accelerate the
healing process and overcome the obstacles of patients’
compromised conditions, and prefer therapies that are easy to
administer. In addition, since many of these patients are not
confined to bed, healthcare providers want therapies that are
minimally disruptive to the patient’s or the
caregiver’s daily routines. dermaPACE’s noninvasive
treatments are designed to elicit the body’s own healing
response and, followed by simple standard of care dressing changes,
are designed to allow for limited disruption to the patients’
normal lives and have no effect on mobility while their wounds
heal.
Developing Product Opportunities - Orthopedic
We
launched the orthoPACE device in Europe, which is intended for use
in orthopedic, trauma and sports medicine indications, following CE
Marking approval in 2010. The device features four types of
applicators including a unique applicator that is less painful for
some indications and may reduce or completely eliminate anesthesia
for some patients. In the orthopedic setting, the orthoPACE is
being used to treat tendinopathies and acute and nonunion
fractures, including the soft tissue surrounding the fracture to
accelerate healing and prevent secondary complications and their
associated treatment costs. In 2013, we obtained approval from
South Korea’s Ministry of Food and Drug Safety to market
orthoPACE in that country.
We
believe there are significant opportunities in the worldwide
orthopedic market, driven by aging baby boomers and their desire
for active lifestyles well into retirement and the growth in the
incidence of osteoporosis, osteoarthritis, obesity, diabetes and
other diseases that cause injury to musculoskeletal tissues and/or
impair the ability of the body to heal injuries.
We
have experience in the sports medicine field (which generally
refers to the non-surgical and surgical management of cartilage,
ligament and tendon injuries) through our legacy devices, OssaTron
and Evotron. Common examples of these injuries include extremity
joint pain, torn rotator cuffs (shoulder), tennis elbow,
Achilles’ tendon tears and torn meniscus cartilage in the
knee. Injuries to these structures are very difficult to treat
because the body has a limited natural ability to regenerate these
kinds of tissues. Cartilage, ligament and tendons seldom return to
a pre-injury state of function. Due to a lack of therapies
that can activate healing and regenerate these tissues, many of
these injuries will result in a degree of permanent impairment and
chronic pain. Prior investigations and pre-clinical work indicate
that PACE can activate various cell types and may be an important
adjunct to the management of sports medicine injuries.
Trauma injuries are acute and result from any
physical damage to the body caused by violence or accident or
fracture
.
Surgical treatment of traumatic
fractures often involves fixation with metallic plates, screws and
rods (internal fixation) and include off-loading to prevent motion,
permitting the body to initiate a healing response. In the United
States, six million traumatic fractures are treated each year, and
over one million internal fixation procedures are performed
annually. The prevalence of non-union among these fractures is
between 2.5% and 10.0% depending on the fracture
type
and risk factors such as diabetes and smoking
history or other systemic diseases. At the time of surgery,
adjunctive agents (such as autograft, cadaver bone and synthetic
filling materials) are often implanted along with internal fixation
to fill bony gaps or facilitate the healing process to avoid
delayed union or non-union (incomplete fracture healing) results.
Both pre-clinical and clinical investigations have shown positive
results, suggesting our technology could potentially be developed
as an adjunct to these surgeries or primary treatment protocol for
delayed or non-union events.
Non-Medical Uses For Our Shock Wave Technology
We
believe there are significant license/partnership opportunities for
our acoustic pressure shock wave technology in non-medical uses,
including in the energy, water, food, and industrial
markets.
Due
to their powerful pressure gradients and localized cavitational
effects, we believe that high-energy, acoustic pressure shock waves
can be used to clean, in an energy efficient manner, contaminated
fluids from impurities, bacteria, viruses, and other harmful
micro-organisms, which provides opportunities for our technology in
cleaning industrial and domestic/municipal waters. Based on the
same principles of action of the acoustic pressure shock waves
against bacteria, viruses, and harmful micro-organisms, we believe
our technology can be applied for cleaning or sterilization of
various foods such as milk, natural juices, and meats.
8
In
the energy sector, we believe that the acoustic pressure shock
waves can be used to improve oil recovery (IOR), as a supplement to
or in conjunction with existing fracking technology, which utilizes
high pressurized water/gases to crack the rocks that trapped oil in
the underground reservoir. Through the use of our high-energy,
acoustic pressure shock waves the efficiency can be improved and in
the same time the environmental impact of the fracking process can
be reduced. Furthermore, we believe our technology can be used for
enhanced oil recovery (EOR) based on the changes in oil flow
characteristics resulting from acoustic pressure shock wave
stimulation, as a tertiary method of oil recovery from older oil
fields.
Additionally,
we demonstrated through three studies performed at Montana State
University that high-energy, acoustic pressure shock waves are
disrupting biofilms and thus can be used for surface cleaning
monuments, ship hulls, and underwater structure cleaning, or to
unclog pipes in the energy industry (shore or off-shore
installations), food industry, and water management industry, which
will reduce or eliminate down times with significant financial
benefits for maintenance of existing infrastructure. Also, our
technology should have a significant environmental impact by
eliminating or reducing the use of harmful chemicals, which are the
preferred biofilm cleaning method at this time.
Market Trends
We
are focused on the development of regenerative medicine products
that have the potential to address substantial unmet clinical needs
across broad market indications. We believe there are limited
therapeutic treatments currently available that directly and
reproducibly activate healing processes in the areas in which we
are focusing, particularly for wound care and repair of certain
types of musculoskeletal conditions.
According
to AdvaMed and Centers for Medicare & Medicaid Services data
from 2006 and our internal projections, the United States advanced
wound healing market for the dermaPACE is estimated at
$20 billion, which includes diabetic foot ulcers, pressure
sores, burns and traumatic wounds, and chronic mixed leg ulcers. We
also believe there are significant opportunities in the worldwide
orthopedic and spine markets, driven by aging baby boomers and
their desire for active lifestyles well into retirement and the
growth in the incidence of osteoporosis, osteoarthritis, obesity,
diabetes and other diseases that cause injury to orthopedic tissues
and/or impair the ability of the body to heal
injuries.
With
the success of negative pressure wound therapy devices in the wound
care market over the last decade and the recognition of the global
epidemic associated with certain types of wounds, as well as
deteriorating musculoskeletal conditions attributed to obesity,
diabetes, vascular and heart disease, as well as sports injuries,
we believe that Medicare and private insurers have become aware of
the high costs and expenditures associated with the adjunctive
therapies being utilized for wound healing and orthopedic
conditions that have limited efficacies in full skin closure, or
bone and tissue regeneration. We believe the wound healing and
orthopedic markets are undergoing a transition, and market
participants are interested in biological response activating
devices that are applied noninvasively and seek to activate the
body’s own capabilities for regeneration of tissue at injury
sites in a cost-effective manner.
Strategy
Our primary objective is to be a leader in the
development and commercialization of our acoustic pressure shock
wave technology for regenerative medicine and other applications.
Our initial focus is regenerative medicine utilizing noninvasive
(extracorporeal), acoustic pressure shock waves to produce a
biological response resulting in the body healing itself through
the repair and regeneration of skin, musculoskeletal tissue and
vascular structures. Our lead regenerative product in the United
States is the dermaPACE device for treating diabetic foot ulcers,
which was subject to two double-blinded, randomized Phase III
clinical studies
and cleared by the FDA on December 28,
2017.
Our
portfolio of healthcare products and product candidates activate
biologic signaling and angiogenic responses, including new
vascularization and microcirculatory improvement, helping to
restore the body’s normal healing processes and regeneration.
We intend to apply our Pulsed Acoustic Cellular Expression (PACE)
technology in wound healing, orthopedic, plastic/cosmetic and
cardiac conditions.
Our
immediate goal for our regenerative medicine technology involves
leveraging the knowledge we gained from our existing human heel and
elbow indications to enter the advanced wound care market with
innovative treatments.
9
The
key elements of our strategy include the following:
●
Commercialize and support the domestic distribution of our
dermaPACE device to treat diabetic foot ulcers.
We initially focused on obtaining FDA approval in
the United States for our lead product candidate, dermaPACE, for
the treatment of diabetic foot ulcers, which we believe represents
a large, unmet need.
On December 28, 2017, the FDA notified
the Company to permit the marketing of the dermaPACE System for the
treatment of diabetic foot ulcers in the United States.
We began the commercialization of
dermaPACE in the United States in 2018 through strategic
partnerships and will begin commercialization of the product
ourselves in 2019. For example,
in February 2018, we entered
into an agreement with Premier Shockwave Wound Care, Inc.
(“PSWC”) and Premier Shockwave, Inc. (“PS”)
for the purchase by PSWC and PS of dermaPACE Systems and related
equipment sold by us, including a minimum purchase of 100 units
over 3 years, and granting PSWC and PS limited but exclusive
distribution rights to provide dermaPACE Systems to certain
government healthcare facilities in exchange for the payment of
certain royalties to us. PSWC is a related party since it is owned
by A. Michael Stolarski, a member of the Company’s board of
directors and an existing shareholder of the
Company.
●
Develop and commercialize our noninvasive biological response
activating devices in the regenerative medicine area for the
treatment of skin, musculoskeletal tissue and vascular
structures.
We
intend to use our proprietary technologies and know-how in the use
of high-energy, acoustic pressure shock waves to address unmet
medical needs in wound care, orthopedic, plastic/cosmetic and
cardiac indications, possibly through potential license and/or
partnership arrangements.
●
License and seek partnership opportunities for our non-medical
acoustic pressure shock wave technology platform, know-how and
extensive patent portfolio.
We
intend to use our acoustic pressure shock wave technology and
know-how for non-medical uses, including energy, food, water
cleaning and other industrial markets, through license/partnership
opportunities.
●
Support the global distribution of our products.
Our
portfolio of products, the dermaPACE and orthoPACE, are CE Marked
and sold through select distributors in certain countries in
Europe, Canada, Asia and Asia/Pacific. Our revenues will continue
from sales of the devices and related applicators in these markets.
We intend to continue to add additional distribution partners in
the Americas, Middle East, Africa, Europe and
Asia/Pacific.
Scientific Advisors
We
have established a network of scientific advisors that brings
expertise in wound healing, orthopedics, cosmetics, clinical and
scientific research, and FDA experience. We consult our scientific
advisors on an as-needed basis on clinical and pre-clinical study
design, product development, and clinical indications.
We
pay consulting fees to certain members of our scientific advisory
board for the services they provide to us, in addition to
reimbursing them for incurred expenses. The amounts vary depending
on the nature of the services. We paid our advisors aggregate
consulting fees through the issuance of stock options in 2018 and
2017 and recorded stock-based compensation expense of $164,800 and
$40,884 for the years ended December 31, 2018 and 2017,
respectively.
Sales, Marketing and Distribution
Following FDA
approval in December 2017, we intend to seek a development and/or
commercialization partnership, or to commercialize the product
ourselves. Outside the United States, we retain distributors to
represent our products in selective international markets. These
distributors have been selected based on their existing business
relationships and the ability of their sales force and distribution
capabilities to effectively penetrate the market with our PACE
product line. We rely on these distributors to manage physical
distribution, customer service and billing services for our
international customers. Three distributors and partners accounted
for 33%, 23% and 11% of revenues for the year ended December 31,
2018, and 24%, 60% and 7% of accounts receivable at December 31,
2018. Three distributors accounted for 8%, 38% and 24% of revenues
for the year ended December 31, 2017, and 69%, 17% and 0% of
accounts receivable at December 31, 2017.
10
Manufacturing
We
have developed a network of suppliers, manufacturers and contract
service providers to provide sufficient quantities of our
products.
We
are party to a manufacturing supply agreement with Swisstronics
Contract Manufacturing AG in Switzerland, a division of Cicor
Technologies Ltd., covering the generator box component of our
products. Our generator boxes are manufactured in accordance with
applicable quality standards (EN ISO 13485) and applicable industry
and regulatory standards. We produce the applicators and applicator
kits for our products. In addition, we program and load software
for both the generator boxes and applicators and perform the final
product testing and certifications internally.
Our
facility in Suwanee, Georgia consists of 10,177 square feet and
provides office, research and development, quality control,
production and warehouse space. It is a FDA registered facility and
is ISO 13485 certified (for meeting the requirements for a
comprehensive management system for the design and manufacture of
medical devices).
Intellectual Property
Our
success depends in part on our ability to obtain and maintain
proprietary protection for our products, product candidates,
technology, and know-how, to operate without infringing on the
proprietary rights of others and to prevent others from infringing
upon our proprietary rights. We seek to protect our proprietary
position by, among other methods, filing United States and selected
foreign patent applications and United States and selected foreign
trademark applications related to our proprietary technology,
inventions, products, and improvements that are important to the
development of our business. Effective trademark, service mark,
copyright, patent, and trade secret protection may not be available
in every country in which our products are made available. The
protection of our intellectual property may require the expenditure
of significant financial and managerial resources.
Patents
We
consider the protection afforded by patents important to our
business. We intend to seek and maintain patent protection in the
United States and select foreign countries where deemed appropriate
for products that we develop. There are no assurances that any
patents will result from our patent applications, or that any
patents that may be issued will protect our intellectual property,
or that any issued patents or pending applications will not be
successfully challenged, including as to ownership and/or validity,
by third parties. In addition, if we do not avoid infringement of
the intellectual property rights of others, we may have to seek a
license to sell our products, defend an infringement action or
challenge the validity of intellectual property in court. Any
current or future challenges to our patent rights, or challenges by
us to the patent rights of others, could be expensive and time
consuming.
We
derive our patent rights, including as to both issued patents and
“patent pending” applications, from three sources: (1)
assignee of patent rights in technology we developed; (2) assignee
of patent rights purchased from HealthTronics, Inc.
(“HealthTronics”); and (3) as licensee of certain
patent rights assigned to HealthTronics. In August 2005, we
purchased a significant portion of our current patents and patent
applications from HealthTronics, to whom we granted back perpetual
and royalty-free field-of-use license rights in the purchased
patent portfolio primarily for urological uses. We believe that our
owned and licensed patent rights provide a competitive advantage
with respect to others that might seek to utilize certain of our
apparatuses and methods incorporating extracorporeal acoustic
pressure shock wave technologies that we have patented; however, we
do not hold patent rights that cover all of our products, product
components, or methods that utilize our products. We also have not
conducted a competitive analysis or valuation with respect to our
issued and pending patent portfolio in relation to our current
products and/or competitor products.
We
are the assignee of twenty-eight issued United States patents and
eighteen issued foreign patents, which on average have remaining
useful lives of ten years with the longest useful life extending to
2036. Our current issued United States and foreign patents include
patent claims directed to particular electrode configurations,
piezoelectric fiber shock wave devices, chemical components for
shock wave generation, reflector geometries, medical systems
general construction, and detachable therapy heads with data
storage devices. Our United States patents also include patent
claims directed to methods of using acoustic pressure shock waves,
including devices such as our products, to treat ischemic
conditions, spinal cord scar tissue and spinal injuries, bone
fractures and osteoporosis, blood sterilization, stem cell
stimulation, tissue cleaning, and, within particular treatment
parameters, diabetic foot ulcers and pressure sores. While such
patented method claims may provide patent protection against
certain indirect infringing promotion and sales activities of
competing manufacturers and distributors, certain medical methods
performed by medical practitioners or related health care entities
may be subject to exemption from potential infringement claims
under 35 U.S.C. § 287(c) and, therefore, may limit enforcement
of claims of our method patents as compared to device and
non-medical method patents.
11
We
also currently maintain eleven United States non-provisional patent
applications and seven foreign patent applications. Our
patent-pending rights include inventions directed to certain shock
wave devices and systems, ancillary products, and components for
acoustic pressure shock wave treatment devices, and various methods
of using acoustic pressure shock waves. Such patent-pending methods
include, for example, using acoustic pressure shock waves to treat
soft tissue disorders, bones, joints, wounds, skin, blood vessels
and circulatory disorders, lymphatic disorders, cardiac tissue, fat
and cellulite, cancer, blood and fluids sterilization, to destroy
pathogens, to process fluids, meat and dairy products, to destroy
blood vessels occlusions and plaques, and to perform personalized
medical treatments. All of our United States and foreign pending
applications either have yet to be examined or require response to
an examiner’s office action rejections and, therefore, remain
subject to further prosecution, the possibility of further
rejections and appeals, and/or the possibility we may elect to
abandon prosecution, without assurance that a patent may issue from
any pending application.
Under our license to HealthTronics, we reserve exclusive rights in
our purchased portfolio as to orthopedic, tendonopathy, skin
wounds, cardiac, dental, neural medical conditions and to all
conditions in animals (Ortho Field). HealthTronics receives
field-exclusive and sublicensable rights under the purchased
portfolio as to (1) certain HealthTronics lithotripsy devices in
all fields other than the Ortho Field, and (2) all products in the
treatment of renal, ureteral, gall stones and other urological
conditions (Litho Field). HealthTronics also receives non-exclusive
and non-sublicensable rights in the purchased portfolio as to any
products in all fields other than the Ortho Field and Litho Field.
Refer to section “Contractual Obligations” for
information on the default of our loan with
HealthTronics.
Pursuant
to mutual amendment and other assignment-back rights under the
patent license agreement with HealthTronics, we are also a licensee
of certain patents and patent applications that have been assigned
to HealthTronics. We received a perpetual, non-exclusive and
royalty-free license to nine issued foreign patents. Our
non-exclusive license is subject to HealthTronics’ sole
discretion to further maintain any of the patents and pending
applications assigned back to HealthTronics.
As
part of the sale of the veterinary business in June 2009, we have
also granted certain exclusive and non-exclusive patent license
rights to Pulse Veterinary Technologies, LLC for most of our patent
portfolio issued before 2009 to utilize acoustic pressure shock
wave technologies in the field of non-human mammals.
Given
our international patent portfolio, there are growing risks of
challenges to our existing and future patent rights. Such
challenges may result in invalidation or modification of some or
all of our patent rights in a particular patent territory and
reduce our competitive advantage with respect to third party
products and services. Such challenges may also require the
expenditure of significant financial and managerial
resources.
If
we become involved in future litigation or any other adverse
intellectual property proceeding, for example, as a result of an
alleged infringement, or a third party alleging an earlier date of
invention, we may have to spend significant amounts of money and
time and, in the event of an adverse ruling, we could be subject to
liability for damages, including treble damages, invalidation of
our intellectual property and injunctive relief that could prevent
us from using technologies or developing products, any of which
could have a significant adverse effect on our business, financial
condition and results of operation. In addition, any claims
relating to the infringement of third party proprietary rights, or
earlier date of invention, even if not meritorious, could result in
costly litigation or lengthy governmental proceedings and could
divert management’s attention and resources and require us to
enter into royalty or license agreements which are not
advantageous, if available at all.
Trademarks
Since
other products on the market compete with our products, we believe
that our product brand names are an important factor in
establishing and maintaining brand recognition.
We have the following trademark
registrations: SANUWAVE
®
(United States, European Community,
Canada, Japan, Switzerland, Taiwan and under the Madrid Protocol),
dermaPACE
®
(United States, European Community,
Japan, South Korea, Switzerland, Taiwan, Canada and under the
Madrid Protocol), angioPACE
®
(Australia, European Community and
Switzerland), PACE
®
(Pulsed Acoustic Cellular Expression)
(United States, European Community, China, Hong Kong, Singapore,
Switzerland, Taiwan, and Canada), orthoPACE
®
(United States and European
Community), DAP
®
(Diffused Acoustic Pressure) (United
States and European Community) and Profile
™
(United States, European Community and
Switzerland).
12
We also maintain trademark registrations for:
OssaTron
®
(United States and Germany),
evoPACE
®
(Australia, European Community and
Switzerland), Evotron
®
(Germany and Switzerland),
Evotrode
®
(Germany and Switzerland),
Orthotripsy
®
(United States). We are phasing out
the Reflectron
®
(Germany and Switzerland) and
Reflectrode
®
(Germany and Switzerland) trademarks
due to the fact that these two products are no longer available for
sale in any market.
Potential Intellectual Property Issues
Although
we believe that the patents and patent applications, including
those that we license, provide a competitive advantage, the patent
positions of biotechnology and medical device companies are highly
complex and uncertain. The medical device industry is characterized
by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. Our success
will depend in part on us not infringing on patents issued to
others, including our competitors and potential competitors, as
well as our ability to enforce our patent rights. We also rely on
trade secrets, know-how, continuing technological innovation and
in-licensing opportunities to develop and maintain our proprietary
position.
Despite
any measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our products
and product candidates, or to obtain and use information that we
regard as proprietary. In enforcement proceedings in Switzerland,
we assisted HealthTronics as an informer of misappropriation by a
Swiss company called SwiTech and related third parties of
intellectual property rights in legacy proprietary software and
devices relating to assets we purchased from HealthTronics in
August 2005. As a result of this action, SwiTech was forced into
bankruptcy. We also pursued the alleged misappropriation by another
Swiss company called SwiTalis and related third parties of
intellectual property rights in legacy proprietary software and
devices relating to assets we purchased from HealthTronics in
August 2005. In 2016, SwiTalis claimed copyright rights on the High
Voltage Modules that were used in our devices and the old line of
Pulse Vet devices during the manufacturing process at Swisstronics
in Switzerland. At this time, however, no such court action against
Swisstronics is pending in Switzerland and we believe that it is
unlikely that SwiTalis will pursue their earlier allegations
against Swisstronics and, indirectly, us. In 2017, we abandoned our
action against SwiTalis. There can be no assurance, however, that
future claims or lawsuits against us may not be brought, and such
present or future actions against violations of our intellectual
property rights may result in us incurring material expense and
divert the attention of management.
Third
parties that license our proprietary rights, such as trademarks,
patented technology or copyrighted material, may also take actions
that diminish the value of our proprietary rights or reputation. In
addition, the steps we take to protect our proprietary rights may
not be adequate and third parties may infringe or misappropriate
our copyrights, trademarks, trade dress, patents, and similar
proprietary rights.
We
collaborate with other persons and entities on research,
development, and commercialization activities and expect to do so
in the future. Disputes may arise about inventorship and
corresponding rights in know-how and inventions resulting from the
joint creation or use of intellectual property by us and our
collaborators, researchers, licensors, licensees and consultants.
In addition, other parties may circumvent any proprietary
protection that we do have. As a result, we may not be able to
maintain our proprietary position.
Competition
We
believe the advanced wound care market can benefit from our
technology which up-regulates the biological factors that promote
wound healing. Current medical technologies developed by Acelity
(formerly Kinetic Concepts, Inc.), Organogenesis, Inc., Smith &
Nephew plc, Derma Sciences, Inc., MiMedx Group, Inc., Osiris
Therapeutics, Inc., Molnlycke Health Care, and Systagenix Wound
Management (US), Inc. (now owned by Acelity) manage wounds, but, in
our opinion, do not provide the value proposition to the patients
and care givers like our PACE technology has the potential to do.
The leading medical device serving this market is the Vacuum
Assisted Closure (“V.A.C.”) System marketed by KCI. The
V.A.C. is a negative pressure wound therapy device that applies
suction to debride and manage wounds.
There
are also several companies that market extracorporeal shock wave
device products targeting lithotripsy and orthopedic markets,
including Dornier MedTech, Storz Medical AG, Electro Medical
Systems (EMS) S.A., CellSonic Medical and Tissue Regeneration
Technologies, LLC, and could ultimately pursue the wound care
market. Nevertheless, we believe that dermaPACE has a competitive
advantage over all of these existing technologies by achieving
wound closure by means of a minimally invasive process through
innate biological response to PACE.
13
Developing
and commercializing new products is highly competitive. The market
is characterized by extensive research and clinical efforts and
rapid technological change. We face intense competition worldwide
from medical device, biomedical technology and medical products and
combination products companies, including major pharmaceutical
companies. We may be unable to respond to technological advances
through the development and introduction of new products. Most of
our existing and potential competitors have substantially greater
financial, marketing, sales, distribution, manufacturing and
technological resources. These competitors may also be in the
process of seeking FDA or other regulatory approvals, or patent
protection, for new products. Our competitors may commercialize new
products in advance of our products. Our products also face
competition from numerous existing products and procedures, which
currently are considered part of the standard of care. In order to
compete effectively, our products will have to achieve widespread
market acceptance.
Regulatory Matters
FDA Regulation
Each
of our products must be approved or cleared by the FDA before it is
marketed in the United States. Before and after approval or
clearance in the United States, our product candidates are subject
to extensive regulation by the FDA under the Federal Food, Drug,
and Cosmetic Act and/or the Public Health Service Act, as well as
by other regulatory bodies. FDA regulations govern, among other
things, the development, testing, manufacturing, labeling, safety,
storage, record-keeping, market clearance or approval, advertising
and promotion, import and export, marketing and sales, and
distribution of medical devices and pharmaceutical
products.
In
the United States, the FDA subjects medical products to rigorous
review. If we do not comply with applicable requirements, we may be
fined, the government may refuse to approve our marketing
applications or to allow us to manufacture or market our products,
and we may be criminally prosecuted. Failure to comply with the law
could result in, among other things, warning letters, civil
penalties, delays in approving or refusal to approve a product
candidate, product recall, product seizure, interruption of
production, operating restrictions, suspension or withdrawal of
product approval, injunctions, or criminal
prosecution.
The
FDA has determined that our technology and product candidates
constitute “medical devices.” The FDA determines what
center or centers within the FDA will review the product and its
indication for use, and also determines under what legal authority
the product will be reviewed. For the current indications, our
products are being reviewed by the Center for Devices and
Radiological Health. However, we cannot be sure that the FDA will
not select a different center and/or legal authority for one or
more of our other product candidates, in which case the
governmental review requirements could vary in some
respects.
FDA Approval or Clearance of Medical Devices
In
the United States, medical devices are subject to varying degrees
of regulatory control and are classified in one of three classes
depending on the extent of controls the FDA determines are
necessary to reasonably ensure their safety and
efficacy:
●
Class I:
general controls, such as labeling and adherence to quality system
regulations;
●
Class II:
special controls, pre-market notification (510(k)), specific
controls such as performance standards, patient registries, and
post market surveillance, and additional controls such as labeling
and adherence to quality system regulations; and
●
Class III:
special controls and approval of a pre-market approval (PMA)
application.
Each
of our product candidates require FDA authorization prior to
marketing, by means of either a 510(k) clearance or a PMA
approval.
To
request marketing authorization by means of a 510(k) clearance, we
must submit a pre-market notification demonstrating that the
proposed device is substantially equivalent to another legally
marketed medical device, has the same intended use, and is as safe
and effective as a legally marketed device and does not raise
different questions of safety and effectiveness than does a legally
marketed device. 510(k) submissions generally include, among other
things, a description of the device and its manufacturing, device
labeling, medical devices to which the device is substantially
equivalent, safety and biocompatibility information, and the
results of performance testing. In some cases, a 510(k) submission
must include data from human clinical studies. Marketing may
commence only when the FDA issues a clearance letter finding
substantial equivalence. After a device receives 510(k) clearance,
any product modification that could significantly affect the safety
or effectiveness of the product, or that would constitute a
significant change in intended use, requires a new 510(k) clearance
or, if the device would no longer be substantially equivalent,
would require a PMA. If the FDA determines that the product does
not qualify for 510(k) clearance, then a company must submit and
the FDA must approve a PMA before marketing can begin.
14
In
the past, the 510(k) pathway for product marketing required only
the proof of significant equivalence in technology for a given
indication with a previously cleared device. Currently, there
has been a trend of the FDA requiring additional clinical work to
prove efficacy in addition to technological equivalence.
Thus, no matter which regulatory pathway we may take in the future
towards marketing products in the United States, we will be
required to provide clinical proof of device
effectiveness.
Within
the past few years, the FDA has released guidelines for the
FDA’s reviewers to use during a product’s submission
review process. This guidance provides the FDA reviewers with
a uniform method of evaluating the benefits verses the risks of a
device when used for a proposed specific indication. Such a
benefit/risk evaluation is very useful when applied to a novel
device or to a novel indication and provides the FDA with a
consistent tool to document their decision process. While
intended as a guide for internal FDA use, the public availability
of this guidance allows medical device manufacturers to use the
review matrix to develop sound scientific and clinical backup to
support proposed clinical claims and to help guide the FDA, through
the decision process, to look at the relevant data. We intend
to use this benefit/risk tool in our FDA submissions.
A
PMA application must provide a demonstration of safety and
effectiveness, which generally requires extensive pre-clinical and
clinical trial data. Information about the device and its
components, device design, manufacturing and labeling, among other
information, must also be included in the PMA. As part of the PMA
review, the FDA will inspect the manufacturer’s facilities
for compliance with Quality System Regulation requirements, which
govern testing, control, documentation and other aspects of quality
assurance with respect to manufacturing. If the FDA determines the
application or manufacturing facilities are not acceptable, the FDA
may outline the deficiencies in the submission and often will
request additional testing or information. Notwithstanding the
submission of any requested additional information, the FDA
ultimately may decide that the application does not satisfy the
regulatory criteria for approval. During the review period, an FDA
advisory committee, typically a panel of clinicians and
statisticians, is likely to be convened to review the application
and recommend to the FDA whether, or upon what conditions, the
device should be approved. The FDA is not bound by the advisory
panel decision. While the FDA often follows the panel’s
recommendation, there have been instances where the FDA has not. If
the FDA finds the information satisfactory, it will approve the
PMA. The PMA approval can include post-approval conditions,
including, among other things, restrictions on labeling, promotion,
sale and distribution, or requirements to do additional clinical
studies post-approval. Even after approval of a PMA, a new PMA or
PMA supplement is required to authorize certain modifications to
the device, its labeling or its manufacturing process. Supplements
to a PMA often require the submission of the same type of
information required for an original PMA, except that the
supplement is generally limited to that information needed to
support the proposed change from the product covered by the
original PMA.
During
the review of either a PMA application or 510(k) submission, the
FDA may request more information or additional studies and may
decide that the indications for which we seek approval or clearance
should be limited. We cannot be sure that our product candidates
will be approved or cleared in a timely fashion or at all. In
addition, laws and regulations and the interpretation of those laws
and regulations by the FDA may change in the future. We cannot
foresee what effect, if any, such changes may have on
us.
Obtaining
medical device clearance, approval, or licensing in the United
States or abroad can be an expensive process. The fees for
submitting an original PMA to the FDA for consideration of device
approval are substantial. Fees for supplement PMA’s are less
costly but still can be substantial. International fee structures
vary from minimal to substantial, depending on the country. In
addition, we are subject to annual establishment registration fees
in the United States and abroad. Device licenses require periodic
renewal with associated fees as well. In the United States, there
is an annual requirement for submitting device reports for Class
III/PMA devices, along with an associated fee. Currently, we are
registered as a Small Business Manufacturer with the FDA and as
such are subject to reduced fees. If, in the future, our revenues
exceed a certain annual threshold limit, we may not qualify for the
Small Business Manufacturer reduced fee amounts and will be
required to pay full fee amounts.
Clinical Trials of Medical Devices
One
or more clinical trials are almost always required to support a PMA
application and more recently are becoming necessary to support a
510(k) submission. Clinical studies of unapproved or un-cleared
medical devices or devices being studied for uses for which they
are not approved or cleared (investigational devices) must be
conducted in compliance with FDA requirements. If an
investigational device could pose a significant risk to patients,
the sponsor company must submit an IDE application to the FDA prior
to initiation of the clinical study. An IDE application must be
supported by appropriate data, such as animal and laboratory test
results, showing that it is safe to test the device on humans and
that the testing protocol is scientifically sound. The IDE will
automatically become effective 30 days after receipt by the
FDA unless the FDA notifies the company that the investigation may
not begin. Clinical studies of investigational devices may not
begin until an institutional review board (IRB) has approved the
study.
15
During
the study, the sponsor must comply with the FDA’s IDE
requirements. These requirements include investigator selection,
trial monitoring, adverse event reporting, and record keeping. The
investigators must obtain patient informed consent, rigorously
follow the investigational plan and study protocol, control the
disposition of investigational devices, and comply with reporting
and record keeping requirements. We, the FDA, or the IRB at each
institution at which a clinical trial is being conducted, may
suspend a clinical trial at any time for various reasons, including
a belief that the subjects are being exposed to an unacceptable
risk. During the approval or clearance process, the FDA typically
inspects the records relating to the conduct of one or more
investigational sites participating in the study supporting the
application.
Post-Approval Regulation of Medical Devices
After
a device is cleared or approved for marketing, numerous and
pervasive regulatory requirements continue to apply. These
include:
●
the
FDA Quality Systems Regulation (QSR), which governs, among other
things, how manufacturers design, test, manufacture, exercise
quality control over, and document manufacturing of their
products;
●
labeling
and claims regulations, which prohibit the promotion of products
for unapproved or “off-label” uses and impose other
restrictions on labeling;
●
the
Medical Device Reporting regulation, which requires reporting to
the FDA of certain adverse experiences associated with use of the
product; and
●
post
market surveillance, including documentation of clinical experience
and also follow-on, confirmatory studies.
We
continue to be subject to inspection by the FDA to determine our
compliance with regulatory requirements, as are our suppliers,
contract manufacturers, and contract testing
laboratories.
International
sales of medical devices manufactured in the United States that are
not approved or cleared by the FDA are subject to FDA export
requirements. Exported devices are subject to the regulatory
requirements of each country to which the device is exported.
Exported devices may also fall under the jurisdiction of the United
States Department of Commerce/Bureau of Industry and Security and
compliance with export regulations may be required for certain
countries.
Manufacturing cGMP Requirements
Manufacturers
of medical devices are required to comply with FDA manufacturing
requirements contained in the FDA’s current Good
Manufacturing Practices (cGMP) set forth in the quality system
regulations promulgated under section 520 of the Food, Drug and
Cosmetic Act. cGMP regulations require, among other things, quality
control and quality assurance as well as the corresponding
maintenance of records and documentation. The manufacturing
facility for our products must meet cGMP requirements to the
satisfaction of the FDA pursuant to a pre-PMA approval inspection
before we can use it. We and some of our third party service
providers are also subject to periodic inspections of facilities by
the FDA and other authorities, including procedures and operations
used in the testing and manufacture of our products to assess our
compliance with applicable regulations. Failure to comply with
statutory and regulatory requirements subjects a manufacturer to
possible legal or regulatory action, including the seizure or
recall of products, injunctions, consent decrees placing
significant restrictions on or suspending manufacturing operations,
and civil and criminal penalties. Adverse experiences with the
product must be reported to the FDA and could result in the
imposition of marketing restrictions through labeling changes or in
product withdrawal. Product approvals may be withdrawn if
compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product occur
following the approval.
International Regulation
We
are subject to regulations and product registration requirements in
many foreign countries in which we may sell our products, including
in the areas of product standards, packaging requirements, labeling
requirements, import and export restrictions and tariff
regulations, duties and tax requirements. The time required to
obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for
licensing a product in a foreign country may differ significantly
from FDA requirements.
16
The
primary regulatory environment in Europe is the European Union,
which consists of 28 member states encompassing most of the major
countries in Europe. In the European Union, the European Medicines
Agency (EMA) and the European Union Commission have determined that
dermaPACE, orthoPACE, OssaTron and Evotron will be regulated as
medical device products. These devices have been determined to be
Class IIb devices. These devices are CE Marked and as such can be
marketed and distributed within the European Economic
Area.
The
primary regulatory body in Canada is Health Canada. In addition to
needing appropriate data to obtain market licensing in Canada, we
must have an ISO 13485 certification, as well as meet additional
requirements of Canadian laws. We currently maintain this
certification. We maintain a device license for dermaPACE with
Health Canada for the indication of “devices for application
of shock waves (pulsed acoustic waves) on acute and chronic defects
of the skin and subcutaneous soft tissue”.
The
primary regulatory bodies and paths in Asia and Australia are
determined by the requisite country authority. In most cases,
establishment registration and device licensing are applied for at
the applicable Ministry of Health through a local intermediary. The
requirements placed on the manufacturer are typically the same as
those contained in ISO 9001 or ISO 13485.
European Good Manufacturing Practices
In
the European Union, the manufacture of medical devices is subject
to current good manufacturing practice (cGMP), as set forth in the
relevant laws and guidelines of the European Union and its member
states. Compliance with cGMP is generally assessed by the competent
regulatory authorities. Typically, quality system evaluation is
performed by a Notified Body, which also recommends to the relevant
competent authority for the European Community CE Marking of a
device. The Competent Authority may conduct inspections of relevant
facilities, and review manufacturing procedures, operating systems
and personnel qualifications. In addition to obtaining approval for
each product, in many cases each device manufacturing facility must
be audited on a periodic basis by the Notified Body. Further
inspections may occur over the life of the product.
United States Anti-Kickback and False Claims Laws
In
the United States, there are Federal and state anti-kickback laws
that prohibit the payment or receipt of kickbacks, bribes or other
remuneration intended to induce the purchase or recommendation of
healthcare products and services. Violations of these laws can lead
to civil and criminal penalties, including exclusion from
participation in Federal healthcare programs. These laws are
potentially applicable to manufacturers of products regulated by
the FDA as medical devices, such as us, and hospitals, physicians
and other potential purchasers of such products. Other provisions
of Federal and state laws provide civil and criminal penalties for
presenting, or causing to be presented, to third-party payers for
reimbursement, claims that are false or fraudulent, or which are
for items or services that were not provided as claimed. In
addition, certain states have implemented regulations requiring
medical device and pharmaceutical companies to report all gifts and
payments over $50 to medical practitioners. This does not apply to
instances involving clinical trials. Although we intend to
structure our future business relationships with clinical
investigators and purchasers of our products to comply with these
and other applicable laws, it is possible that some of our business
practices in the future could be subject to scrutiny and challenge
by Federal or state enforcement officials under these
laws.
Third Party Reimbursement
We
anticipate that sales volumes and prices of the products we
commercialize will depend in large part on the availability of
coverage and reimbursement from third party payers. Third party
payers include governmental programs such as Medicare and Medicaid,
private insurance plans, and workers’ compensation plans.
These third party payers may deny coverage and reimbursement for a
product or therapy, in whole or in part, if they determine that the
product or therapy was not medically appropriate or necessary. The
third party payers also may place limitations on the types of
physicians or clinicians that can perform specific types of
procedures. In addition, third party payers are increasingly
challenging the prices charged for medical products and services.
Some third party payers must also pre-approve coverage for new or
innovative devices or therapies before they will reimburse
healthcare providers who use the products or therapies. Even though
a new product may have been approved or cleared by the FDA for
commercial distribution, we may find limited demand for the device
until adequate reimbursement has been obtained from governmental
and private third party payers.
17
In
international markets, reimbursement and healthcare payment systems
vary significantly by country, and many countries have instituted
price ceilings on specific product lines and procedures. There can
be no assurance that procedures using our products will be
considered medically reasonable and necessary for a specific
indication, that our products will be considered cost-effective by
third party payers, that an adequate level of reimbursement will be
available or that the third party payers’ reimbursement
policies will not adversely affect our ability to sell our products
profitably.
In
the United States, some insured individuals are receiving their
medical care through managed care programs, which monitor and often
require pre-approval of the services that a member will receive.
Some managed care programs are paying their providers on a per
capita basis, which puts the providers at financial risk for the
services provided to their patients by paying these providers a
predetermined payment per member per month, and consequently, may
limit the willingness of these providers to use products, including
ours.
One
of the components in the reimbursement decision by most private
insurers and governmental payers, including the Centers for
Medicare & Medicaid Services, which administers Medicare, is
the assignment of a billing code. Billing codes are used to
identify the procedures performed when providers submit claims to
third party payers for reimbursement for medical services. They
also generally form the basis for payment amounts. We will seek new
billing codes for the wound care indications of our products as
part of our efforts to commercialize such products.
The
initial phase of establishing a professional billing code for a
medical service typically includes applying for a CPT Category III
code for both hospital and in-office procedures. This is a tracking
code without relative value assigned that allows third party payers
to identify and monitor the service as well as establish value if
deemed medically necessary. The process includes CPT application
submission, clinical discussion with Medical Professional Society
CPT advisors as well as American Medical Association (AMA) CPT
Editorial Panel review. A new CPT Category III code will be
assigned if the AMA CPT Editorial Panel committee deems it meets
the applicable criteria and is appropriate. In 2018, we applied for
two, new CPT Category III codes for extracorporeal shock wave
therapy (ESWT) in wound healing. These codes were published by
AMA/CPT for use beginning January 1, 2019.
The
secondary phase in the CPT billing code process includes the
establishment of a permanent CPT Category I code in which relative
value is analyzed and established by the AMA. The approval of this
code, is based on, among other criteria, widespread usage and
established clinical efficacy of the medical service.
There
are also billing codes that facilities, rather than health care
professionals, utilize for the reimbursement of operating costs for
a particular medical service. For the hospital outpatient setting,
the Centers for Medicare & Medicaid Services automatically
classified the new ESWT wound healing CPT Category III codes into
interim APC groups. The APC groups are services grouped together
based on clinical characteristics and similar costs. An APC
classification does not guarantee payment.
We
believe that the overall escalating costs of medical products and
services has led to, and will continue to lead to, increased
pressures on the healthcare industry to reduce the costs of
products and services. In addition, recent healthcare reform
measures, as well as legislative and regulatory initiatives at the
Federal and state levels, create significant additional
uncertainties. There can be no assurance that third party coverage
and reimbursement will be available or adequate, or that future
legislation, regulation, or reimbursement policies of third party
payers will not adversely affect the demand for our products or our
ability to sell these products on a profitable basis. The
unavailability or inadequacy of third party payer coverage or
reimbursement would have a material adverse effect on our business,
operating results and financial condition.
Confidentiality and Security of Personal Health
Information
The
Health Insurance Portability and Accountability Act of 1996, as
amended (“HIPAA”), contains provisions that protect
individually identifiable health information from unauthorized use
or disclosure by covered entities and their business associates.
The Office for Civil Rights of HHS, the agency responsible for
enforcing HIPAA, has published regulations to address the privacy
(the “Privacy Rule”) and security (the “Security
Rule”) of protected health information (“PHI”).
HIPAA also requires that all providers who transmit claims for
health care goods or services electronically utilize standard
transaction and data sets and to standardize national provider
identification codes. In addition, the American Recovery and
Reinvestment Act (“ARRA”) enacted the HITECH Act, which
extends the scope of HIPAA to permit enforcement against business
associates for a violation, establishes new requirements to notify
the Office for Civil Rights of HHS of a breach of HIPAA, and allows
the Attorneys General of the states to bring actions to enforce
violations of HIPAA. Rules implementing various aspects of HIPAA
are continuing to be promulgated.
18
We
anticipate that, as we expand our dermaPACE business, we will in
the future be a covered entity under HIPAA. We intend to adopt
policies and procedures to comply with the Privacy Rule, the
Security Rule and the HIPAA statute as such regulations become
applicable to our business and as such regulations are in effect at
such time.
In
addition to the HIPAA Privacy Rule and Security Rule described
above, we may become subject to state laws regarding the handling
and disclosure of patient records and patient health information.
These laws vary widely. Penalties for violation include sanctions
against a laboratory’s licensure as well as civil or criminal
penalties. Additionally, private individuals may have a right of
action against us for a violation of a state’s privacy laws.
We intend to adopt policies and procedures to ensure material
compliance with state laws regarding the confidentiality of health
information as such laws become applicable to us and to monitor and
comply with new or changing state laws on an ongoing
basis.
Environmental and Occupational Safety and Health
Regulations
Our
operations are subject to extensive Federal, state, provincial and
municipal environmental statutes, regulations and policies,
including those promulgated by the Occupational Safety and Health
Administration, the United States Environmental Protection Agency,
Environment Canada, Alberta Environment, the Department of Health
Services, and the Air Quality Management District, that govern
activities and operations that may have adverse environmental
effects such as discharges into air and water, as well as handling
and disposal practices for solid and hazardous wastes. Some of
these statutes and regulations impose strict liability for the
costs of cleaning up, and for damages resulting from, sites of
spills, disposals, or other releases of contaminants, hazardous
substances and other materials and for the investigation and
remediation of environmental contamination at properties leased or
operated by us and at off-site locations where we have arranged for
the disposal of hazardous substances. In addition, we may be
subject to claims and lawsuits brought by private parties seeking
damages and other remedies with respect to similar matters. We have
not to date needed to make material expenditures to comply with
current environmental statutes, regulations and policies. However,
we cannot predict the impact and costs those possible future
statutes, regulations and policies will have on our
business.
Employees
As
of March 28, 2019, we had a total of fourteen full time employees
and two temporary employees in the United States. Of these, eight
were engaged in research and development which includes clinical,
regulatory and quality. None of our employees are represented by a
labor union or covered by a collective bargaining agreement. We
believe our relationship with our employees is good.
Item 1A.
RISK
FACTORS
Risks Related to our Business
Our recurring losses from operations and dependency upon future
issuances of equity or other financing to fund ongoing operations
have raised substantial doubts as to our ability to continue as a
going concern
.
We will be
required to raise additional funds to finance our operations and
remain a going concern; we may not be able to do so, and/or the
terms of any financings may not be advantageous to
us.
The continuation of our business is dependent upon
raising additional capital.
We expect to devote substantial
resources for the commercialization of the dermaPACE and will
continue to research and develop the non-medical uses of the PACE
technology, both of which will require additional capital
resources. We incurred a net loss of $11,631,394 and $5,537,936 for
the years ended December 31, 2018 and 2017, respectively. These
operating losses and the events of default on the notes payable to
HealthTronics, Inc., the Company’s convertible promissory
notes and the Company’s short term notes payable create
uncertainty about our ability to continue as a going
concern.
At
December 31, 2018, we had cash and cash equivalents totaling
$364,549
and negative working capital
of $15,403,609. For the years ended December 31, 2018 and 2017, our
net cash used by operating activities was $3,621,172 and
$1,528,971, respectively. Management expects the cash used in
operations for the Company will be approximately $225,000 to
$300,000 per month for the first half of 2019 and $275,000 to
$350,000 per month for the second half of 2019 as
resources
are devoted to the commercialization of the dermaPACE product
including hiring of new employees, expansion of our international
business and continued research and development of non-medical uses
of our technology.
19
The continuation of our business is dependent upon
raising additional capital to fund operations. Management’s
plans are to obtain additional capital in 2019 through investments
by strategic partners for market opportunities, which may include
strategic partnerships or licensing arrangements, or raise capital
through the conversion of outstanding warrants, the issuance of
common or preferred stock, securities convertible into common
stock, or secured or unsecured debt. These possibilities, to the
extent available, may be on terms that result in significant
dilution to our existing shareholders.
Although no
assurances can be given, management believes that potential
additional issuances of equity or other potential financing
transactions as discussed above should provide the necessary
funding for us.
If these efforts are
unsuccessful, we may be required to significantly curtail or
discontinue operations or obtain funds through financing
transactions with unfavorable terms.
The accompanying
consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a
going concern and the realization of assets and satisfaction of
liabilities in the normal course of business. The carrying amounts
of assets and liabilities presented in the financial statements do
not necessarily purport to represent realizable or settlement
values. The consolidated financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
Our consolidated financial statements
do not include any adjustments relating to the recoverability of
assets and classification of assets and liabilities that might be
necessary should we be unable to continue as a going
concern.
In addition, we may
have potential liability for certain sales, offers or issuances of
equity securities of the Company in possible violation of federal
securities laws. Pursuant to a Registration Statement on Form S-1
(Registration No. 333-208676), declared effective on February 16,
2016 (the “2016 Registration Statement”), the Company
sought to register: a primary offering of up to $4,000,000 units,
the Common Stock included as part of the units, the warrants
included as part of the units, and the Common Stock issuable upon
exercise of such warrants; a primary offering of up to $400,000
placement agent warrants and the Common Stock issuable upon
exercise of such placement agent warrants; and a secondary offering
of 23,545,144 shares of Common Stock held by certain selling
stockholders named in the 2016 Registration Statement. The SEC
Staff’s interpretations provides that, when an issuer is
registering units composed of common stock, common stock purchase
warrants, and the common stock underlying the warrants, the
registration fee is based on the offer price of the units and the
exercise price of the warrants. The registration fee paid did
include the fee based on the offer price of the units, allocated to
the unit line item in the fee table. Although the fee table in the
2016 Registration Statement included a line item for the Common
Stock underlying the warrants, the Company did not include in that
line item the fee payable based on the exercise price of $0.08 per
share for such warrants, which amount should have been allocated to
such line item based on the SEC Staff’s interpretations. As a
result, a portion of the securities intended to be registered by
the 2016 Registration Statement was not registered. In addition, in
a post-effective amendment to the 2016 Registration Statement filed
on September 23, 2016, too many placement agent warrants were
inadvertently deregistered. The post-effective amendment stated
that the Company had issued $180,100, based on 2,251,250 Class L
warrants issued with a $0.08 exercise price of warrants to the
placement agent and therefore deregistered $219,900, based on
2,748,750 Class L warrants issued with a $0.08 exercise price of
placement agent warrants from the $400,000, based on 5,000,000
Class L warrants issued with a $0.08 exercise price total offering
amount included in the Registration Statement. The actual warrants
issued to the placement agent totaled $240,133.36, based on
3,001,667 Class L warrants issued with a $0.08 exercise price, and
only $159,867, based on 1,998,338 Class L warrants issued with a
$0.08 exercise price should have been deregistered in such
post-effective amendment. To the extent that we have not registered
or failed to maintain an effective registration statement with
respect to any of the transactions in securities described above
and with respect to our ongoing offering of shares of Common Stock
underlying the warrants, and a violation of Section 5 of the
Securities Act did in fact occur or is occurring, eligible holders
of our securities that participated in these offerings would have a
right to rescind their transactions, and the Company may have to
refund any amounts paid for the securities, which could have a
materially adverse effect on the Company’s financial
condition. Eligible securityholders have not filed a claim against
the Company alleging a violation of Section 5 of the Securities Act
with respect to these transactions, but they could file a claim in
the future. Furthermore, the ongoing offering of and issuance of
shares of Common Stock underlying certain of our warrants from the
2016 Registration Statement may have been, andmay continue to be,
in violation of Section 5 of the Securities Act and the rules and
regulations under the Securities Act, because we did not update the
prospectus in the 2016 Registration Statement for a period of time
after the 2016 Registration Statement was declared effective and
because our reliance on Rule 457(p) under the Securities Act in an
amendment to our Registration Statement on Form S-1 (Registration
No. 333-213774) filed on September 23, 2016 effected a
deregistration of the securities registered under the 2016
Registration Statement. Eligible securityholders have not filed a
claim against the Company alleging a violation of Section 5 of the
Securities Act, but they could file such a claim in the future. If
a violation of Section 5 of the Securities Act did in fact occur or
is occurring, eligible securityholders would have a right to
rescind their transactions, and the Company may have to refund any
amounts paid the securities, which could have a materially adverse
effect on the Company’s financial
condition.
We have a history of losses and we may continue to incur losses and
may not achieve or maintain profitability.
For
the year ended December 31, 2018, we had a net loss of
$11,631,394 and used $3,621,172of cash in operations. For the year
ended December 31, 2017, we had a net loss of $5,537,936 and
used $1,528,971 of cash in operations. As of December 31, 2018, we
had an accumulated deficit of $116,602,778 and a total
stockholders' deficit of $15,356,099. As a result of our
significant research, clinical development, regulatory compliance
and general and administrative expenses, we expect to incur losses
as we continue to incur expenses related to commercialization of
the dermaPACE System and research and development of the
non-medical uses of the PACE technology. Even if we succeed in
developing and commercializing the dermaPACE System or any other
product candidates, we may not be able to generate sufficient
revenues and we may never achieve or be able to maintain
profitability.
20
If we are unable to successfully raise additional capital, our
viability may be threatened; however, if we do raise additional
capital, your percentage ownership as a shareholder could decrease
and constraints could be placed on the operations of our
business.
We
have experienced negative operating cash flows since our inception
and have funded our operations primarily from proceeds received
from sales of our capital stock, the issuance of convertible
promissory notes, the issuance of notes payable to related parties,
the issuance of promissory notes, the sale of our veterinary
division in June 2009 and product sales. We will seek to obtain
additional funds in the future through equity or debt financings,
or strategic alliances with third parties, either alone or in
combination with equity financings. These financings could result
in substantial dilution to the holders of our common stock, or
require contractual or other restrictions on our operations or on
alternatives that may be available to us. If we raise additional
funds by issuing debt securities, these debt securities could
impose significant restrictions on our operations. Any such
required financing may not be available in amounts or on terms
acceptable to us, and the failure to procure such required
financing could have a material adverse effect on our business,
financial condition and results of operations, or threaten our
ability to continue as a going concern. Additionally, we will be
required to make mandatory prepayments of principal to
HealthTronics, Inc. on the notes payable, related parties equal to
20% of the proceeds received through the issuance or sale of any
equity securities in cash or through the licensing of our patents
or other intellectual property rights.
A
variety of factors could impact our need to raise additional
capital, the timing of any required financings and the amount of
such financings. Factors that may cause our future capital
requirements to be greater than anticipated or could accelerate our
need for funds include, without limitation:
●
unanticipated
expenditures in research and development or manufacturing
activities;
●
delayed
market acceptance of any approved product;
●
unanticipated
expenditures in the acquisition and defense of intellectual
property rights;
●
the
failure to develop strategic alliances for the marketing of some of
our product candidates;
●
additional
inventory builds to adequately support the launch of new
products;
●
unforeseen
changes in healthcare reimbursement for procedures using any of our
approved products;
●
inability
to train a sufficient number of physicians to create a demand for
any of our approved products;
●
lack
of financial resources to adequately support our
operations;
●
difficulties
in maintaining commercial scale manufacturing capacity and
capability;
●
unforeseen
problems with our third party manufacturers, service providers or
specialty suppliers of certain raw materials;
●
unanticipated
difficulties in operating in international markets;
●
unanticipated
financial resources needed to respond to technological changes and
increased competition;
●
unforeseen
problems in attracting and retaining qualified
personnel;
●
the impact of the
Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Affordability Reconciliation Act
(collectively the PPACA) on our operations;
●
the impact of
changes in U.S. health care law and policy on our
operations;
●
enactment
of new legislation or administrative regulations;
●
the
application to our business of new court decisions and regulatory
interpretations;
●
claims
that might be brought in excess of our insurance
coverage;
●
delays
in timing of receipt of required regulatory approvals;
●
the
failure to comply with regulatory guidelines; and
●
the
uncertainty in industry demand and patient wellness
behavior.
In
addition, although we have no present commitments or understandings
to do so, we may seek to expand our operations and product line
through acquisitions. Any acquisition would likely increase our
capital requirements.
Our product candidates may not be developed or commercialized
successfully.
Our
product candidates are based on a technology that has not been used
previously in the manner we propose and must compete with more
established treatments currently accepted as the standards of care.
Market acceptance of our products will largely depend on our
ability to demonstrate their relative safety, efficacy,
cost-effectiveness and ease of use.
21
We are subject to risks that:
●
the
FDA or a foreign regulatory authority finds our product candidates
ineffective or unsafe;
●
we
do not receive necessary regulatory approvals;
●
the
regulatory review and approval process may take much longer than
anticipated, requiring additional time, effort and expense to
respond to regulatory comments and/or directives;
●
the
reimbursement for our products is difficult to obtain or is too
low, which can hinder the introduction and acceptance of our
products in the market;
●
we
are unable to get our product candidates in commercial quantities
at reasonable costs; and
●
the
patient and physician community does not accept our product
candidates.
In
addition, our product development program may be curtailed,
redirected, eliminated or delayed at any time for many reasons,
including:
●
adverse
or ambiguous results;
●
undesirable
side effects that delay or extend the trials;
●
the
inability to locate, recruit, qualify and retain a sufficient
number of clinical investigators or patients for our trials;
and
●
regulatory
delays or other regulatory actions.
We
cannot predict whether we will successfully develop and
commercialize our product candidates. If we fail to do so, we will
not be able to generate substantial revenues, if any.
The medical device/therapeutic product industries are highly
competitive and subject to rapid technological change. If our
competitors are better able to develop and market products that are
safer and more effective than any products we may develop, our
commercial opportunities will be reduced or
eliminated.
Our
success depends, in part, upon our ability to maintain a
competitive position in the development of technologies and
products. We face competition from established medical device,
pharmaceutical and biotechnology companies, as well as from
academic institutions, government agencies, and private and public
research institutions in the United States and abroad. Many of our
principal competitors have significantly greater financial
resources and expertise than we do in research and development,
manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products.
Smaller or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements, or
mergers with, or acquisitions by, large and established companies,
or through the development of novel products and
technologies.
The
industry in which we operate has undergone, and we expect it to
continue to undergo, rapid and significant technological change,
and we expect competition to intensify as technological advances
are made. Our competitors may develop and commercialize
pharmaceutical, biotechnology or medical devices that are safer or
more effective, have fewer side effects or are less expensive than
any products that we may develop. We also compete with our
competitors in recruiting and retaining qualified scientific and
management personnel, in establishing clinical trial sites and
patient registration for clinical trials, and in acquiring
technologies complementary to our programs or advantageous to our
business.
If our products and product candidates do not gain market
acceptance among physicians, patients and the medical community, we
may be unable to generate significant revenues, if
any.
Even
if we obtain regulatory approval for our product candidates, they
may not gain market acceptance among physicians, healthcare payers,
patients and the medical community. Market acceptance will depend
on our ability to demonstrate the benefits of our approved products
in terms of safety, efficacy, convenience, ease of administration
and cost effectiveness. In addition, we believe market acceptance
depends on the effectiveness of our marketing strategy, the pricing
of our approved products and the reimbursement policies of
government and third party payers. Physicians may not utilize our
approved products for a variety of reasons and patients may
determine for any reason that our product is not useful to them. If
any of our approved products fail to achieve market acceptance, our
ability to generate revenues will be limited.
22
We may not successfully establish and maintain licensing and/or
partnership arrangements for our technology for non-medical uses,
which could adversely affect our ability to develop and
commercialize our non-medical technology.
Our
strategy for the development, testing, manufacturing, and
commercialization of our technology for non-medical uses generally
relies on establishing and maintaining collaborations with
licensors and other third parties. We may not be able to obtain,
maintain or expand these or other licenses and collaborations or
establish additional licensing and collaboration arrangements
necessary to develop and commercialize our product candidates. Even
if we are able to obtain, maintain or establish licensing or
collaboration arrangements, these arrangements may not be on
favorable terms and may contain provisions that will restrict our
ability to develop, test and market our product candidates.
Furthermore, our licensing and collaboration agreements are subject
to counterparty risk, and to the extent the licensors or other
third parties that we enter into licensing, joint venture or other
collaboration arrangements with face operational, regulatory or
financial difficulties, and to the extent we are unable to find
suitable alternative counterparties in a timely manner, if at all,
our business and results of operations could be materially
adversely affected. Any failure to obtain, maintain or establish
licensing or collaboration arrangements on favorable terms could
adversely affect our business prospects, financial condition or
ability to develop and commercialize our technology for non-medical
uses.
We
expect to rely at least in part on third party collaborators to
perform a number of activities relating to the development and
commercialization of our technology for non-medical uses, including
possibly the design and manufacture of product materials,
potentially the obtaining of regulatory or environmental approvals
and the marketing and distribution of any successfully developed
products. Our collaborators also may have or acquire rights to
control aspects of our product development programs. As a result,
we may not be able to conduct these programs in the manner or on
the time schedule we may contemplate. In addition, if any of these
collaborators withdraw support for our programs or product
candidates or otherwise impair their development, our business
could be negatively affected. To the extent we undertake any of
these activities internally, our expenses may
increase.
Many of our product component materials are only produced by a
single supplier for such product component. If we are unable to
obtain product component materials and other products from our
suppliers that we depend on for our operations, or find suitable
replacement suppliers, our ability to deliver our products to
market will likely be impeded, which could have a material adverse
effect on us.
We
depend on suppliers for product component materials and other
components that are subject to stringent regulatory requirements.
Many of our product component materials are only produced by a
single supplier for such product component, and the loss of any of
these suppliers could result in a disruption in our production. If
this were to occur, it may be difficult to arrange a replacement
supplier because certain of these materials may only be available
from one or a limited number of sources. Our suppliers may
encounter problems during manufacturing due to a variety of
reasons, including failure to follow specific protocols and
procedures, failure to comply with applicable regulations,
equipment malfunction and environmental factors. In addition,
establishing additional or replacement suppliers for these
materials may take a substantial period of time, as certain of
these suppliers must be approved by regulatory
authorities.
If we
are unable to secure, on a timely basis, sufficient quantities of
the materials we depend on to manufacture our products, if we
encounter delays or contractual or other difficulties in our
relationships with these suppliers, or if we cannot find
replacement suppliers at an acceptable cost, then the manufacturing
of our products may be disrupted, which could increase our costs
and have a material adverse effect on our business and results of
operations.
We currently sell our products through distributors and partners
whose sales account for the majority of our revenues and accounts
receivable. Our business and results of operations could be
adversely affected by any business disruptions or credit or other
financial difficulties experienced by such distributors or
partners.
A
majority of our revenues, and a majority of our accounts
receivable, are from distributors and partners. Three distributors
and partners accounted for 33%, 23% and 11% of revenues for the
year ended December 31, 2018, and 24%, 60% and 7% of accounts
receivable at December 31, 2018. Three distributors and partners
accounted for 8%, 38% and 24% of revenues for the year ended
December 31, 2017, and 69%, 17% and 0% of accounts receivable at
December 31, 2017. To the extent that our distributors or partners
experience any business disruptions or credit or other financial
difficulties, our revenues and the collectability of our accounts
receivable could be negatively impacted. If we are unable to
establish, on a timely basis, relationships with new distributors
or partners, our business and results of operations could be
negatively impacted.
23
We have identified control deficiencies in our internal control
over financial reporting that constitute a material weakness in our
internal control over financial reporting. If we are unable to
remediate these control deficiencies including this material
weakness, we may not be able to accurately or timely report our
financial condition or results of operations, which could cause
investors to lose confidence in our reported financial information
and thereby adversely affect the market price of our common
stock.
As disclosed in Item 9A of this Annual Report on
Form 10-K, management concluded that we had three material
weaknesses in our internal control over financial reporting
process.
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.
The first material weakness is 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 is due to the lack of internal resources to analyze and
properly apply generally accepted accounting principles to
accounting for equity components of service agreements with select
vendors. 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, as
well as lack of internal resources and expertise. The third
material weakness relates to our information technology
infrastructure. This material weakness is due to cybersecurity
breaches from email spoofing, which occurred in
2019.
As a result of these material weaknesses, our
management concluded that our internal control over financial
reporting was not effective as of December 31, 2018 and our
disclosure controls and procedures were not effective as of
December 31, 2018. Certain of these control deficiencies were also
in existence as of December 31, 2017, but we are actively engaged
in developing and implementing remedial measures designed to
address these control deficiencies including the identified
material weakness, but we have not remedied these matters as of the
date of this Annual Report on Form 10-K and can provide no
assurance that we will be successful in remediating these
deficiencies or the material weakness in a timely manner, or at
all, or that we will not identify additional deficiencies and
material weaknesses in the future. If our remedial measures are
insufficient to address these deficiencies or the material
weakness, or if additional material weaknesses or deficiencies in
our internal control over financial reporting are discovered or
occur in the future, we may not be able to accurately or timely
report our financial condition or results of operations, which
could cause investors to lose confidence in our reported financial
information and thereby adversely affect the perception of our
business and the market price of our common stock. See “Item
9A—Controls and Procedures.”
We have entered into an agreement with companies owned by a current
board member and stockholder that could delay or prevent an
acquisition of our company and could result in the dilution of our
shareholders in the event of our change of control.
On February 13, 2018, the Company entered into an Agreement for
Purchase and Sale, Limited Exclusive Distribution and Royalties,
and Servicing and Repairs with Premier Shockwave Wound Care, Inc.
(“PSWC”) and Premier Shockwave, Inc.
(“PS”), each of which is owned by A. Michael Stolarski,
a member of the Company’s board of directors and an existing
shareholder of the Company. Among other terms, the agreement
contains provisions whereby in the event of a change of control of
the Company (as defined in the agreement), the stockholders of PSWC
have the right and option to cause the Company to purchase all of
the stock of PSWC, and whereby the Company has the right and option
to purchase all issued and outstanding shares of PSWC, in each case
based upon certain defined purchase price provisions and other
terms. Such provision may have the effect of delaying or deterring
a change in control of us, and as a result could limit the
opportunity for our stockholders to receive a premium for their
shares of our common stock and could also affect the price that
some investors are willing to pay for our common stock. In
addition, in the event we do experience a change of control, such
provision may cause dilution of our existing shareholders in the
event that PSWC exercises its option to require the Company to
purchase all issued and outstanding shares of PSWC and the Company
finances some or all of such purchase price through equity
issuances.
The loss of our key management would likely hinder our ability to
execute our business plan.
As
a small company with sixteen employees, our success depends on the
continuing contributions of our management team and qualified
personnel. Turnover, transitions or other disruptions in our
management team and personnel could make it more difficult to
successfully operate our business and achieve our business goals
and could adversely affect our results of operation and financial
condition. Our success depends in large part on our ability to
attract and retain highly qualified personnel. We face intense
competition in our hiring efforts from other pharmaceutical,
biotechnology and medical device companies, as well as from
universities and nonprofit research organizations, and we may have
to pay higher salaries to attract and retain qualified personnel.
The loss of one or more of these individuals, or our inability to
attract additional qualified personnel, could substantially impair
our ability to implement our business plan.
We face an inherent risk of liability in the event that the use or
misuse of our product candidates results in personal injury or
death.
The
use of our product candidates in clinical trials and the sale of
any approved products may expose us to product liability claims
which could result in financial loss. Our clinical and commercial
product liability insurance coverage may not be sufficient to cover
claims that may be made against us. In addition, we may not be able
to maintain insurance coverage at a reasonable cost, or in
sufficient amounts or scope, to protect us against losses. Any
claims against us, regardless of their merit, could severely harm
our financial condition, strain our management team and other
resources, and adversely impact or eliminate the prospects for
commercialization of the product candidate, or sale of the product,
which is the subject of any such claim. Although we do not promote
any off-label use, off-label uses of products are common and the
FDA does not regulate a physician’s choice of treatment.
Off-label uses of any product for which we obtain approval may
subject us to additional liability.
We are dependent on information technology and our systems and
infrastructure face certain risks, including from cybersecurity
breaches and data leakage.
We rely to a large extent upon sophisticated information technology
systems to operate our businesses, some of which are managed,
hosted, provided and/or used by third parties or their vendors. We
collect, store and transmit large amounts of confidential
information, and we deploy and operate an array of technical and
procedural controls to maintain the confidentiality and integrity
of such confidential information. A significant breakdown,
invasion, corruption, destruction or interruption of critical
information technology systems or infrastructure, by our workforce,
others with authorized access to our systems or unauthorized
persons could negatively impact our operations. The ever-increasing
use and evolution of technology, including cloud-based computing,
creates opportunities for the unintentional dissemination or
intentional destruction of confidential information stored in our
or our third-party providers’ systems, portable media or
storage devices. We could also experience, and in some cases have
experienced in the past, a business interruption, theft of
confidential information, financial theft, or reputational damage
from industrial espionage attacks, malware, spoofing or other
cyber-attacks, which may compromise our system infrastructure, lead
to data leakage, either internally or at our third-party providers,
or materially adversely impact our financial condition. While we
have invested in the protection of data and information technology,
there can be no assurance that our efforts will prevent service
interruptions or security breaches. Any such interruption or breach
of our systems could adversely affect our business operations
and/or result in the loss of critical or sensitive confidential
information or intellectual property, and could result in
financial, legal, business and reputational harm to
us.
24
We generate a portion of our revenue internationally and are
subject to various risks relating to our international activities
which could adversely affect our operating results.
A portion of our revenue comes from international sources, and we
anticipate that we will continue to expand our overseas operations.
Engaging in international business involves a number of
difficulties and risks, including:
●
required
compliance with existing and changing foreign healthcare and other
regulatory requirements and laws, such as those relating to patient
privacy or handling of bio-hazardous waste.
●
required
compliance with anti-bribery laws, data privacy requirements, labor
laws and anti-competition regulations.
●
export
or import restrictions.
●
various
reimbursement and insurance regimes.
●
laws
and business practices favoring local companies.
●
political
and economic instability.
●
potentially
adverse tax consequences, tariffs, customs charges, bureaucratic
requirements and other trade barriers.
●
foreign
exchange controls. and
●
difficulties
protecting or procuring intellectual property rights.
As we expand internationally, our results of
operations and cash flows will become increasingly subject to
fluctuations due to changes in foreign currency exchange rates. Our
expenses are generally denominated in the currencies in which our
operations are located, which is in the United States. If the value
of the U.S. dollar increases relative to foreign currencies in the
future, in the absence of a corresponding change in local currency
prices, our future revenue could be adversely affected as we
convert future revenue from local currencies to U.S.
dollars.
Provisions in our Articles of Incorporation, Bylaws and Nevada law
might decrease the chances of an acquisition.
Provisions
of our Articles of Incorporation and Bylaws and applicable
provisions of Nevada law may delay or discourage transactions
involving an actual or potential change in control or change in our
management, including transactions in which stockholders might
otherwise receive a premium for their shares, or transactions that
our stockholders might otherwise deem to be in their best
interests. Some of the following provisions in our Articles of
Incorporation and Bylaws that implement these are:
●
stockholders
may not vote by written consent;
●
advance
notice of business to be brought is required for a meeting of the
Company’s stockholders;
●
no
cumulative voting rights for the holders of common stock in the
election of directors; and
●
vacancies
in the board of directors may be filled by the affirmative vote of
a majority of directors then in office, even if less than a
quorum.
In
addition, Section 78.438 of the Nevada Revised Statutes prohibits a
publicly-held Nevada corporation from engaging in a business
combination with an interested stockholder (generally defined as a
person which together with its affiliates owns, or within the last
three years has owned, 10% of our voting stock, for a period of
three years after the date of the transaction in which the person
became an interested stockholder) unless the business combination
is approved in a prescribed manner. The existence of the foregoing
provisions and other potential anti-takeover measures could limit
the price that investors might be willing to pay in the future for
shares of our common stock. They could also deter potential
acquirers of our Company, thereby reducing the likelihood that you
could receive a premium for your common stock in an
acquisition.
25
Regulatory Risks
The results of our clinical trials may be insufficient to obtain
regulatory approval for our product candidates
.
We
will only receive regulatory approval to commercialize a product
candidate if we can demonstrate to the satisfaction of the FDA or
the applicable foreign regulatory agency, in well designed and
conducted clinical trials, that the product candidate is safe and
effective. If we are unable to demonstrate that a product candidate
is safe and effective in advanced clinical trials involving large
numbers of patients, we will be unable to submit the necessary
application to receive regulatory approval to commercialize the
product candidate. We face risks that:
●
the
product candidate may not prove to be safe or
effective;
●
the
product candidate’s benefits may not outweigh its
risks;
●
the
results from advanced clinical trials may not confirm the positive
results from pre-clinical studies and early clinical
trials;
●
the
FDA or comparable foreign regulatory authorities may interpret data
from pre-clinical and clinical testing in different ways than us;
and
●
the
FDA or other regulatory agencies may require additional or expanded
trials and data.
We are subject to extensive governmental regulation, including the
requirement of FDA approval or clearance, before our product
candidates may be marketed.
The
process of obtaining FDA approval is lengthy, expensive and
uncertain, and we cannot be sure that our product candidates will
be approved in a timely fashion, or at all. If the FDA does not
approve or clear our product candidates in a timely fashion, or at
all, our business and financial condition would likely be adversely
affected. The FDA has determined that our technology and product
candidates constitute “medical devices”, and are thus
subject to review by the Center for Devices and Radiological
Health. However, we cannot be sure that the FDA will not select a
different center and/or legal authority for one or more of our
other product candidates, in which case applicable governmental
review requirements could vary in some respects and be more lengthy
and costly.
Both
before and after approval or clearance of our product candidates,
we and our product candidates, our suppliers and our contract
manufacturers are subject to extensive regulation by governmental
authorities in the United States and other countries. Failure to
comply with applicable requirements could result in, among other
things, any of the following actions:
●
warning
letters;
●
fines
and other monetary penalties;
●
unanticipated
expenditures;
●
delays
in FDA approval and clearance, or FDA refusal to approve or clear a
product candidate;
●
product
recall or seizure;
●
interruption
of manufacturing or clinical trials;
●
operating
restrictions;
●
injunctions;
and
●
criminal
prosecutions.
In
addition to the approval and clearance requirements, numerous other
regulatory requirements apply, both before and after approval or
clearance, to us and our products and product candidates, our
suppliers and contract manufacturers. These include requirements
related to the following:
●
testing;
●
manufacturing;
●
quality
control;
●
labeling;
●
advertising;
●
promotion;
●
distribution;
●
export;
●
reporting
to the FDA certain adverse experiences associated with the use of
the products; and
●
obtaining
additional approvals or clearances for certain modifications to the
products or their labeling or claims.
26
We
are also subject to inspection by the FDA and other international
regulatory bodies to determine our compliance with regulatory
requirements, as are our suppliers and contract manufacturers, and
we cannot be sure that the FDA and other international regulatory
bodies will not identify compliance issues that may disrupt
production or distribution or require substantial resources to
correct.
The
FDA’s requirements and international regulatory body
requirements may change and additional regulations may be
promulgated that could affect us, our product candidates, and our
suppliers and contract manufacturers. We cannot predict the
likelihood, nature or extent of government regulation that may
arise from future legislation or administrative action. There can
be no assurance that we will not be required to incur significant
costs to comply with such laws and regulations in the future, or
that such laws or regulations will not have a material adverse
effect upon our business.
Patients may discontinue their participation in our clinical
studies, which may negatively impact the results of these studies
and extend the timeline for completion of our development
programs.
Clinical
trials for our product candidates require sufficient patient
enrollment. We may not be able to enroll a sufficient number of
patients in a timely or cost-effective manner. Patients enrolled in
our clinical studies may discontinue their participation at any
time during the study as a result of a number of factors, including
withdrawing their consent or experiencing adverse clinical events,
which may or may not be judged to be related to our product
candidates under evaluation. If a large number of patients in a
study discontinue their participation in the study, the results
from that study may not be positive or may not support a filing for
regulatory approval of the product candidate.
In
addition, the time required to complete clinical trials is
dependent upon, among other factors, the rate of patient
enrollment. Patient enrollment is a function of many factors,
including the following:
●
the
size of the patient population;
●
the
nature of the clinical protocol requirements;
●
the
availability of other treatments or marketed therapies (whether
approved or experimental);
●
our
ability to recruit and manage clinical centers and associated
trials;
●
the
proximity of patients to clinical sites; and
●
the
patient eligibility criteria for the study.
We rely on third parties to conduct our clinical trials, and their
failure to perform their obligations in a timely or competent
manner may delay development and commercialization of our
device.
We
engage a clinical research organization (CRO) and other third party
vendors to assist in the conduct of our clinical trials. There are
numerous sources that are capable of providing these services.
However, we may face delays outside of our control if these parties
do not perform their obligations in a timely or competent fashion
or if we are forced to change service providers. Any third party
that we hire to conduct clinical trials may also provide services
to our competitors, which could compromise the performance of their
obligations to us. If we experience significant delays in the
progress of our clinical trials, the commercial prospects for the
product could be harmed and our ability to generate product
revenues would be delayed or prevented. Any failure of the CRO and
other third party vendors to successfully accomplish clinical trial
monitoring, data collection, safety monitoring and data management
and the other services they provide for us in a timely manner and
in compliance with regulatory requirements could have a material
adverse effect on our ability to complete clinical development of
our product and obtain regulatory approval. Problems with the
timeliness or quality of the work of the CRO may lead us to seek to
terminate the relationship and use an alternate service provider.
However, making such changes may be costly and may delay our
clinical trials, and contractual restrictions may make such a
change difficult or impossible. Additionally, it may be difficult
to find a replacement organization that can conduct our trials in
an acceptable manner and at an acceptable cost.
We may be required to suspend or discontinue clinical trials due to
unexpected side effects or other safety risks that could preclude
approval of our product candidates.
Our
clinical trials may be suspended at any time for a number of
reasons. For example, we may voluntarily suspend or terminate our
clinical trials if at any time we believe that they present an
unacceptable risk to the clinical trial patients. In addition, the
FDA or other regulatory agencies may order the temporary or
permanent discontinuation of our clinical trials at any time if
they believe that the clinical trials are not being conducted in
accordance with applicable regulatory requirements or that they
present an unacceptable safety risk to the clinical trial
patients.
27
Administering any
product candidate to humans may produce undesirable side effects.
These side effects could interrupt, delay or halt clinical trials
of our product candidates and could result in the FDA or other
regulatory authorities denying further development or approval of
our product candidates for any or all targeted indications.
Ultimately, some or all of our product candidates may prove to be
unsafe for human use. Moreover, we could be subject to significant
liability if any patient suffers, or appears to suffer, adverse
health effects as a result of participating in our clinical
trials.
Regulatory approval of our product candidates may be withdrawn at
any time.
After
regulatory approval has been obtained for medical device products,
the product and the manufacturer are subject to continual review,
including the review of adverse experiences and clinical results
that are reported after our products are made available to
patients, and there can be no assurance that such approval will not
be withdrawn or restricted. Regulators may also subject approvals
to restrictions or conditions or impose post-approval obligations
on the holders of these approvals, and the regulatory status of
such products may be jeopardized if such obligations are not
fulfilled. If post-approval studies are required, such studies may
involve significant time and expense.
The
manufacturing facilities we use to make any of our products will
also be subject to periodic review and inspection by the FDA or
other regulatory authorities, as applicable. The discovery of any
new or previously unknown problems with the product or facility may
result in restrictions on the product or facility, including
withdrawal of the product from the market. We will continue to be
subject to the FDA or other regulatory authority requirements, as
applicable, governing the labeling, packaging, storage,
advertising, promotion, recordkeeping, and submission of safety and
other post-market information for all of our product candidates,
even those that the FDA or other regulatory authority, as
applicable, had approved. If we fail to comply with applicable
continuing regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approval, product recalls
and seizures, operating restrictions and other adverse
consequences.
Federal regulatory reforms may adversely affect our ability to sell
our products profitably.
From
time to time, legislation is drafted and introduced in the United
States Congress that could significantly change the statutory
provisions governing the clearance or approval, manufacture and
marketing of a medical device. In addition, FDA regulations and
guidance are often revised or reinterpreted by the agency in ways
that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted
or FDA regulations, guidance or interpretations changed, and what
the impact of such changes on us, if any, may be.
Failure to obtain regulatory approval in foreign jurisdictions will
prevent us from marketing our products abroad.
International
sales of our products and any of our product candidates that we
commercialize are subject to the regulatory requirements of each
country in which the products are sold. Accordingly, the
introduction of our product candidates in markets outside the
United States will be subject to regulatory approvals in those
jurisdictions. The regulatory review process varies from country to
country. Many countries impose product standards, packaging and
labeling requirements, and import restrictions on medical devices.
In addition, each country has its own tariff regulations, duties
and tax requirements. The approval by foreign government
authorities is unpredictable and uncertain and can be expensive.
Our ability to market our approved products could be substantially
limited due to delays in receipt of, or failure to receive, the
necessary approvals or clearances.
Prior
to marketing our products in any country outside the United States,
we must obtain marketing approval in that country. Approval and
other regulatory requirements vary by jurisdiction and differ from
the United States’ requirements. We may be required to
perform additional pre-clinical or clinical studies even if FDA
approval has been obtained.
If we fail to obtain an adequate level of reimbursement for our
approved products by third party payers, there may be no
commercially viable markets for our approved products or the
markets may be much smaller than expected.
The
availability and levels of reimbursement by governmental and other
third party payers affect the market for our approved products. The
efficacy, safety, performance and cost-effectiveness of our product
and product candidates, and of any competing products, will
determine the availability and level of reimbursement.
Reimbursement and healthcare payment systems in international
markets vary significantly by country and include both government
sponsored healthcare and private insurance. To obtain reimbursement
or pricing approval in some countries, we may be required to
produce clinical data, which may involve one or more clinical
trials, that compares the cost-effectiveness of our approved
products to other available therapies. We may not obtain
international reimbursement or pricing approvals in a timely
manner, if at all. Our failure to receive international
reimbursement or pricing approvals would negatively impact market
acceptance of our approved products in the international markets in
which those pricing approvals are sought.
28
We
believe that, in the future, reimbursement for any of our products
or product candidates may be subject to increased restrictions both
in the United States and in international markets. Future
legislation, regulation or reimbursement policies of third party
payers may adversely affect the demand for our products currently
under development and limit our ability to sell our products on a
profitable basis. In addition, third party payers continually
attempt to contain or reduce the costs of healthcare by challenging
the prices charged for healthcare products and services. If
reimbursement for our approved products is unavailable or limited
in scope or amount, or if pricing is set at unsatisfactory levels,
market acceptance of our approved products would be impaired and
our future revenues, if any, would be adversely
affected.
Uncertainty surrounding and future changes to healthcare law in the
United States may have a material adverse effect on
us.
●
a 2.3% excise tax
on any entity that manufactures or imports medical devices offered
for sale in the United States, with limited exceptions, began in
2013 but a two year moratorium has been issued for sales during
2016 and 2017, and new legislation was passed in January 2018 such
that the tax will be delayed until January 1, 2020;
●
a new
Patient-Centered Outcomes Research Institute to oversee, identify
priorities and conduct comparative clinical effectiveness
research;
●
payment system
reforms including a national pilot program on payment bundling to
encourage hospitals, physicians and other providers to improve the
coordination, quality and efficiency of certain healthcare services
through bundled payment models;
●
an independent
payment advisory board that will submit recommendations to reduce
Medicare spending if projected Medicare spending exceeds a
specified growth rate; and
●
a new abbreviated
pathway for the licensure of biological products that are
demonstrated to be biosimilar or interchangeable with a licensed
biological product.
29
If we fail to comply with the United States Federal Anti-Kickback
Statute, False Claims Act and similar state laws, we could be
subject to criminal and civil penalties and exclusion from the
Medicare and Medicaid programs, which would have a material adverse
effect on our business and results of operations.
A
provision of the Social Security Act, commonly referred to as the
Federal Anti-Kickback Statute, prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for
referring, ordering, leasing, purchasing or arranging for, or
recommending the ordering, purchasing or leasing of, items or
services payable by Medicare, Medicaid or any other Federal
healthcare program. The Federal Anti-Kickback Statute is very broad
in scope and many of its provisions have not been uniformly or
definitively interpreted by existing case law or regulations. In
addition, most of the states have adopted laws similar to the
Federal Anti-Kickback Statute, and some of these laws are even
broader than the Federal Anti-Kickback Statute in that their
prohibitions are not limited to items or services paid for by
Federal healthcare programs, but instead apply regardless of the
source of payment. Violations of the Federal Anti-Kickback Statute
may result in substantial civil or criminal penalties and exclusion
from participation in Federal healthcare programs.
Our
operations may also implicate the False Claims Act. If we fail to
comply with federal and state documentation, coding and billing
rules, we could be subject to liability under the federal False
Claims Act, including criminal and/or civil penalties, loss of
licenses and exclusion from the Medicare and Medicaid programs. The
False Claims Act prohibits individuals and companies from knowingly
submitting false claims for payments to, or improperly retaining
overpayments from, the government.
All
of our financial relationships with healthcare providers and others
who provide products or services to Federal healthcare program
beneficiaries are potentially governed by the Federal Anti-Kickback
Statute, False Claims Act and similar state laws. We believe our
operations are in compliance with the Federal Anti-Kickback
Statute, False Claims Act and similar state laws. However, we
cannot be certain that we will not be subject to investigations or
litigation alleging violations of these laws, which could be
time-consuming and costly to us and could divert management’s
attention from operating our business, which in turn could have a
material adverse effect on our business. In addition, if our
arrangements were found to violate the Federal Anti-Kickback
Statute, False Claims Act or similar state laws, the consequences
of such violations would likely have a material adverse effect on
our business, results of operations and financial
condition.
Failure to comply with the HIPAA Privacy, Security and Breach
Notification Regulations, as such rules become applicable to our
business, may increase our operational costs.
The
HIPAA privacy and security regulations establish comprehensive
federal standards with respect to the uses and disclosures of PHI
by certain entities including health plans and health care
providers, and set standards to protect the confidentiality,
integrity and availability of electronic PHI. The regulations
establish a complex regulatory framework on a variety of subjects,
including, for example: the circumstances under which uses and
disclosures of PHI are permitted or required without a specific
authorization by the patient. a patient’s right to access,
amend and receive an accounting of certain disclosures of PHI. the
content of notices of privacy practices describing how PHI is used
and disclosed and individuals’ rights with respect to their
PHI. and implementation of administrative, technical and physical
safeguards to protect privacy and security of PHI. We anticipate
that, as we expand our dermaPACE business, we will in the future be
a covered entity under HIPAA. We intend to adopt policies and
procedures to comply with the Privacy Rule, the Security Rule and
the HIPAA statute as such regulations become applicable to our
business and as such regulations are in effect at such time;
however, there can be no assurance that our policies and procedures
will be adequate or will prevent all incidents of non-compliance
with such regulations.
The
privacy regulations establish a uniform federal standard but do not
supersede state laws that may be more stringent. Therefore, as we
expand our deramPACE business, we may also be required to comply
with both federal privacy and security regulations and varying
state privacy and security laws and regulations. The federal
privacy regulations restrict the ability to use or disclose certain
individually identifiable patient health information, without
patient authorization, for purposes other than payment, treatment
or health care operations (as defined by HIPAA), except for
disclosures for various public policy purposes and other permitted
purposes outlined in the privacy regulations.
30
The
HITECH Act and its implementing regulations also require healthcare
providers to notify affected individuals, the Secretary of the U.S.
Department of Health and Human Services, and in some cases, the
media, when PHI has been breached as defined under and following
the requirements of HIPAA. Many states have similar breach
notification laws. In the event of a breach, to the extent such
regulations are applicable to our business, we could incur
operational and financial costs related to remediation as well as
preparation and delivery of the notices, which costs could be
substantial. Additionally, HIPAA, the HITECH Act, and their
implementing regulations provide for significant civil fines,
criminal penalties, and other sanctions for failure to comply with
the privacy, security, and breach notification rules, including for
wrongful or impermissible use or disclosure of PHI. Although the
HIPAA statute and regulations do not expressly provide for a
private right of action for damages, private parties may also seek
damages under state laws for the wrongful or impermissible use or
disclosure of confidential health information or other private
personal information. Additionally, amendments to HIPAA provide
that the state Attorneys General may bring an action against a
covered entity for a violation of HIPAA. As we expand our business
such that federal and state laws regarding PHI and privacy apply to
our operations, any noncompliance with such regulations could have
a material adverse effect on our business, results of operations
and financial condition.
We face periodic reviews and billing audits from governmental and
private payors and these audits could have adverse results that may
negatively impact our business.
As
a result of our participation in the Medicare and Medicaid
programs, we are subject to various governmental reviews and audits
to verify our compliance with these programs and applicable laws
and regulations. We also are subject to audits under various
government programs in which third-party firms engaged by the
Centers for Medicare & Medicaid Services conduct extensive
reviews of claims data and medical and other records to identify
potential improper payments under the Medicare program. Private pay
sources also reserve the right to conduct audits. If billing errors
are identified in the sample of reviewed claims, the billing error
can be extrapolated to all claims filed which could result in a
larger overpayment than originally identified in the sample of
reviewed claims. Our costs to respond to and defend reviews and
audits may be significant and could have a material adverse effect
on our business, financial condition, results of operations and
cash flows. Moreover, an adverse review or audit could result
in:
●
required
refunding or retroactive adjustment of amounts we have been paid by
governmental or private payors.
●
state
or Federal agencies imposing fines, penalties and other sanctions
on us.
●
loss
of our right to participate in the Medicare program, state
programs, or one or more private payor networks. or
●
damage
to our business and reputation in various markets.
Any
one of these results could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Product quality or performance issues may be discovered through
ongoing regulation by the FDA and by comparable international
agencies, as well as through our internal standard quality
process.
The
medical device industry is subject to substantial regulation by the
FDA and by comparable international agencies. In addition to
requiring clearance or approval to market new or improved devices,
we are subject to ongoing regulation as a device manufacturer.
Governmental regulations cover many aspects of our operations,
including quality systems, marketing and device reporting. As a
result, we continually collect and analyze information about our
product quality and product performance through field observations,
customer feedback and other quality metrics. If we fail to comply
with applicable regulations or if post market safety issues arise,
we could be subject to enforcement sanctions, our promotional
practices may be restricted, and our marketed products could be
subject to recall or otherwise impacted. Each of these potential
actions could result in a material adverse effect on our business,
operating results and financial condition.
The use of hazardous materials in our operations may subject us to
environmental claims or liability.
We
conduct research and development and manufacturing operations in
our facility. Our research and development process may, at times,
involve the controlled use of hazardous materials and chemicals. We
may conduct experiments in which we may use small quantities of
chemicals, including those that are corrosive, toxic and flammable.
The risk of accidental injury or contamination from these materials
cannot be eliminated. We do not maintain a separate insurance
policy for these types of risks. In the event of an accident or
environmental discharge or contamination, we may be held liable for
any resulting damages, and any liability could exceed our
resources. We are subject to Federal, state and local laws and
regulations governing the use, storage, handling and disposal of
these materials and specified waste products. The cost of
compliance with these laws and regulations could be
significant.
31
Risks Related to Intellectual Property
The protection of our intellectual property is critical to our
success and any failure on our part to adequately protect those
rights could materially adversely affect our business.
Our
commercial success depends to a significant degree on our ability
to:
●
obtain
and/or maintain protection for our product candidates under the
patent laws of the United States and other countries;
●
defend
and enforce our patents once obtained;
●
obtain
and/or maintain appropriate licenses to patents, patent
applications or other proprietary rights held by others with
respect to our technology, both in the United States and other
countries;
●
maintain
trade secrets and other intellectual property rights relating to
our product candidates; and
●
operate
without infringing upon the patents, trademarks, copyrights and
proprietary rights of third parties.
The
degree of intellectual property protection for our technology is
uncertain, and only limited intellectual property protection may be
available for our product candidates, which may prevent us from
gaining or keeping any competitive advantage against our
competitors. Although we believe the patents that we own or
license, and the patent applications that we own, generally provide
us a competitive advantage, the patent positions of biotechnology,
biopharmaceutical and medical device companies are generally highly
uncertain, involve complex legal and factual questions and have
been the subject of much litigation. Neither the United States
Patent & Trademark Office nor the courts have a consistent
policy regarding the breadth of claims allowed or the degree of
protection afforded under many biotechnology patents. Even if
issued, patents may be challenged, narrowed, invalidated or
circumvented, which could limit our ability to stop competitors
from marketing similar products or limit the length of term of
patent protection we may have for our products. Further, a court or
other government agency could interpret our patents in a way such
that the patents do not adequately cover our current or future
product candidates. Changes in either patent laws or in
interpretations of patent laws in the United States and other
countries may diminish the value of our intellectual property or
narrow the scope of our patent protection.
We
also rely upon trade secrets and unpatented proprietary know-how
and continuing technological innovation in developing our products,
especially where we do not believe patent protection is appropriate
or obtainable. We seek to protect this intellectual property, in
part, by generally requiring our employees, consultants, and
current and prospective business partners to enter into
confidentiality agreements in connection with their employment,
consulting or advisory relationships with us, where appropriate. We
also require our employees, consultants, researchers, and advisors
who we expect to work on our products and product candidates to
agree to disclose and assign to us all inventions conceived during
the work day, developed using our property or which relate to our
business. We may lack the financial or other resources to
successfully monitor and detect, or to enforce our rights in
respect of, infringement of our rights or breaches of these
confidentiality agreements. In the case of any such undetected or
unchallenged infringements or breaches, these confidentiality
agreements may not provide us with meaningful protection of our
trade secrets and unpatented proprietary know-how or adequate
remedies. In addition, others may independently develop technology
that is similar or equivalent to our trade secrets or know-how. If
any of our trade secrets, unpatented know-how or other confidential
or proprietary information is divulged to third parties, including
our competitors, our competitive position in the marketplace could
be harmed and our ability to sell our products successfully could
be severely compromised. Enforcing a claim that a party illegally
obtained and is using trade secrets that have been licensed to us
or that we own is also difficult, expensive and time consuming, and
the outcome is unpredictable. In addition, courts outside the
United States may be less willing to protect trade secrets. Costly
and time consuming litigation could be necessary to seek to enforce
and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could have a material
adverse effect on our business. Moreover, some of our academic
institution licensees, evaluators, collaborators and scientific
advisors have rights to publish data and information to which we
have rights. If we cannot maintain the confidentiality of our
technologies and other confidential information in connection with
our collaborations, our ability to protect our proprietary
information or obtain patent protection in the future may be
impaired, which could have a material adverse effect on our
business.
32
In
particular, we cannot assure you that:
●
we
or the owners or other inventors of the patents that we own or that
have been licensed to us, or that may be issued or licensed to us
in the future, were the first to file patent applications or to
invent the subject matter claimed in patent applications relating
to the technologies upon which we rely;
●
others
will not independently develop similar or alternative technologies
or duplicate any of our technologies;
●
any
of our patent applications will result in issued
patents;
●
the
patents and patent applications that we own or that have been
licensed to us, or that may be issued or licensed to us in the
future, will provide a basis for commercially viable products or
will provide us with any competitive advantages, or will not be
challenged by third parties;
●
the
patents and patent applications that have been licensed to us are
valid and enforceable;
●
we
will develop additional proprietary technologies that are
patentable;
●
we
will be successful in enforcing the patents that we own or license
and any patents that may be issued or licensed to us in the future
against third parties;
●
the
patents of third parties will not have an adverse effect on our
ability to do business; or
●
our
trade secrets and proprietary rights will remain
confidential.
Accordingly,
we may fail to secure meaningful patent protection relating to any
of our existing or future product candidates or discoveries despite
the expenditure of considerable resources. Further, there may be
widespread patent infringement in countries in which we may seek
patent protection, including countries in Europe and Asia, which
may instigate expensive and time consuming litigation that could
adversely affect the scope of our patent protection. In addition,
others may attempt to commercialize products similar to our product
candidates in countries where we do not have adequate patent
protection. Failure to obtain adequate patent protection for our
product candidates, or the failure by particular countries to
enforce patent laws or allow prosecution for alleged patent
infringement, may impair our ability to be competitive. The
availability of infringing products in markets where we have patent
protection, or the availability of competing products in markets
where we do not have adequate patent protection, could erode the
market for our product candidates, negatively impact the prices we
can charge for our product candidates, and harm our reputation if
infringing or competing products are manufactured to inferior
standards.
Patent applications owned by us or licensed to us may not result in
issued patents, and our competitors may commercialize the
discoveries we attempt to patent.
The
patent applications that we own and that have been licensed to us,
and any future patent applications that we may own or that may be
licensed to us, may not result in the issuance of any patents. The
standards that the United States Patent & Trademark Office and
foreign patent agencies use to grant patents are not always applied
predictably or uniformly and can change. Consequently, we cannot be
certain as to the type and scope of patent claims to which we may
in the future be entitled under our license agreements or that may
be issued to us in the future. These applications may not be
sufficient to meet the statutory requirements for patentability
and, therefore, may not result in enforceable patents covering the
product candidates we want to commercialize. Further, patent
applications in the United States that are not filed in other
countries may not be published or generally are not published until
at least 18 months after they are first filed, and patent
applications in certain foreign countries generally are not
published until many months after they are filed. Scientific and
patent publication often occurs long after the date of the
scientific developments disclosed in those publications. As a
result, we cannot be certain that we will be the first creator of
inventions covered by our patents or applications, or the first to
file such patent applications. As a result, our issued patents and
our patent applications could become subject to challenge by third
parties that created such inventions or filed patent applications
before us or our licensors, resulting in, among other things,
interference proceedings in the United States Patent &
Trademark Office to determine priority of discovery or invention.
Interference proceedings, if resolved adversely to us, could result
in the loss of or significant limitations on patent protection for
our products or technologies. Even in the absence of interference
proceedings, patent applications now pending or in the future filed
by third parties may prevail over the patent applications that may
be owned by us or licensed to us or that we may file in the future,
or may result in patents that issue alongside patents issued to us
or our licensors or that may be issued or licensed to us in the
future, leading to uncertainty over the scope of the patents owned
by us or licensed to us or that may in the future be owned by us or
impede our freedom to practice the claimed inventions.
33
Our patents may not be valid or enforceable and may be challenged
by third parties.
We
cannot assure you that the patents that have been issued or
licensed to us would be held valid by a court or administrative
body or that we would be able to successfully enforce our patents
against infringers, including our competitors. The issuance of a
patent is not conclusive as to its validity or enforceability, and
the validity and enforceability of a patent is susceptible to
challenge on numerous legal grounds, including the possibility of
reexamination proceedings brought by third parties in the United
States Patent & Trademark Office against issued patents and
similar validity challenges under foreign patent laws. Challenges
raised in patent infringement litigation brought by us or against
us may result in determinations that patents that have been issued
to us or licensed to us or any patents that may be issued to us or
our licensors in the future are invalid, unenforceable or otherwise
subject to limitations. In the event of any such determinations,
third parties may be able to use the discoveries or technologies
claimed in these patents without paying licensing fees or royalties
to us, which could significantly diminish the value of our
intellectual property and our competitive advantage. Even if our
patents are held to be enforceable, others may be able to design
around our patents or develop products similar to our products that
are not within the scope of any of our patents.
In
addition, enforcing the patents that we own or license and any
patents that may be issued to us in the future against third
parties may require significant expenditures regardless of the
outcome of such efforts. Our inability to enforce our patents
against infringers and competitors may impair our ability to be
competitive and could have a material adverse effect on our
business.
Issued patents and patent licenses may not provide us with any
competitive advantage or provide meaningful protection against
competitors.
The
discoveries or technologies covered by issued patents we own or
license may not have any value or provide us with a competitive
advantage, and many of these discoveries or technologies may not be
applicable to our product candidates at all. We have devoted
limited resources to identifying competing technologies that may
have a competitive advantage relative to ours, especially those
competing technologies that are not perceived as infringing on our
intellectual property rights. In addition, the standards that
courts use to interpret and enforce patent rights are not always
applied predictably or uniformly and can change, particularly as
new technologies develop. Consequently, we cannot be certain as to
how much protection, if any, will be afforded by these patents with
respect to our products if we, our licensees or our licensors
attempt to enforce these patent rights and those rights are
challenged in court.
The
existence of third party patent applications and patents could
significantly limit our ability to obtain meaningful patent
protection. If patents containing competitive or conflicting claims
are issued to third parties, we may be enjoined from pursuing
research, development or commercialization of product candidates or
may be required to obtain licenses, if available, to these patents
or to develop or obtain alternative technology. If another party
controls patents or patent applications covering our product
candidates, we may not be able to obtain the rights we need to
those patents or patent applications in order to commercialize our
product candidates or we may be required to pay royalties, which
could be substantial, to obtain licenses to use those patents or
patent applications.
In
addition, issued patents may not provide commercially meaningful
protection against competitors. Other parties may seek and/or be
able to duplicate, design around or independently develop products
having effects similar or identical to our patented product
candidates that are not within the scope of our
patents.
Limitations
on patent protection in some countries outside the United States,
and the differences in what constitutes patentable subject matter
in these countries, may limit the protection we have under patents
issued outside of the United States. We do not have patent
protection for our product candidates in a number of our target
markets. The failure to obtain adequate patent protection for our
product candidates in any country would impair our ability to be
commercially competitive in that country.
The ability to market the products we develop is subject to the
intellectual property rights of third parties.
The
biotechnology, biopharmaceutical and medical device industries are
characterized by a large number of patents and patent filings and
frequent litigation based on allegations of patent infringement.
Competitors may have filed patent applications or have been issued
patents and may obtain additional patents and proprietary rights
related to products or processes that compete with or are similar
to ours. We may not be aware of all of the patents potentially
adverse to our interests that may have been issued to others.
Because patent applications can take many years to issue, there may
be currently pending applications, unknown to us, which may later
result in issued patents that our product candidates or proprietary
technologies may infringe. Third parties may claim that our
products or related technologies infringe their patents or may
claim that the products of our suppliers, manufacturers or contract
service providers that produce our devices infringe on their
intellectual property. Further, we, our licensees or our licensors,
may need to participate in interference, opposition, protest,
reexamination or other potentially adverse proceedings in the
United States Patent & Trademark Office or in similar agencies
of foreign governments with regards to our patents, patent
applications, and intellectual property rights. In addition, we,
our licensees or our licensors may need to initiate suits to
protect our intellectual property rights.
34
Litigation or any
other proceeding relating to intellectual property rights, even if
resolved in our favor, may cause us to incur significant expenses,
divert the attention of our management and key personnel from other
business concerns and, in certain cases, result in substantial
additional expenses to license technologies from third parties.
Some of our competitors may be able to sustain the costs of complex
patent litigation more effectively than we can because they have
substantially greater resources. An unfavorable outcome in any
patent infringement suit or other adverse intellectual property
proceeding could require us to pay substantial damages, including
possible treble damages and attorneys’ fees, cease using our
technology or developing or marketing our products, or require us
to seek licenses, if available, of the disputed rights from other
parties and potentially make significant payments to those parties.
There is no guarantee that any prevailing party would offer us a
license or that we could acquire any license made available to us
on commercially acceptable terms. Even if we are able to obtain
rights to a third party’s patented intellectual property,
those rights may be nonexclusive and, therefore, our competitors
may obtain access to the same intellectual property. Ultimately, we
may be unable to commercialize our product candidates or may have
to cease some of our business operations as a result of patent
infringement claims, which could materially harm our business. We
cannot guarantee that our products or technologies will not
conflict with the intellectual property rights of
others.
If we
need to redesign our products to avoid third party patents, we may
suffer significant regulatory delays associated with conducting
additional clinical studies or submitting technical, clinical,
manufacturing or other information related to any redesigned
product and, ultimately, in obtaining regulatory approval. Further,
any such redesigns may result in less effective and/or less
commercially desirable products, if the redesigns are possible at
all.
Additionally, any
involvement in litigation in which we, our licensees or our
licensors are accused of infringement may result in negative
publicity about us or our products, injure our relations with any
then-current or prospective customers and marketing partners, and
cause delays in the commercialization of our products.
Risks Related to our Common Stock
Our stock price is volatile.
The
market price of our common stock is volatile and could fluctuate
widely in response to various factors, many of which are beyond our
control, including the following:
●
our
ability to obtain additional financing and, if available, the terms
and conditions of the financing;
●
changes
in the timing of on-going clinical trial enrollment, the results of
our clinical trials and regulatory approvals for our product
candidates or failure to obtain such regulatory
approvals;
●
changes
in our industry;
●
additions
or departures of key personnel;
●
sales
of our common stock;
●
our
ability to execute our business plan;
●
operating
results that fall below expectations;
●
period-to-period
fluctuations in our operating results;
●
new
regulatory requirements and changes in the existing regulatory
environment; and
●
general
economic conditions and other external factors.
In
addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market
price of our common stock.
35
There is currently a limited trading market for our common stock
and we cannot predict how liquid the market might
become.
To
date, there has been a limited trading market for our common stock
and we cannot predict how liquid the market for our common stock
might become. Our common stock is quoted on the Over-the-Counter
market (OTCQB), which is an inter-dealer market that provides
significantly less liquidity than the New York Stock Exchange or
the Nasdaq Stock Market. The quotation of our common stock on the
OTCQB does not assure that a meaningful, consistent and liquid
trading market exists. The market price for our common stock is
subject to volatility and holders of our common stock may be unable
to resell their shares at or near their original purchase price, or
at any price. In the absence of an active trading
market:
●
investors
may have difficulty buying and selling, or obtaining market
quotations for our common stock;
●
market
visibility for our common stock may be limited; and
●
a
lack of visibility for our common stock may have a depressive
effect on the market for our common stock.
Trading for our common stock is limited under the SEC’s penny
stock regulations, which has an adverse effect on the liquidity of
our common stock.
The
trading price of our common stock is less than $5.00 per share and,
as a result, our common stock is considered a “penny
stock,” and trading in our common stock is subject to the
requirements of Rule 15g-9 under the Securities Exchange Act of
1934, as amended (the Exchange Act). Under this rule,
broker-dealers who recommend low-priced securities to persons other
than established customers and accredited investors must satisfy
special sales practice requirements. Generally, the broker-dealer
must make an individualized written suitability determination for
the purchaser and receive the purchaser’s written consent
prior to the transaction.
Regulations of the Securities and Exchange
Commission (the “
SEC
”) also require additional disclosure in
connection with any trades involving a “penny stock,”
including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity
of securities in the secondary market because only a few brokers or
dealers are likely to undertake these compliance activities.
Compliance with these requirements may make it more difficult for
holders of our Common Stock to resell their shares to third parties
or to otherwise dispose of them in the market.
As an issuer of “penny stock”, the protection provided
by the federal securities laws relating to forward looking
statements does not apply to us.
Although federal
securities laws provide a safe harbor for forward-looking
statements made by a public company that files reports under the
federal securities laws, this safe harbor is not available to
issuers of penny stocks. As a result, we will not have the benefit
of this safe harbor protection in the event of any legal action
based upon a claim that the material provided by us contained a
material misstatement of fact or was misleading in any material
respect because of our failure to include any statements necessary
to make the statements not misleading. Such an action could hurt
our financial condition.
We have not paid dividends in the past and do not expect to pay
dividends in the future. Any return on investment may be limited to
the value of our common stock.
We
have never paid cash dividends on our common stock and do not
anticipate doing so in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial
condition and other business and economic factors affecting us at
such time as our board of directors may consider relevant. If we do
not pay dividends, our common stock may be less valuable because a
return on your investment will only occur if our stock price
appreciates.
The rights of the holders of common stock may be impaired by the
potential issuance of preferred stock.
Our
board of directors has the right, without stockholder approval, to
issue preferred stock with voting, dividend, conversion,
liquidation or other rights which could adversely affect the voting
power and equity interest of the holders of common stock, which
could be issued with the right to more than one vote per share, and
could be utilized as a method of discouraging, delaying or
preventing a change of control. The possible negative impact on
takeover attempts could adversely affect the price of our common
stock.
36
On
January 12, 2016, the Company filed a Certificate of Designation of
Preferences, Right and Limitations of Series B Convertible
Preferred Stock of the Company with the Nevada Secretary of State
which amended our Articles of Incorporation to designate 293 shares
of our preferred stock as Series B Convertible Preferred Stock. The
293 shares of Series B Convertible Preferred Stock were converted
to 3,657,278 shares of Common Stock on April 29, 2016.
Although we have no shares of preferred stock
currently outstanding and no present intention to issue any
additional shares of preferred stock or to create any additional
series of preferred stock, we may issue such shares in the
future.
We have never held an annual meeting for the election of
directors.
Pursuant
to the provisions of the Nevada Revised Statutes (the
“NRS”), directors are to be elected at the annual
meeting of the stockholders. Pursuant to the NRS and our
bylaws, our board of directors is granted the authority to fix the
date, time and place for annual stockholder meetings. No date, time
or place has yet been fixed by our board for the holding of an
annual stockholder meeting. Pursuant to the NRS and our bylaws,
each of our directors holds office after the expiration of his term
until a successor is elected and qualified, or until the director
resigns or is removed. Under the provisions of the NRS, if an
election of our directors has not been made by our stockholders
within 18 months of the last such election, then an application may
be made to the Nevada district court by stockholders holding a
minimum of 15% of our outstanding stockholder voting power for an
order for the election of directors in the manner provided in the
NRS.
We have not sought an advisory stockholder vote to approve the
compensation of our named executive officers.
Rule
14a-21 under the Exchange Act requires us to seek a separate
stockholder advisory vote at our annual meeting at which
directors are elected to approve the compensation of our named
executive officers, not less frequently than once every three years
(say-on-pay vote), and, at least once every six years, to seek a
separate stockholder advisory vote on the frequency with which we
will submit advisory say-on-pay votes to our stockholders
(say-on-frequency vote). In 2013, the year in which Rule 14a-21
became applicable to smaller reporting companies, and in 2014, we
did not submit to our stockholders a say-on-pay vote to approve an
advisory resolution regarding our compensation program for our
named executive officers, or a say-on-frequency vote. Consequently,
the board of directors has not considered the outcome of our
say-on-pay vote results when determining future compensation
policies and pay levels for our named executive
officers.
I
tem 1B. UNRESOLVED STAFF
COMMENTS
None.
I
tem 2. PROPERTIES
Our
operations, production and research and development office is in a
leased facility in Suwanee, Georgia, consisting of 10,177 square
feet of space under a lease which expires on December 31, 2021.
Under the terms of the lease, we pay monthly rent of $14,651,
subject to a 3% adjustment on an annual basis.
I
tem 3. LEGAL PROCEEDINGS
We
are engaged in various legal actions, claims and proceedings
arising in the ordinary course of business, including claims
related to breach of contracts and intellectual property matters
resulting from our business activities. As with most actions such
as these, an estimation of any possible and/or ultimate liability
cannot always be determined.
There
are no material proceedings known to us to be contemplated by any
governmental authority.
There
are no material proceedings known to us, pending or contemplated,
in which any of our directors, officers or affiliates or any of our
principal security holders, or any associate of any of the
foregoing, is a party or has an interest adverse to
us.
I
tem 4. MINE SAFETY
DISCLOSURE
Not
applicable.
37
PART II
I
tem 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
The
Company’s common stock is quoted on the OTCQB under the
symbol “SNWV”.
Holders of Common Stock
As
of March 28, 2019, there were 149 holders of record of the
Company’s common stock.
Dividends
The
Company has never declared or paid any cash dividends on its common
stock. The Company intends to retain future earnings, if any, to
finance the expansion of its business. As a result, the Company
does not anticipate paying any cash dividends in the foreseeable
future.
Securities Authorized for Issuance under Equity Compensation
Plans
|
Plan Category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants
and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
-
|
$
0.00
|
-
|
|
Equity
compensation plans not approved by security holders
|
31,703,385
|
$
0.29
|
4,628,281
|
|
Total
|
31,703,385
|
$
0.29
|
4,628,281
|
Stock Incentive Plans
During 2006, the Company adopted the 2006 Stock
Incentive Plan of SANUWAVE, Inc.,
and certain non-statutory
stock option agreements with key employees outside of the 2006
Stock Incentive Plan. The non-statutory stock option agreements
have terms substantially the same as the 2006 Stock Incentive Plan.
The stock options granted under the plans were non-statutory
options which vest over a period of up to four years and have a ten
year term. The options were granted at an exercise price equal to
the fair market value of the common stock on the date of the grant,
which was approved by the board of directors of the
Company.
On November
1, 2010, the Company approved the Amended and Restated 2006 Stock
Incentive Plan of SANUWAVE Health, Inc. effective as of January 1,
2010 (the “Stock Incentive Plan”). The Stock Incentive
Plan permits grants of awards to selected employees, directors and
advisors of the Company in the form of restricted stock or options
to purchase shares of common stock. Options granted may include
non-statutory options as well as qualified incentive stock options.
The Stock Incentive Plan is currently administered by the board of
directors of the Company. The Stock Incentive Plan gives broad
powers to the board of directors of the Company to administer and
interpret the particular form and conditions of each option. The
stock options granted under the Stock Incentive Plan are
non-statutory options which vest over a period of up to three years
and have a ten year term. The options are granted at an exercise
price equal to the fair market value of the common stock on the
date of the grant which is approved by the board of directors of
the Company.
38
I
tem 6. SELECTED FINANCIAL
DATA
Not
required under Regulation S-K for “smaller reporting
companies”.
I
tem 7.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements regarding our business development
plans, clinical trials, regulatory reviews, timing, strategies,
expectations, anticipated expenses levels, projected profits,
business prospects and positioning with respect to market,
demographic and pricing trends, business outlook, technology
spending and various other matters (including contingent
liabilities and obligations and changes in accounting policies,
standards and interpretations) and express our current intentions,
beliefs, expectations, strategies or predictions. These
forward-looking statements are based on a number of assumptions and
currently available information and are subject to a number of
risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under the
sections titled “Cautionary Note Regarding Forward-Looking
Statements” and “Risk Factors” and elsewhere in
this Annual Report on Form 10-K. The following discussion should be
read in conjunction with our consolidated financial statements and
related notes thereto included elsewhere in this Annual Report on
Form 10-K.
Overview
We are
a shock wave technology company using a patented system of
noninvasive, high-energy, acoustic shock waves for regenerative
medicine and other applications. Our initial focus is regenerative
medicine – utilizing noninvasive, acoustic shock waves to
produce a biological response resulting in the body healing itself
through the repair and regeneration of tissue, musculoskeletal and
vascular structures. Our lead regenerative product in the United
States is the dermaPACE
®
device, used
for treating diabetic foot ulcers, which was subject to two
double-blinded, randomized Phase III clinical studies and cleared
by the U.S. Food and Drug Administration (FDA) on December 28,
2017.
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 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.
Our
lead product candidate for the global wound care market, dermaPACE,
has received FDA clearance for commercial use to treat diabetic
foot ulcers in the United States and the CE Mark allowing for
commercial use on acute and chronic defects of the skin and
subcutaneous soft tissue.
We believe we have demonstrated that
our patented technology is safe and effective in stimulating
healing in chronic conditions of the foot and the elbow through our
United States FDA Class III 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.
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.
39
In
addition to healthcare uses, our high-energy, acoustic pressure
shock waves, due to their powerful pressure gradients and localized
cavitational effects, may have applications in secondary and
tertiary oil exploitation, for cleaning industrial waters, for
sterilizing food liquids and finally for maintenance of industrial
installations by disrupting biofilms formation. Our business
approach will be through licensing and/or partnership
opportunities.
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. In August 2018,
MundiMed advised the Company that it did not anticipate being able
to make further payments under the binding term sheet due to
operational and cash flow difficulties. On September 14, 2018, the
Company sent a letter to MundiMed informing them of a breach in our
agreement regarding payment of the upfront distribution fee. On
September 28, 2018, the Company received a response letter stating
that the Company was in default of the agreement. On October 9,
2018, the Company sent MundiMed a letter of termination of the
agreement effective as of October 8, 2018. The Company is currently
in discussions with a new partner to take over this agreement for
the marketing and distribution of its products in
Brazil.
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 committed to enter into a joint venture for the manufacture,
sale and distribution of the Company’s dermaPACE and
orthoPACE devices. 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, Brunei, Cambodia, Myanmar, Laos,
Indonesia, Thailand, Philippines and Vietnam (the “SEA
Region”) to be paid in the fourth quarter of 2018. On
September 21, 2018, the Company entered into a joint venture
agreement (the “JV Agreement”) with FKS setting forth
the terms of the operation, management and control of a joint
venture entity initially with the name of Holistic Health Institute
Pte. Ltd., a private limited company to be incorporated in the
Republic of Singapore, but with such company name subject to
confirmation by Singapore Government. On November 9, 2018, the
joint venture entity was incorporated in the Republic of Singapore
with the name of Holistic Wellness Alliance Pte. Ltd.
(“HWA”). HWA was formed as a joint venture of the
Company and FKS for the manufacture, sale and distribution of the
Company’s dermaPACE
®
and
orthoPACE
®
devices. Under
the JV Agreement, the Company and FKS each hold shares constituting
fifty percent of the issued share capital of HWA. The Company
provides to HWA FDA and CE approved products for an agreed cost,
access to treatment protocols, training, marketing and sales
materials and management expertise, and FKS provides to HWA
capital, human capital and sales resources in Singapore, Malaysia,
Brunei, Cambodia, Myanmar, Laos, Indonesia, Thailand, Philippines
and Vietnam, certain reports and identification of new key opinion
leaders as well as clinical trial and poster access availability.
The JV Agreement also established the corporate governance of HWA,
including a five-person board of directors consisting of two
directors designated by the Company, two directors designated by
FKS, and a third director appointed jointly by the parties.
Initially, net profits under the JV Agreement shall be used to
repay FKS for (i) the payment of $500,000 on June 22, 2018 to the
Company for initial distribution rights in Taiwan and (ii) the cash
advance to HWA per the terms of the JV Agreement. The JV Agreement
includes other customary terms, including regarding the transfer of
shares, indemnification and confidentiality.
40
The Company entered
into short term notes payable with twenty-four individuals between
June 26, 2018 and March 13, 2019 in the total principal amount of
$2,835,525 with an interest rate of 5% per annum. The principal and
accrued interest are due and payable six months from the date of
issuance or receipt of notice of warrant exercise. On December 26,
2018, the Company defaulted on the short term notes payable issued
on June 26, 2018 and began accruing interest at the default
interest rate of 10%. On January 2, 2019, the Company defaulted on
the short term notes payable issued on July 2, 2018 and began
accruing interest at the default interest rate of 10%. On January
30, 2019, the Company defaulted on the short term notes payable
issued on July 30, 2018 and began accruing interest at the default
interest rate of 10%.
On
October 10, 2018, the Company entered into short term notes payable
with Shri P. Parikh, the President of the Company, in the total
principal amount of $100,000 with an interest rate of 5% per annum.
The principal and accrued interest are due and payable on the
earlier of (i) one day after receipt of payment from
Johnfk Medical Inc.
, (ii) six months from
the date of issuance and (iii) the acceleration of the maturity of
the short term note by the holder upon the occurrence of an event
of default.
On October 17,
2018, the Company and a vendor agreed to settle a portion of a
previously incurred fee for services in Common Stock in lieu of
cash. On October 17, 2018, the Company issued 426,176 shares for
services rendered May 2017 through February
2018.
On
November 12, 2018, the Company entered into an amendment to the
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 was increased to $1,000,000 with an
annualized interest rate of 6%. The line of credit may be called
for payment upon demand of the holder.
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 1cm
2
and 16cm
2
, 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).
41
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.
42
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 $11,631,394
and $5,537,936 for the years ended December 31, 2018 and 2017,
respectively. These factors and the events of default on the notes
payable to HealthTronics, Inc., the Company’s convertible
promissory notes and the Company’s short term notes payable
create substantial doubt about the Company’s ability to
continue as a going concern for a period of at least twelve months
from the financial statement issuance date.
The continuation of our business is dependent upon
raising additional capital to fund operations. Management’s
plans are to obtain additional capital in 2019 through investments
by strategic partners for market opportunities, which may include
strategic partnerships or licensing arrangements, or raise capital
through the conversion of outstanding warrants, the issuance of
common or preferred stock, securities convertible into common
stock, or secured or unsecured debt. These possibilities, to the
extent available, may be on terms that result in significant
dilution to our existing shareholders.
Although no
assurances can be given, management believes that potential
additional issuances of equity or other potential financing
transactions as discussed above should provide the necessary
funding for us.
If these efforts are
unsuccessful, we may be required to significantly curtail or
discontinue operations or obtain funds through financing
transactions with unfavorable terms.
The accompanying
consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a
going concern and the realization of assets and satisfaction of
liabilities in the normal course of business. The carrying amounts
of assets and liabilities presented in the financial statements do
not necessarily purport to represent realizable or settlement
values. The consolidated financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
. Our consolidated financial
statements do not include any adjustments relating to the
recoverability of assets and classification of assets and
liabilities that might be necessary should we be unable to continue
as a going concern.
Since
our inception, we have incurred losses from operations each year.
As of December 31, 2018, we had an accumulated deficit of
$116,602,778. Although the size and timing of our future operating
losses are subject to significant uncertainty, we anticipate that
our operating losses will continue over the next few years as we
incur expenses related to commercialization of our dermaPACE system
for the treatment of diabetic foot ulcers in the United States. If
we are able to successfully commercialize, market and distribute
the dermaPACE system, then we hope to partially or completely
offset these losses in the future. Although no assurances can be
given, we believe that potential additional issuances of equity,
debt or other potential financing, as discussed above, 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 and marketing products,
including the uncertainty of:
●
the scope, rate of
progress and cost of our clinical trials;
●
future clinical
trial results;
●
the cost and timing
of regulatory approvals;
●
the establishment
of successful marketing, sales and distribution channels and
partnerships, including our efforts to expand our marketing, sales
and distribution reach through joint ventures and other contractual
arrangements;
●
the cost and timing
associated with establishing reimbursement for our
products;
●
the effects of
competing technologies and market developments; and
●
the industry demand
and patient wellness behavior.
Any
failure to complete the development of our product candidates in a
timely manner, or any failure to successfully market and
commercialize our product candidates, would have a material adverse
effect on our operations, financial position and liquidity. A
discussion of the risks and uncertainties associated with us and
our business are set forth under the section entitled “Risk
Factors – Risks Related to Our Business”.
43
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements,
which have been prepared in accordance with United States generally
accepted accounting principles. The preparation of our consolidated
financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues
and expenses.
On an
ongoing basis, we evaluate our estimates and judgments, including
those related to the recording of the allowances for doubtful
accounts, 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 warrants
and 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 this
Annual Report on Form 10-K, we believe that the following
accounting policies relating to revenue recognition, research and
development costs, inventory valuation, liabilities related to
warrants issued, stock-based compensation and income taxes are
significant and; therefore, they are important to aid you in fully
understanding and evaluating our reported financial
results.
Revenue Recognition
Refer to Notes 6
and 17 to the accompanying consolidated financial
statements.
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 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.
44
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.
The fair value of
each option award is estimated on the date of grant using the
Black-Scholes option pricing model. The expected terms of options
granted represent the period of time that options granted are
estimated to be outstanding and are derived from the contractual
terms of the options granted. We amortize the fair value of each
option over each option’s vesting period.
Results of Operations for the Years ended December 31, 2018 and
2017
Revenues and Cost of Revenues
Revenues for the
year ended December 31, 2018 were $1,850,060, compared to $738,527
for the same period in 2017, an increase of $1,111,533, or 151%.
Revenue resulted primarily from sales in Europe and Asia/Pacific of
our orthoPACE devices and related applicators, sales in the United
States and Asia/Pacific of our dermaPACE devices and related
applicators and upfront distribution fee from our Southeast Asia
distribution agreement with FKS. The increase in revenue for 2018
is primarily due to initial sales of dermaPACE devices in the
United States, an increase in sales of orthoPACE devices in
Asia/Pacific and the European Community, as compared to the prior
year, as well as higher sales of new applicators.
Cost of
revenues for the year ended December 31, 2018 were $693,664,
compared to $241,970 for the same period in 2017. Gross profit as a
percentage of revenues was 63% for the year ended December 31,
2018, compared to 67% for the same period in 2017. The decrease in
gross profit as a percentage of revenues in 2018 was primarily due
to reduced margin on sales of devices to distribution partners and
increase in new applicators which have a lower margin and higher
shipping costs. This was partially offset by increased revenue for
refurbishment license and upfront distribution fee which have
little or no related cost, as compared to 2017.
Research and Development Expenses
Research and
development expenses for the year ended December 31, 2018 were
$1,663,838, compared to $1,292,531 for the same period in
2017, an increase of $371,307, or 29%. The increase in research and
development expenses in 2018, as compared to 2017, was due to an
increase in salary and benefits of $263,628 as a result of hiring
and contracting for temporary services and increased consulting
expenses of $72,972 related to our insurance reimbursement strategy
for the commercialization of dermaPACE.
General and Administrative Expenses
General and
administrative expenses for the year ended December 31, 2018 were
$6,650,484, as compared to $3,004,403 for the same period in 2017,
an increase of $3,646,081, or 121%. The increase in general and
administrative expenses in 2018, as compared to 2017, was due to an
increase in salary and benefits and recruitment fees related to new
hires of $1,062,594, increased legal costs of $196,845 associated
with SEC filings and patent issuance and maintenance, increased
travel of $156,986 related to tradeshows and joint venture with
FKS, and increased non-cash stock based compensation of $1,696,665
related to stock option and stock warrants issued in 2018 to new
and existing employees.
Depreciation
Depreciation for
the year ended December 31, 2018 was $22,332, compared to $24,069
for the same period in 2017, a decrease of $1,737, or 7%. The
decrease was due to the lower depreciation related to devices as
some devices were fully depreciated throughout the
year.
45
Other Income (Expense)
Other
income (expense) was a net expense of $4,451,136 for the year ended
December 31, 2018 as compared to a net expense of
$1,713,490 for the same period in 2017, an increase of
$2,737,646, or 160%, in the net expense. The increase was primarily
due to increased interest expense, beneficial conversion discount
and debt discount related to the convertible promissory notes
issued in the fourth quarter of 2017 and first quarter of 2018, as
well as increased interest expense as a result of issuance of short
term notes payable in the fourth quarter of 2018. In addition, the
net expense in 2018 included a non-cash gain of $55,376 for a
valuation adjustment on outstanding warrants, as compared to a
non-cash loss of $568,729 for a valuation adjustment on outstanding
warrants in 2017.
Net Loss
Net
loss for the year ended December 31, 2018 was $11,631,394, or
($0.08) per basic and diluted share, compared to a net loss of
$5,537,936, or ($0.04) per basic and diluted share, for the same
period in 2017, an increase in the net loss of $6,093,458, or 110%.
The increase in the net loss was primarily a result of increase in
operating expenses and interest expense as explained
above.
Liquidity and Capital Resources
We
expect to devote substantial resources for the commercialization of
the dermaPACE System and will continue to research and develop the
non-medical uses of the PACE technology, both of which will require
additional capital resources. We incurred a net loss of $11,631,394
and $5,537,936 for the years ended December 31, 2018 and 2017,
respectively. These factors and the events of default on the notes
payable to HealthTronics, Inc., the Company’s convertible
promissory notes and the Company’s short term notes payable
create substantial doubt about the Company’s ability to
continue as a going concern for a period of at least twelve months
from the financial issuance date.
The continuation of our business is dependent upon
raising additional capital to fund operations. Management expects
the cash used in operations for the Company will be approximately
$225,000 to $300,000 per month for the first half of 2019 and
$275,000 to $350,000 per month for the second half of 2019
as
resources are devoted to the commercialization of the
dermaPACE product including hiring of new employees, expansion of
our international business and continued research and development
of non-medical uses of our technology.
Management’s plans are to obtain additional
capital in 2019 through investments by strategic partners for
market opportunities, which may include strategic partnerships or
licensing arrangements, or raise capital through the conversion of
outstanding warrants, issuance of common or preferred stock,
securities convertible into common stock, or secured or unsecured
debt. These possibilities, to the extent available, may be on terms
that result in significant dilution to our existing
shareholders.
Although no assurances can be given,
management believes that potential additional issuances of equity
or other potential financing transactions as discussed above should
provide the necessary funding for us.
If these efforts are unsuccessful, we may be
required to significantly curtail or discontinue operations or
obtain funds through financing transactions with unfavorable
terms.
The accompanying consolidated financial statements
have been prepared in conformity with accounting principles
generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern and the
realization of assets and satisfaction of liabilities in the normal
course of business. The carrying amounts of assets and liabilities
presented in the financial statements do not necessarily purport to
represent realizable or settlement values. The consolidated
financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
Our consolidated financial statements do not
include any adjustments relating to the recoverability of assets
and classification of assets and liabilities that might be
necessary should we be unable to continue as a going
concern.
46
In
addition, we may have potential liability for certain sales, offers
or issuances of equity securities of the Company in possible
violation of federal securities laws. Pursuant to a Registration
Statement on Form S-1 (Registration No. 333-208676), declared
effective on February 16, 2016 (the “2016 Registration
Statement”), the Company sought to register: a primary
offering of up to $4,000,000 units, the Common Stock included as
part of the units, the warrants included as part of the units, and
the Common Stock issuable upon exercise of such warrants; a primary
offering of up to $400,000 placement agent warrants and the Common
Stock issuable upon exercise of such placement agent warrants; and
a secondary offering of 23,545,144 shares of Common Stock held by
certain selling stockholders named in the 2016 Registration
Statement. The SEC Staff’s interpretations provide that, when
an issuer is registering units composed of common stock, common
stock purchase warrants, and the common stock underlying the
warrants, the registration fee is based on the offer price of the
units and the exercise price of the warrants. The registration fee
paid did include the fee based on the offer price of the units,
allocated to the unit line item in the fee table. Although the fee
table in the 2016 Registration Statement included a line item for
the Common Stock underlying the warrants, the Company did not
include in that line item the fee payable based on the exercise
price of $0.08 per share for such warrants, which amount should
have been allocated to such line item based on the SEC
Staff’s interpretations. As a result, a portion of the
securities intended to be registered by the 2016 Registration
Statement was not registered. In addition, in a post-effective
amendment to the 2016 Registration Statement filed on September 23,
2016, too many placement agent warrants were inadvertently
deregistered. The post-effective amendment stated that the Company
had issued $180,100, based on 2,251,250 Class L warrants issued
with a $0.08 exercise price of warrants to the placement agent and
therefore deregistered $219,900, based on 2,748,750 Class L
warrants issued with a $0.08 exercise price of placement agent
warrants from the $400,000, based on 5,000,000 Class L warrants
issued with a $0.08 exercise price total offering amount included
in the Registration Statement. The actual warrants issued to the
placement agent totaled $240,133.36, based on 3,001,667 Class L
warrants issued with a $0.08 exercise price, and only $159,867,
based on 1,998,338 Class L warrants issued with a $0.08 exercise
price should have been deregistered in such post-effective
amendment. To the extent that we have not registered or failed to
maintain an effective registration statement with respect to any of
the transactions in securities described above and with respect to
our ongoing offering of shares of Common Stock underlying the
warrants, and a violation of Section 5 of the Securities Act did in
fact occur or is occurring, eligible holders of our securities that
participated in these offerings would have a right to rescind their
transactions, and the Company may have to refund any amounts paid
for the securities, which could have a materially adverse effect on
the Company’s financial condition. Eligible securityholders
have not filed a claim against the Company alleging a violation of
Section 5 of the Securities Act with respect to these transactions,
but they could file a claim in the future. Furthermore, the ongoing
offering of and issuance of shares of Common Stock underlying
certain of our warrants from the 2016 Registration Statement may
have been, and may continue to be, in violation of Section 5 of the
Securities Act and the rules and regulations under the Securities
Act, because we did not update the prospectus in the 2016
Registration Statement for a period of time after the 2016
Registration Statement was declared effective and because our
reliance on Rule 457(p) under the Securities Act in an amendment to
our Registration Statement on Form S-1 (Registration No.
333-213774) filed on September 23, 2016 effected a deregistration
of the securities registered under the 2016 Registration Statement.
Eligible securityholders have not filed a claim against the Company
alleging a violation of Section 5 of the Securities Act, but they
could file such a claim in the future. If a violation of Section 5
of the Securities Act did in fact occur or is occurring, eligible
securityholders would have a right to rescind their transactions,
and the Company may have to refund any amounts paid the securities,
which could have a materially adverse effect on the Company’s
financial condition.
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.
On
November 12, 2018, the Company entered into an amendment to the
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 was increased to $1,000,000 with an
annualized interest rate of 6%. The line of credit may be called
for payment upon demand of the holder. On October 5, 2018 and
October 23, 2018, the Company received $15,000 and $40,000,
respectively, as an increase in the line of credit.
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, 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.
47
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 committed to enter into a joint venture for the manufacture,
sale and distribution of the Company’s dermaPACE and
orthoPACE devices. On September 21, 2018, the Company entered into
a joint venture agreement with FKS setting forth the terms of the
operation, management and control of a joint venture entity
initially with the name of Holistic Health Institute Pte. Ltd., a
private limited company to be incorporated in the Republic of
Singapore, but with such company name subject to confirmation by
Singapore Government. On November 9, 2018, the joint venture entity
was incorporated in the Republic of Singapore with the name of
Holistic Wellness Alliance Pte. Ltd. Under the terms of the June
2018 agreement, FKS paid the Company a fee of $500,000 on June 22,
2018 for initial distribution rights in Taiwan. An additional fee
of $500,000 for initial distribution rights in the SEA Region will
be received in installments. The first two installments of $50,000
have been received and the remaining $400,000 is expected to be
received in April 2019.
The Company entered
into short term notes payable with twenty-four individuals between
June 26, 2018 and March 13, 2019 in the total principal amount of
$2,835,525 with an interest rate of 5% per annum. The principal and
accrued interest are due and payable six months from the date of
issuance or receipt of notice of warrant exercise. On December 26,
2018, the Company defaulted on the short term notes payable issued
on June 26, 2018 and began accruing interest at the default
interest rate of 10%. On January 2, 2019, the Company defaulted on
the short term notes payable issued on July 2, 2018 and began
accruing interest at the default interest rate of 10%. On January
30, 2019, the Company defaulted on the short term notes payable
issued on July 30, 2018 and began accruing interest at the default
interest rate of 10%.
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.
For the
years ended December 31, 2018 and 2017, net cash used by operating
activities was $3,621,172 and $1,528,971, respectively, primarily
consisting of compensation costs, research and development
activities and general corporate operations. The increase in the
use of cash for operating activities for the year ended December
31, 2018, as compared to the same period for 2017, of $2,092,201,
or 137%, was primarily due to the increase in accounts payable,
accrued employee compensation and accrued expenses of $803,561 and
increase in interest payable, related parties of $485,875. Net cash
used by investing activities in 2018 was $42,888 as compared to net
cash used by investing activities in 2017 of $0. The increase in
cash used by investing activities is due to the purchase of
property and equipment. Net cash provided by financing activities
for the year ended December 31, 2018 was $3,317,510, which
primarily consisted of the proceeds from short term notes of
$1,637,497, net proceeds from convertible promissory notes of
$1,159,785, proceeds from related party line of credit of $480,000,
proceeds from advances from related parties of $144,000 and
proceeds from warrant exercises of $40,728 which was offset by
payment on related party line of credit of $144,500. Net cash
provided by financing activities for the year ended December 31,
2017 was $2,117,298, which primarily consisted of the net proceeds
from convertible promissory notes of $1,384,232, proceeds from
related party line of credit of $370,000, proceeds from advances
from related parties of $310,000 and proceeds from warrant
exercises of $93,066. Cash and cash equivalents decreased by
$365,635 for the year ended December 31, 2018 and cash and cash
equivalents increased by $596,613 for the year ended December 31,
2017.
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.
In
August 2016, we entered into a lease agreement for 7,500
square feet of office space for office, research and development,
quality control, production and warehouse space which expires on
December 31, 2021. On February 1, 2018, we entered into an
amendment to the lease agreement for an additional 380 square feet
of office space for storage which expires on December 31, 2021. On
January 2, 2019, we entered into a second amendment to the lease
agreement for an additional 2,297 square feet of office space for
office space which expires on December 31, 2021. Under the terms of
the lease, we pay monthly rent of $14,651, subject to a 3%
adjustment on an annual basis.
48
We have
developed a network of suppliers, manufacturers, and contract
service providers to provide sufficient quantities of product
component materials for our products through the development,
clinical testing and commercialization phases.
We have a manufacturing supply agreement with
Swisstronics Contract Manufacturing AG in Switzerland, a division
of Cicor Technologies Ltd., covering the generator box component of
our devices.
In
August 2005, as part of the purchase of the orthopedic division
assets of HealthTronics, Inc., we issued two notes to
HealthTronics, Inc. for $2,000,000 each. The notes bear interest at
6% annually. Quarterly interest through June 30, 2010 was accrued
and added to the principal balance. Interest is paid quarterly in
arrears beginning September 30, 2010. All remaining unpaid accrued
interest and principal was due August 1, 2015. Accrued interest on
the notes which matured in August 2015 totaled $1,372,743 at
December 31, 2018 and 2017.
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.
Since
December 31, 2018, the Company has been in default under the notes,
as amended by the Third Amendment, and as a result HealthTronics,
Inc. could, among other rights and remedies, exercise its rights
under the security agreement granting HealthTronics, Inc. a first
priority security interest in the assets of the Company. The
Company is in negotiations with HealthTronics, Inc. to address the
event of default.
Recently Issued Accounting Standards
New
accounting pronouncements are issued by the Financial Standards
Board (“FASB”) or other standards setting bodies that
the Company adopts according to the various timetables the FASB
specifies. The Company does not expect the adoption of recently
issued accounting pronouncements to have a significant impact on
the Company’s results of operations, financial position or
cash flow. See Note 2 to the accompanying consolidated financial
statements.
Off-Balance Sheet Arrangements
Since
inception, we have not engaged in any off-balance sheet activities,
including the use of structured finance, special purpose entities
or variable interest entities.
Effects of Inflation
Due to
the fact that our assets are, to an extent, liquid in nature, they
are not significantly affected by inflation. However, the rate of
inflation affects such expenses as employee compensation, office
space leasing costs and research and development charges, which may
not be readily recoverable during the period of time that we are
bringing the product candidates to market. To the extent inflation
results in rising interest rates and has other adverse effects on
the market, it may adversely affect our consolidated financial
condition and results of operations.
I
tem 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not
required under Regulation S-K for “smaller reporting
companies”.
I
tem 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
|
Page
|
|
Consolidated Financial Statements
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2018 and 2017
|
F-4
|
|
|
|
|
Consolidated
Statements of Comprehensive Loss for the years ended
December 31, 2018 and 2017
|
F-5
|
|
|
|
|
Consolidated
Statements of Stockholders’ Deficit for the years ended
December 31, 2018 and 2017
|
F-6
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2018
and 2017
|
F-7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
49
F-1
F-2
F-3
SANUWAVE
HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December
31, 2018 and 2017
|
|
2018
|
2017
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash and cash
equivalents
|
$
364,549
|
$
730,184
|
|
Accounts
receivable, net of allowance for doubtful accounts
of
$33,045 in 2018 and $92,797 in 2017
|
234,774
|
152,520
|
|
Due from related
party
|
1,228
|
-
|
|
Inventory
|
357,820
|
231,532
|
|
Prepaid expenses
and other current assets
|
125,111
|
90,288
|
|
TOTAL CURRENT
ASSETS
|
1,083,482
|
1,204,524
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT, net
|
77,755
|
60,369
|
|
|
|
|
|
OTHER
ASSETS
|
16,491
|
13,917
|
|
TOTAL
ASSETS
|
$
1,177,728
|
$
1,278,810
|
|
|
|
|
|
LIABILITIES
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable
|
$
1,592,643
|
$
1,496,523
|
|
Accrued
expenses
|
689,280
|
673,600
|
|
Accrued employee
compensation
|
340,413
|
1,680
|
|
Contract
liabilities
|
131,797
|
-
|
|
Advances
payable
|
-
|
310,000
|
|
Line of credit,
related parties
|
883,224
|
370,179
|
|
Accrued interest,
related parties
|
1,171,782
|
685,907
|
|
Short term notes
payable
|
1,883,163
|
-
|
|
Convertible
promissory notes, net
|
2,652,377
|
455,606
|
|
Notes payable,
related parties, net
|
5,372,743
|
5,222,259
|
|
Warrant
liability
|
1,769,669
|
1,943,883
|
|
TOTAL CURRENT
LIABILITIES
|
16,487,091
|
11,159,637
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
Contract
liabilities
|
46,736
|
-
|
|
TOTAL NON-CURRENT
LIABILITIES
|
46,736
|
-
|
|
TOTAL
LIABILITIES
|
16,533,827
|
11,159,637
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
PREFERRED STOCK,
par value $0.001, 5,000,000
shares
authorized; no shares issued and outstanding
|
-
|
-
|
|
|
|
|
|
PREFERRED STOCK,
SERIES A CONVERTIBLE, par value $0.001,
6,175 designated; 0
shares issued and 0 shares outstanding
in 2018 and
2017
|
-
|
-
|
|
|
|
|
|
PREFERRED STOCK,
SERIES B CONVERTIBLE, par value $0.001,
293 designated; 0
shares issued and 0 shares outstanding
in 2018 and
2017
|
-
|
-
|
|
|
|
|
|
COMMON
STOCK, par value $0.001, 350,000,000 shares authorized;
155,665,138 and
139,300,122 issued and outstanding in 2018 and
2017,
respectively
|
155,665
|
139,300
|
|
|
|
|
|
ADDITIONAL PAID-IN
CAPITAL
|
101,153,882
|
94,995,040
|
|
|
|
|
|
ACCUMULATED
DEFICIT
|
(116,602,778
)
|
(104,971,384
)
|
|
|
|
|
|
ACCUMULATED OTHER
COMPREHENSIVE LOSS
|
(62,868
)
|
(43,783
)
|
|
TOTAL STOCKHOLDERS'
DEFICIT
|
(15,356,099
)
|
(9,880,827
)
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$
1,177,728
|
$
1,278,810
|
The
accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
SANUWAVE
HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
Years
Ended December 31, 2018 and 2017
|
|
2018
|
2017
|
|
|
|
|
|
REVENUES
|
|
|
|
Product
|
$
949,601
|
$
456,765
|
|
License
fees
|
819,696
|
235,878
|
|
Other
revenue
|
80,763
|
45,884
|
|
TOTAL
REVENUES
|
1,850,060
|
738,527
|
|
|
|
|
|
COST OF
REVENUES
|
|
|
|
Product
|
525,216
|
129,512
|
|
Other
|
168,448
|
112,458
|
|
TOTAL COST OF
REVENUES
|
693,664
|
241,970
|
|
|
|
|
|
GROSS
MARGIN
|
1,156,396
|
496,557
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Research and
development
|
1,663,838
|
1,292,531
|
|
General and
administrative
|
6,650,484
|
3,004,403
|
|
Depreciation
|
22,332
|
24,069
|
|
TOTAL OPERATING
EXPENSES
|
8,336,654
|
4,321,003
|
|
|
|
|
|
OPERATING
LOSS
|
(7,180,258
)
|
(3,824,446
)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
Gain (loss) on
warrant valuation adjustment
|
55,376
|
(568,729
)
|
|
Interest
expense
|
(4,496,148
)
|
(1,139,711
)
|
|
Other income,
net
|
9,952
|
-
|
|
Loss on foreign
currency exchange
|
(20,316
)
|
(5,050
)
|
|
TOTAL OTHER INCOME
(EXPENSE), NET
|
(4,451,136
)
|
(1,713,490
)
|
|
|
|
|
|
NET
LOSS
|
(11,631,394
)
|
(5,537,936
)
|
|
|
|
|
|
OTHER COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
Foreign currency
translation adjustments
|
(19,085
)
|
8,286
|
|
TOTAL COMPREHENSIVE
LOSS
|
$
(11,650,479
)
|
$
(5,529,650
)
|
|
|
|
|
|
LOSS PER
SHARE:
|
|
|
|
Net loss - basic
and diluted
|
$
(0.08
)
|
$
(0.04
)
|
|
|
|
|
|
Weighted average
shares outstanding - basic and diluted
|
149,537,777
|
138,838,602
|
The
accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
SANUWAVE
HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years
Ended December 31, 2018 and 2017
|
|
Preferred
Stock
|
Common
Stock
|
|
|
|
|
||
|
|
Number
of
|
|
Number
of
|
|
|
|
Accumulated
|
|
|
|
Shares
|
|
Shares
|
|
|
|
Other
|
|
|
|
Issued
and
|
|
Issued
and
|
|
Additional
Paid-
|
Accumulated
|
Comprehensive
|
|
|
|
Outstanding
|
Par
Value
|
Outstanding
|
Par
Value
|
in
Capital
|
Deficit
|
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of
December 31, 2016
|
-
|
$
-
|
137,219,968
|
$
137,220
|
$
92,436,697
|
$
(99,433,448
)
|
$
(52,069
)
|
$
(6,911,600
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(5,537,936
)
|
-
|
(5,537,936
)
|
|
Warrant
exercise
|
-
|
-
|
1,163,333
|
1,163
|
91,903
|
-
|
-
|
93,066
|
|
Cashless warrant
exercise
|
-
|
-
|
866,625
|
867
|
66,100
|
-
|
-
|
66,967
|
|
Shares issued for
services
|
-
|
-
|
50,196
|
50
|
7,950
|
-
|
-
|
8,000
|
|
Warrants issued for
services
|
-
|
-
|
-
|
-
|
182,856
|
-
|
-
|
182,856
|
|
Stock-based
compensation - options and warrants
|
-
|
-
|
-
|
-
|
768,105
|
-
|
-
|
768,105
|
|
Warrants issued
with convertible promissory note
|
-
|
-
|
-
|
-
|
620,748
|
-
|
-
|
620,748
|
|
Beneficial
conversion feature on debt
|
-
|
-
|
-
|
-
|
820,681
|
-
|
-
|
820,681
|
|
Foreign currency
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
8,286
|
8,286
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of
December 31, 2017
|
-
|
-
|
139,300,122
|
139,300
|
94,995,040
|
(104,971,384
)
|
(43,783
)
|
(9,880,827
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(11,631,394
)
|
-
|
(11,631,394
)
|
|
Cashless warrant
exercises
|
-
|
-
|
6,395,499
|
6,396
|
(6,396
)
|
-
|
-
|
-
|
|
Proceeds from
warrant exercise
|
-
|
-
|
422,939
|
423
|
40,305
|
-
|
-
|
40,728
|
|
Shares issued for
services
|
-
|
-
|
1,049,340
|
1,049
|
180,451
|
-
|
-
|
181,500
|
|
Conversion of
promissory notes
|
-
|
-
|
8,497,238
|
8,497
|
926,199
|
-
|
-
|
934,696
|
|
Warrants issued for
services
|
-
|
-
|
-
|
-
|
828,690
|
-
|
-
|
828,690
|
|
Stock-based
compensation - options
|
-
|
-
|
-
|
-
|
2,480,970
|
-
|
-
|
2,480,970
|
|
Warrants issued
with convertible promissory notes
|
-
|
-
|
-
|
-
|
808,458
|
-
|
-
|
808,458
|
|
Beneficial
conversion feature on convertible promissory notes
|
-
|
-
|
-
|
-
|
709,827
|
-
|
-
|
709,827
|
|
Warrants issued
with promissory note
|
-
|
-
|
-
|
-
|
36,104
|
-
|
-
|
36,104
|
|
Beneficial
conversion feature on promissory notes
|
-
|
-
|
-
|
-
|
35,396
|
-
|
-
|
35,396
|
|
Reclassification of
warrant liability to equity
|
-
|
-
|
-
|
-
|
118,838
|
-
|
-
|
118,838
|
|
Foreign currency
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
(19,085
)
|
(19,085
)
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of
December 31, 2018
|
-
|
$
-
|
155,665,138
|
$
155,665
|
$
101,153,882
|
$
(116,602,778
)
|
$
(62,868
)
|
$
(15,356,099
)
|
The
accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
SANUWAVE
HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2018 and 2017
|
|
2018
|
2017
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$
(11,631,394
)
|
$
(5,537,936
)
|
|
|
|
|
|
Adjustments to
reconcile loss from operations
to net cash used by
operating activities
|
|
|
|
Depreciation
|
22,332
|
24,069
|
|
Bad debt expense
(recovery)
|
(59,752
)
|
57,601
|
|
Stock-based
compensation
|
2,480,970
|
768,105
|
|
Loss (gain) on
warrant valuation adjustment
|
(55,376
)
|
568,729
|
|
Amortization of
debt issuance costs
|
2,767,361
|
431,087
|
|
Amortization of
debt discount
|
150,484
|
110,247
|
|
Stock issued for
consulting services
|
181,500
|
8,000
|
|
Warrants issued for
consulting services
|
828,690
|
182,856
|
|
Accrued
interest
|
410,289
|
21,896
|
|
Interest payable,
related parties
|
485,875
|
576,481
|
|
Changes in assets
and liabilities
|
|
|
|
Accounts
receivable - trade
|
(22,502
)
|
250,678
|
|
Inventory
|
(123,118
)
|
(7,079
)
|
|
Prepaid
expenses
|
(34,823
)
|
(2,465
)
|
|
Other
|
(3,802
)
|
(131
)
|
|
Accounts
payable
|
276,120
|
783,559
|
|
Accrued
expenses
|
188,708
|
298,512
|
|
Accrued
employee compensation
|
338,733
|
(63,180
)
|
|
Contract
liabilties
|
178,533
|
-
|
|
NET CASH USED BY
OPERATING ACTIVITIES
|
(3,621,172
)
|
(1,528,971
)
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES
|
|
|
|
Purchases of
property and equipment
|
(42,888
)
|
-
|
|
NET CASH USED BY
INVESTING ACTIVITIES
|
(42,888
)
|
-
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES
|
|
|
|
Proceeds from short
term note
|
1,637,497
|
-
|
|
Proceeds from
convertible promissory notes, net
|
1,159,785
|
1,384,232
|
|
Proceeds from line
of credit, related party
|
624,000
|
370,000
|
|
Advances from
related parties
|
-
|
310,000
|
|
Proceeds from note
payable, product
|
96,708
|
-
|
|
Proceeds from
warrant exercise
|
40,728
|
93,066
|
|
Payment on line of
credit, related party
|
(144,500
)
|
-
|
|
Payments on note
payable, product
|
(96,708
)
|
-
|
|
Payments on short
term loan
|
-
|
(40,000
)
|
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
3,317,510
|
2,117,298
|
|
|
|
|
|
EFFECT OF EXCHANGE
RATES ON CASH
|
(19,085
)
|
8,286
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(365,635
)
|
596,613
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
730,184
|
133,571
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
$
364,549
|
$
730,184
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION
|
|
|
|
Cash paid for
interest, related parties
|
$
151,227
|
$
-
|
|
|
|
|
|
NONCASH INVESTING
AND FINANCING ACTIVITIES
|
|
|
|
Reclassification of
warrant liability to equity
|
$
118,838
|
$
-
|
|
|
|
|
|
Advances payable
converted to convertible promissory notes
|
$
310,000
|
$
-
|
|
|
|
|
|
Accounts payable
converted to convertible promissory notes
|
$
120,000
|
$
-
|
|
|
|
|
|
Beneficial
conversion feature on convertible debt
|
$
745,223
|
$
820,681
|
|
|
|
|
|
Warrants issued
with debt
|
$
844,562
|
$
620,748
|
|
|
|
|
|
Conversion of 10%
convertible promissory notes
|
$
934,696
|
$
-
|
The
accompanying notes to consolidated statements are an integral part
of these statements.
F-7
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
1.
Description of the Business
and
Going Concern and Management’s Plans
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. In 2018, the Company
started marketing its 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. The Company generates
revenue streams from product sales, licensing transactions and
other activities.
As
shown in the accompanying consolidated financial statements, the
Company incurred a net loss of $11,631,394 and $5,537,936 during
the years ended December 31, 2018 and 2017, respectively, and the
net cash used by operating activities
was $3,621,172 and $1,528,971, respectively
. As of December
31, 2018, the Company had a net working capital deficit of
$15,403,609, total stockholders’ deficit of $15,356,099 and
cash and cash equivalents of
$364,549
. These factors and the events of default on the
notes payable to HealthTronics, Inc. (see Note 12), the
Company’s convertible promissory notes (see Note 10) and the
Company’s short term notes payable (see Note 9) raise
substantial doubt about the Company’s ability to continue as
a going concern for a period of at least twelve months from the
financial statement issuance date.
The
Company does not currently generate significant recurring revenue
and will require additional capital during 2019. Although no
assurances can be given, management of the Company believes that
existing capital resources should enable the Company to fund
operations into the second quarter of 2019.
The continuation of the Company’s business
is dependent upon raising additional capital to fund operations.
Management’s plans are to obtain additional capital in 2019
through investments by strategic partners for market opportunities,
which may include strategic partnerships or licensing arrangements,
or raise capital through the conversion of outstanding warrants,
the issuance of common or preferred stock, securities convertible
into common stock, or secured or unsecured debt. These
possibilities, to the extent available, may be on terms that result
in significant dilution to 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
required to
significantly curtail or discontinue operations or obtain funds
through financing transactions with unfavorable terms.
The
accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the
Company as a going concern and the realization of assets and
satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the
financial statements do not necessarily purport to represent
realizable or settlement values. The consolidated financial
statements do not include any adjustment that might result from the
outcome of this uncertainty. The consolidated financial statements
do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
F-8
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
2.
Summary of
significant accounting policies
The
significant accounting policies followed by the Company are
summarized below:
Foreign currency
translation
- The functional currencies of the
Company’s foreign operations are the local currencies. The
financial statements of the Company’s foreign subsidiary have
been translated into United States dollars. All balance sheet
accounts have been translated using the exchange rates in effect at
the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year.
Translation adjustments are reported in other comprehensive loss in
the consolidated statements of comprehensive loss and as cumulative
translation adjustments in accumulated other comprehensive income
(loss) in the consolidated statements of stockholders’
deficit.
Principles of
consolidation
- The 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 consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States of America (“U.S. GAAP”). Because a
precise determination of assets and liabilities, and
correspondingly revenues and expenses, depend on future events, the
preparation of consolidated financial statements for any period
necessarily involves the use of estimates and assumptions. Actual
amounts may differ from these estimates. These consolidated
financial statements have, in management’s opinion, been
properly prepared within reasonable limits of materiality and
within the framework of the accounting policies summarized herein.
Significant estimates include the recording of allowances for
doubtful accounts, estimate of the net realizable value of
inventory, estimated reserves for inventory, valuation of
derivatives, the determination of the valuation allowances for
deferred taxes, estimated fair value of stock-based compensation,
and estimated fair value of warrants.
Reclassifications
–
Certain accounts in the prior period consolidated
financial statements have been reclassified for comparison purposes
to conform to the presentation of the current period consolidated
financial statements. These reclassifications had no effect on the
previously reported net loss.
Cash and cash
equivalents
- For purposes of the consolidated financial
statements, liquid instruments with an original maturity of 90 days
or less when purchased are considered cash equivalents. The Company
maintains its cash in bank accounts which may exceed federally
insured limits.
Concentration of credit
risk and limited suppliers
- Management routinely assesses
the financial strength of its customers and, as a consequence,
believes accounts receivable are stated at the net realizable value
and credit risk exposure is limited. Three distributors and
partners accounted for 33%, 23% and 11% of revenues for the year
ended December 31, 2018, and 24%, 60% and 7% of accounts receivable
at December 31, 2018. Three distributors accounted for 8%, 38% and
24% of revenues for the year ended December 31, 2017, and 69%, 17%
and 0% of accounts receivable at December 31, 2017.
The
Company depends on suppliers for product component materials and
other components that are subject to stringent regulatory
requirements. The Company currently purchases most of its product
component materials from single suppliers and the loss of any of
these suppliers could result in a disruption in our production. If
this were to occur, it may be difficult to arrange a replacement
supplier because certain of these materials may only be available
from one or a limited number of sources. In addition, establishing
additional or replacement suppliers for these materials may take a
substantial period of time, as certain of these suppliers must be
approved by regulatory authorities.
F-9
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
2.
Summary
of significant accounting policies (continued)
Accounts receivable
- Accounts receivable are stated at the amount management expects
to collect from outstanding balances. Management provides for
probable uncollectible amounts through a charge to earnings based
on its assessment of the current status of individual accounts.
Receivables are generally considered past due if greater than 60
days old. Balances that are still outstanding after management has
used reasonable collection efforts are written off through a charge
to the allowance for doubtful accounts.
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.
Depreciation of property
and equipment
- The straight-line method of depreciation is
used for computing depreciation on property and equipment. The
costs of additions and betterments are capitalized and expenditures
for repairs and maintenance, which do not extend the economic
useful life of the related assets, are expensed. Depreciation is
based on estimated useful lives as follows: machines and equipment,
3 years; devices, 5 - 15 years; office and computer equipment, 3
years; furniture and fixtures, 3 years; and software, 2
years.
Fair value of financial
instruments
- The carrying values of accounts payable
approximate their fair values, principally because of the
short-term maturities of these instruments.
The
Company has adopted ASC 820-10,
Fair Value Measurements
, which defines
fair value, establishes a framework for measuring fair value and
requires disclosures about fair value measurements. The framework
that is set forth in this standard is applicable to the fair value
measurements where it is permitted or required under other
accounting pronouncements.
The ASC
820-10 hierarchy ranks the quality and reliability of inputs, or
assumptions, used in the determination of fair value and requires
financial assets and liabilities carried at fair value to be
classified and disclosed in one of the following three
categories:
Level 1
- Observable inputs that reflect quoted prices (unadjusted) in
active markets for identical assets and liabilities;
Level 2
- Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly; and
Level 3
- Unobservable inputs that are not corroborated by market data,
therefore requiring the Company to develop its own
assumptions.
The
Company recognizes all derivatives on the balance sheet at fair
value. The fair value of the warrant liability is determined based
on a lattice solution, binomial approach pricing model, and
includes the use of unobservable inputs such as the expected term,
anticipated volatility and risk-free interest rate, and therefore
is classified within level 3 of the fair value hierarchy. (See Note
15).
The
Company’s notes payable approximate fair value because the
terms are substantially similar to comparable debt in the
marketplace.
F-10
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
2.
Summary
of significant accounting policies (continued)
Impairment of long-lived
assets
– The Company reviews long-lived assets for
impairment whenever facts and circumstances indicate that the
carrying amounts of the assets may not be recoverable. An
impairment loss is recognized only if the carrying amount of the
asset is not recoverable and exceeds its fair value. Recoverability
of assets to be held and used is measured by comparing the carrying
amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the asset’s
carrying value is not recoverable, an impairment charge is
recognized for the amount by which the carrying amount of the asset
exceeds its fair value. The Company determines fair value by using
a combination of comparable market values and discounted cash
flows, as appropriate.
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. 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 over the term of the contract. See Note 17 for
further discussion.
Shipping and handling
costs
- Shipping charges billed to customers are included in
revenues. Shipping and handling costs incurred have been recorded
in cost of revenues.
Income taxes
-
Income taxes are accounted for utilizing the asset and liability
method. Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is provided for the deferred tax
assets, including loss carryforwards, when it is more likely than
not that some portion or all of a deferred tax asset will not be
realized.
A
provision of ASC 740,
Income
Taxes
, Accounting for Uncertainty in Income Taxes (FIN 48)
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 the Company’s tax returns to
determine whether the tax positions would
“more-likely-than-not” be sustained if challenged by
the applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold would be recorded as a tax benefit
or expense in the current year. Management has evaluated and
concluded that there were no material uncertain tax positions
requiring recognition in the Company’s financial statements
as of December 31, 2018 and 2017. The Company does not expect any
significant changes in the unrecognized tax benefits within twelve
months of the reporting date.
The
Company will recognize in income tax expense, interest and
penalties related to income tax matters. For the years ended
December 31, 2018 and 2017, the Company did not have any amounts
recorded for interest and penalties.
F-11
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
2.
Summary
of significant accounting policies (continued)
Loss per share
-
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 years ended December 31, 2018 and 2017, respectively, all
potentially dilutive shares were anti-dilutive and therefore
excluded from the computation of diluted net loss per share.
Anti-dilutive equity securities consists of the following at
December 31, 2018 and 2017, respectively:
|
|
2018
|
2017
|
|
|
|
|
|
Stock
options
|
31,703,385
|
21,593,385
|
|
Warrants
|
103,994,927
|
97,977,851
|
|
Convertible
promissory notes
|
24,112,518
|
14,641,190
|
|
Anti-dilutive equity
securities
|
159,810,830
|
134,212,426
|
Comprehensive income
–Comprehensive income (loss) as defined includes all changes
in equity (net assets) during a period from non-owner sources. The
only source of other comprehensive income (loss) for the Company,
which is excluded from net income (loss), is foreign currency
translation adjustments.
Stock-based
compensation
- The Company uses the fair value method of
accounting for its employee stock option program. Stock-based
compensation expense for all stock-based payment awards is based on
the estimated fair value of the award. For employees and directors,
the award is measured on the grant date. For non-employees, the
award is measured on the grant date and is then remeasured at each
vesting date and financial reporting date. The Company recognizes
the estimated fair value of the award as compensation cost over the
requisite service period of the award, which is generally the
option vesting term. The Company generally issues new shares of
common stock to satisfy option and warrant exercises.
Research and
development
- Research and development costs are expensed as
incurred. Research and development costs include payments to third
parties that specifically relate to the Company’s products in
clinical development, such as payments to contract research
organizations, consulting fees for FDA submissions, universities
performing non-medical related research and insurance premiums for
clinical studies and non-medical research. In addition, employee
costs (salaries, payroll taxes, benefits and travel) for employees
of the regulatory affairs, clinical affairs, quality assurance, and
research and development departments are classified as research and
development costs.
Liabilities related to
warrants issued
– The Company records certain common
stock warrants issued at fair value and recognizes the change in
the fair value of such warrants as a gain or loss, which is
reported in the Other Income (Expense) section in our Consolidated
Statements of Comprehensive Loss. The Company reports these
warrants at fair value and classified as liabilities because they
contain certain down-round provisions allowing for reduction of
their exercise price. The fair value of these warrants is estimated
using a binomial options pricing model.
F-12
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
2.
Summary
of significant accounting policies (continued)
Warrants related to debt
issued
– The Company records a warrant discount
related to warrants issued with debt at fair value and recognizes
the cost using the straight-line method over the term of the
related debt as interest expense, which is reported in the Other
Income (Expense) section in our Consolidated Statements of
Comprehensive Loss. This warrant discount is reported as a
reduction of the related debt liability.
Beneficial conversion
feature on convertible debt
-The Company records a
beneficial conversion feature related convertible debt at fair
value and recognizes the cost using the straight-line method over
the term of the related debt as interest expense, which is reported
in the Other Income (Expense) section in our Consolidated
Statements of Comprehensive Loss. This beneficial conversion
feature is reported as a reduction of the related debt
liability.
Recently issued or adopted accounting standards
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(Topic 606)
(ASC 606),
which supersedes nearly all existing revenue recognition
guidance under U. S. GAAP. The core principle of ASC 606 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. ASC
606 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 U. S.
GAAP. The standard can be adopted 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. The Company adopted
ASC 606 on a modified retrospective basis as of January 1, 2018.
The Company completed an assessment of customer contracts and
concluded that the adoption of ASC 606 did not have a material
impact on its consolidated financial statements; therefore, no
cumulative-effect adjustment was recorded on the adoption date. 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 Notes 6 and 17.
In
February 2016, the FASB issued Accounting Standards Update
(“ASU”) 2016-02, "Leases (Topic 842)." ASU 2016-02
requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize in the
statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its
right to use the underlying asset for the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an
accounting policy election by class of underlying asset not to
recognize lease assets and lease liabilities. In transition,
lessees and lessors are required to recognize and measure leases at
the beginning of the earliest period presented using a modified
retrospective approach. This amendment will be effective for fiscal
years beginning after December 15, 2018, including interim periods
within those fiscal years. The FASB issued ASU No. 2018-10
“Codification Improvements to Topic 842, Leases” and
ASU No. 2018-11 “Leases (Topic 842) Targeted Improvements" in
July 2018, and ASU No. 2018-20 "Leases (Topic 842) - Narrow Scope
Improvements for Lessors" in December 2018. ASU 2018-10 and ASU
2018-20 provide certain amendments that affect narrow aspects of
the guidance issued in ASU 2016-02. ASU 2018-11 allows all entities
adopting ASU 2016-02 to choose an additional (and optional)
transition method of adoption, under which an entity initially
applies the new leases standard at the adoption date and recognizes
a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The Company expects to adopt
ASU 2016-02 effective January 1, 2019. Upon adoption of Topic 842,
the Company expects recognition of additional assets and
corresponding liabilities pertaining to its operating leases on its
consolidated balance sheets. The Company is evaluating the
requirements of this guidance and has not yet determined the impact
on its consolidated balance sheet and statements of
operations.
F-13
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
2.
Summary
of significant accounting policies (continued)
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 will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash
flows. The ASU will be 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 would be required to apply the amendments 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 our financial statements.
In
May 2017, the FASB issued ASU
No. 2017-09,
Compensation - Stock Compensation (Topic
718):
Scope of
Modification Accounting
, which clarifies what
constitutes a modification of a share-based payment award. The
ASU is intended to provide clarity and reduce both diversity in
practice and cost and complexity when applying the guidance in
Topic 718 to a change to the terms or conditions of a share-based
payment award. ASU 2017-09 is effective for public entities
January 1, 2018. The Company does not anticipate that the adoption
of ASU 2017-09 will have a material impact on its financial
condition or results of operations.
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. The Company
anticipates applying Part I of this ASU at the effective date of
January 1, 2019 and is in the process of evaluating the impact of
the pending adoption on the Company’s financial
position.
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
position.
In July 2018, the FASB issued ASU No.
2018-09,
Codification
Improvements
(“ASU
2018-09”). These
amendments provide clarifications and corrections
to certain ASC subtopics including the following:
Income
Statement -
Reporting Comprehensive Income – Overall (Topic 220-10), Debt
- Modifications and Extinguishments (Topic 470-50), Distinguishing
Liabilities from Equity – Overall (Topic 480-10),
Compensation - Stock Compensation - Income Taxes (Topic 718-740),
Business Combinations - Income Taxes (Topic 805-740), Derivatives
and Hedging – Overall (Topic 815- 10), and Fair Value
Measurement – Overall (Topic 820-10). The majority of the
amendments in ASU 2018-09 will be effective in annual periods
beginning after December 15, 2018. The Company is currently
evaluating and assessing the impact this guidance will have on its
financial position or results of operations.
F-14
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
2.
Summary
of significant accounting policies (continued)
In August 2018, the FASB issued ASU No.
2018-13,
Fair Value Measurement (Topic
820): Disclosure
Framework—Changes to the
Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”).
The
amendments in ASU
2018-13 modify the disclosure requirements associated with fair
value measurements based on the concepts in the Concepts Statement,
including the consideration of costs and benefits. The amendments
on changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3
fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
The amendments are effective for all entities for fiscal years
beginning after December 15, 2019, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in an
interim period. The Company is currently evaluating ASU 2018-13 and
its impact on its consolidated financial
statements.
3.
Inventory
Inventory consists
of the following at December 31, 2018 and 2017:
|
|
2018
|
2017
|
|
|
|
|
|
Inventory -
finished goods
|
$
250,821
|
$
136,534
|
|
Inventory -
parts
|
226,299
|
167,613
|
|
Gross
inventory
|
477,120
|
304,147
|
|
Provision for
losses and obsolescence
|
(119,300
)
|
(72,615
)
|
|
Net
inventory
|
$
357,820
|
$
231,532
|
4.
Property
and equipment
Property and
equipment consists of the following at December 31, 2018 and
2017:
|
|
2018
|
2017
|
|
|
|
|
|
Machines and
equipment
|
$
240,295
|
$
240,295
|
|
Office and computer
equipment
|
196,150
|
156,860
|
|
Devices
|
81,059
|
89,704
|
|
Software
|
38,126
|
34,528
|
|
Furniture and
fixtures
|
16,019
|
16,019
|
|
Other
assets
|
2,259
|
2,259
|
|
Total
|
573,908
|
539,665
|
|
Accumulated
depreciation
|
(496,153
)
|
(479,296
)
|
|
Net
property and equipment
|
$
77,755
|
$
60,369
|
Depreciation
expense was $22,332 and $24,069 for the years ended December 31,
2018 and 2017, respectively. The depreciation policies followed by
the Company are described in Note 2.
F-15
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
5.
Accrued
expenses
Accrued
expenses consist of the following at December 31, 2018 and
2017:
|
|
2018
|
2017
|
|
|
|
|
|
Accrued board of
director's fees
|
$
200,000
|
$
125,000
|
|
Accrued executive
severance
|
136,000
|
118,000
|
|
Accrued outside
services
|
115,118
|
165,427
|
|
Accrued related
party advance
|
101,137
|
-
|
|
Accrued
travel
|
58,993
|
39,926
|
|
Deferred
rent
|
44,623
|
51,191
|
|
Accrued clinical
study expenses
|
13,650
|
13,650
|
|
Accrued computer
equipment
|
8,752
|
-
|
|
Accrued audit and
tax preparation
|
-
|
73,800
|
|
Accrued legal and
professional fees
|
-
|
61,890
|
|
Deferred
revenue
|
-
|
13,317
|
|
Accrued
other
|
11,007
|
11,399
|
|
|
$
689,280
|
$
673,600
|
The
Company is a party to a Severance and Advisory Agreement (the
“Severance Agreement”) with its former President and
Chief Executive Officer, and a director of the Company. Pursuant to
the Severance Agreement, the former executive will receive, as
severance along with other non-cash items, six months of his base
salary payable over the following six month period and bonus
payments of $100,000 upon each of four bonus payment events tied to
the Company’s clinical trial plan for the dermaPACE device,
or December 31, 2016, whichever occurs first. The Company achieved
three of the four bonus payment events in 2014 and paid $300,000 in
accrued executive severance in 2014. The accrued executive
severance at December 31, 2018 and 2017 represents the unpaid
portion of the bonus payments plus accrued interest due to late
payment.
On
October 10, 2018, the Company entered into accrued related party
advance with Shri P. Parikh, the President of the Company, in
the total principal amount of $100,000 with an interest rate of 5%
per annum. The principal and accrued interest are due and
payable on the earlier of (i) one day after receipt of payment from
Johnfk Medical Inc.
, (ii) six
months from the date of issuance and (iii) the acceleration of the
maturity of the short term note by the holder upon the occurrence
of an event of default.
On May
1, 2017, the Company entered into an agreement with a firm to
provide business advisory and consulting services. The compensation
for those services was to be paid in a combination of cash and
common stock. At December 31, 2017, the Company accrued $120,000 of
expense for the services provided. In March 2018, the Company
issued 467,423 shares of common stock for services provided in 2017
and 66,026 shares of common stock for services provided in
2018.
F-16
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
6.
Contract
liabilities
As of
December 31, 2018, the Company has contract assets and liabilities
from contracts with customers (see Note 17).
Contract
liabilities consist of the following:
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
|
|
|
Deposit on
product
|
$
92,950
|
$
-
|
|
Service
agreement
|
57,365
|
-
|
|
Other
|
28,218
|
-
|
|
Total
Contract liabilities
|
178,533
|
-
|
|
Non-Current
|
(46,736
)
|
-
|
|
Total
Current
|
$
131,797
|
$
-
|
The
timing of the Company’s revenue recognition may differ from
the timing of payment by its customers. A contract asset
(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 $178,533 of contract liability balances as of
December 31, 2018, the Company expects to satisfy its remaining
performance obligations associated with $131,797 and $46,736 of
contract liability balances within the next twelve months and
following twelve months, respectively. Deferred revenue as of
December 31, 2017 was de minimus to the consolidated financial
statements.
7.
Advances
payable
The
Company has received cash advances to help fund the Company’s
operations. On January 10, 2018, the outstanding balance of
the $310,000 of advances payable was converted into two 10%
Convertible Promissory Notes (see Note 10).
On November 12, 2018, the advances
payable balance was added to the outstanding balance line of
credit, related parties.
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 10).
8.
Line
of credit, related parties
The
Company entered into a line of credit agreement with a member of
the board of directors and an existing shareholder at December
29, 2017. The agreement established a line of credit in the amount
of $370,000 with an annualized interest rate of 6%. On
November 12, 2018, the Company entered into an amendment to the
line of credit agreement. The line of credit was increased to
$1,000,000 with an annualized interest rate of 6%. The line of
credit may be called for payment upon demand of the holder. The
line of credit, related parties had an aggregate outstanding
balance of $883,224 and $370,179 as of December 31, 2018 and 2017,
respectively.
Interest expense on
line of credit, related parties totaled $33,724 and $179 for the
years ended December 31, 2018 and 2017, respectively.
F-17
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
9.
Short
term notes payable
The
Company entered into short term notes payable between June 26, 2018
and December 31, 2018 in the total principal amount of
$1,870,525 with an interest rate of 5% per annum.
The principal and accrued interest of $1,883,163 as of
December 31, 2018 are due and payable six months from the date of
issuance of the respective notes
, of which $233,028
are held by an officer and director of the
Company
.
On
December 26, 2018, the Company defaulted on the short term notes
payable issued on June 26, 2018 and began accruing interest at the
default interest rate of 10%. On January 2, 2019, the Company
defaulted on the short term notes payable issued on July 2, 2018
and began accruing interest at the default interest rate of 10%. On
January 30, 2019, the Company defaulted on the short term notes
payable issued on July 30, 2018 and began accruing interest at the
default interest rate of 10%.
10.
Convertible
promissory notes
In
2017, the Company
began offering
subscriptions for 10% convertible promissory notes (the
“10%
Convertible
Promissory Notes”) to selected investors. 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. During the year ended December 31, 2018,
the Company issued $1,596,000 in the aggregate principal amount of
10% Convertible Promissory Notes, including $430,000 purchased by
officers and directors. During the year ended December 31, 2017,
the Company issued $1,533,750 in the aggregate principal amount of
10% Convertible Promissory Notes.
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 January
23, 2019, the Company extended the expiration date to May 1, 2019
and on March 1, 2019, the Company extended the expiration date to
June 28, 2019.
During the years ended December 31, 2018 and
2017, the Company issued 14,509,090 and 13,943,180, 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
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.
As of the date of the filing of this
report the registration statement has not yet been filed. At this
time, the monetary penalty has been determined by management to be
de minimis.
The
Company recorded $709,827 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 during 2018. The Company
recorded $820,681 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 during 2017. The Company recorded
$508,866 in debt issuance costs for Class N Warrants issued per the
engagement letter with West Park Capital.
F-18
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
10.
Convertible
promissory notes (continued)
The
calculated fair value of the Class N Warrants was determined using
the Black-Scholes pricing model based on the following
assumptions:
|
|
December
31,
|
|
December
31,
|
|
|
2018
|
|
2017
|
|
Weighted
average contractual term in years
|
1.13
- 1.19
|
|
1.25
- 1.39
|
|
Weighted
average risk free interest rate
|
1.98% -
2.15%
|
|
1.63% -
1.89%
|
|
Weighted
average volatility
|
94.43%
- 98.63%
|
|
86.62%
- 103.21%
|
|
Forfeiture
rate
|
0.0%
|
|
0.0%
|
|
Expected
dividend yield
|
0.0%
|
|
0.0%
|
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 terms of a placement
agent agreement and $417,633 was expensed as interest expense. On
October 4, 2018, the Company issued 1,242,954 Class N Warrants to
West Park Capital per the terms of a placement agent agreement and
$91,233 was expensed as interest expense.
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
July 10, 2018, the Company defaulted on the 10% Convertible
Promissory Notes issued on January 10, 2018 and began accruing
interest at the default interest rate of 18%. On August 2, 2018,
the Company defaulted on the 10% Convertible Promissory Notes
issued on February 2, 2018 and began accruing interest at the
default interest rate of 18%.
The 10%
Convertible Promissory Notes had an aggregate outstanding principal
balance of $2,652,377, net of $0 beneficial conversion feature,
warrant discount and debt issuance costs and $455,606, net of
$1,099,861 beneficial conversion feature, warrant discount and debt
issuance costs at December 31, 2018 and 2017,
respectively.
Interest expense on
the 10% Convertible Promissory Notes totaled $3,565,198 and
$452,804 for the years ended December 31, 2018 and 2017,
respectively.
Kevin A. Richardson II, CEO, chairperson 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 for the year
ended December 31, 2018. 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 amount
of
$170,000 and $330,000 and was issued 1,545,455 and 3,000,000 Class
N Warrants for the years ended December 31, 2018 and 2017,
respectively.
F-19
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
10.
Convertible
promissory notes (continued)
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
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 10%
Convertible Promissory Note was converted in full in August 2018
(See Note 14).
11.
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. NFS Leasing Inc. was a purchaser
of the 10% Convertible Promissory Notes (see Note 10) and thus, is
considered a related party.
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 $20,909 for the year ended December
31, 2018.
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, 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.
12.
Notes
payable, related parties
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 is due on December
31, 2018, as amended. HealthTronics, Inc. is a related party
because they are a shareholder in the Company and have a security
agreement with the Company detailed below.
F-20
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
12.
Notes
payable, related parties (continued)
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. I
n 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, June 30, 2018, September 30, 2018 and December 31, 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.
The
notes payable, related parties had an aggregate outstanding
principal balance of $5,372,743, net of $0 debt discount and
$5,222,259, net of $150,484 debt discount at December 31, 2018, and
2017, respectively.
Accrued
interest currently payable totaled $1,171,782 and $685,907 at
December 31, 2018 and 2017, respectively. Interest expense on notes
payable, related parties totaled $787,586 and $634,169 for the
years ended December 31, 2018 and 2017, respectively.
As of
January 1, 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.
As of December 31, 2018, we are in default under
the notes, as amended by the Third Amendment, and
as
a result HealthTronics,
Inc. could, among other rights and remedies, exercise its rights
under its first priority
security interest in our assets. We are in
negotiations with HealthTronics, Inc. to address the event of
default.
13.
Preferred
Stock
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 amends 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.
F-21
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
13.
Preferred
Stock (continued)
Under
the Certificate of Designation, holders of Series B Convertible
Preferred Stock are entitled to receive dividends equal (on an
as-if-converted-to-common-stock basis) to and in the same form as
dividends (other than dividends in the form of common stock)
actually paid on shares of the common stock when, as and if such
dividends are paid. Such holders will participate on an equal basis
per-share with holders of common stock in any distribution upon
winding up, dissolution, or liquidation of the Company. Holders of
Series B Convertible Preferred Stock are entitled to convert each
share of Series A Convertible Preferred Stock into 2,000 shares of
common stock, provided that after giving effect to such conversion,
such holder, together with its affiliates, shall not beneficially
own in excess of 9.99% of the number of shares of common stock
outstanding (the “Beneficial Ownership Limitation”).
Holders of the Series B Convertible Preferred Stock are entitled to
vote on all matters affecting the holders of the common stock on an
“as converted” basis, provided that such holder shall
only vote such shares of Series B Convertible Preferred Stock
eligible for conversion without exceeding the Beneficial Ownership
Limitation.
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.
Thre are no shares
of Series A or Series B Convertible Preferred Stock issued or
outstanding as of December 31, 2018 and
2017.
14.
Equity
Transactions
Conversion of 10% Convertible Promissory Notes
For the
year ended December 31, 2018, the Company issued 8,497,238 shares
of Common Stock upon the conversion of 10% Convertible
Promissory Notes in the amount of $902,500 plus accrued interest of
$32,197 at the conversion price of $0.11 per share per the
terms of the 10% Convertible Promissory Notes
agreement.
Warrant Exercise
For
the year ended December 31, 2018, the Company issued 422,939 shares
of common stock upon the exercise of 422,939 Class N Warrants,
Series A Warrants and Class O Warrants to purchase shares of stock
under the terms of the respective warrant agreements.
For
the year ended December 31, 2017, the Company issued 1,163,333
shares of common stock upon the exercise of 1,163,333 Class L
Warrants to purchase shares of stock for $0.08 per share under the
terms of the Class L Warrant agreement.
Cashless Warrant Exercise
For
the year ended December 31, 2018, the Company issued 6,395,499
shares of common stock upon the exercise of 7,878,925 Class N
Warrants, Series A Warrants and Class O Warrants to purchase shares
of stock under the terms of the respective warrant
agreements.
For the
year ended December 31, 2017, the Company issued 866,625 shares of
common stock upon the cashless exercise of 1,428,745 Class L
Warrants and Series A Warrants to purchase shares of stock based on
the current market value per share as of the date of conversion as
determined under the terms of the respective warrant
agreements.
F-22
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
14.
Equity
Transactions (continued)
Consulting Agreement
In
November 2017, the Company entered into a three month consulting
agreement for which a portion of the fee for the services was to be
paid with Common Stock. The number of shares to be paid with Common
Stock was 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 and 23,529 shares, respectively in each of the first
two months of the agreement. The $4,000 was recorded as a non-cash
general and administrative expense during the year ended December
31, 2017.
In
April 2018, the Company verbally entered into a month-to-month
consulting agreement with a consultant 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 74,714 shares
of Common Stock for services performed from January through June
2018. $20,000 was recorded as a non-cash general and administrative
expense during the year ended December 31, 2018.
In May
2017, the Company entered into an agreement with an investment
company to provide business advisory and consulting services.
The compensation for those services was to be paid in a combination
of cash and Common Stock. At December 31, 2017, the Company
accrued $120,000 of expense for the services provided. The Common
Stock was issued in March and June 2018 in the amount of 533,450
and 15,000 shares, respectively. On October 17, 2018, this
agreement was verbally amended to provide for the cash compensation
of services performed to be paid with Common Stock. The Common
Stock was issued in October 2018 in the amount of 426,176
shares. The $37,500 was recorded as a non-cash general and
administrative expense during the year ended December 31,
2018.
15.
Warrants
A
summary of warrants as of December 31, 2018 and 2017, and the
changes during the years ended December 31, 2018 and 2017, is
presented as follows:
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Outstanding
|
|
|
as
of
|
|
|
as
of
|
|
|
|
as
of
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
December
31,
|
|
Warrant
class
|
2016
|
Issued
|
Exercised
|
2017
|
Issued
|
Exercised
|
Expired
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Class F
Warrants
|
300,000
|
-
|
-
|
300,000
|
-
|
-
|
(300,000
)
|
-
|
|
Class G
Warrants
|
1,503,409
|
-
|
-
|
1,503,409
|
-
|
-
|
(1,503,409
)
|
-
|
|
Class H
Warrants
|
1,988,095
|
-
|
-
|
1,988,095
|
-
|
-
|
(1,988,095
)
|
-
|
|
Class I
Warrants
|
1,043,646
|
-
|
-
|
1,043,646
|
-
|
-
|
(1,043,646
)
|
-
|
|
Class K
Warrants
|
5,200,000
|
2,000,000
|
-
|
7,200,000
|
-
|
-
|
-
|
7,200,000
|
|
Class L
Warrants
|
65,945,005
|
-
|
(2,046,832
)
|
63,898,173
|
-
|
(6,639,834
)
|
-
|
57,258,339
|
|
Class N
Warrants
|
-
|
13,943,180
|
-
|
13,943,180
|
17,644,999
|
(1,136,364
)
|
-
|
30,451,815
|
|
Class O
Warrants
|
-
|
6,540,000
|
-
|
6,540,000
|
1,509,091
|
(120,000
)
|
-
|
7,929,091
|
|
Series A
Warrants
|
2,106,594
|
-
|
(545,246
)
|
1,561,348
|
-
|
(405,666
)
|
-
|
1,155,682
|
|
|
78,086,749
|
22,483,180
|
(2,592,078
)
|
97,977,851
|
19,154,090
|
(8,301,864
)
|
(4,835,150
)
|
103,994,927
|
F-23
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
15.
Warrants
(continued)
A
summary of the warrant exercise price per share and expiration date
is presented as follows:
|
|
Exercise
|
Expiration
|
|
|
price/share
|
date
|
|
|
|
|
|
Class K
Warrants
|
$
0.08
|
June
2025
|
|
Class K
Warrants
|
$
0.11
|
August
2027
|
|
Class L
Warrants
|
$
0.08
|
May
2019
|
|
Class N
Warrants
|
$
0.11
|
June
2019
|
|
Class O
Warrants
|
$
0.11
|
June
2019
|
|
Series A
Warrants
|
$
0.03
|
May
2019
|
On
January 23, 2019, the Company extended the expiration date to May
1, 2019 for Series A Warrants, Class L Warrants and Class N
Warrants. On March 1, 2019, the Company extended the expiration
date to June 28, 2019 for Class N Warrants and Class O
Warrants.
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 securities at a
price lower than the then applicable exercise price of the
warrants. 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.
On
January 26, 2018, the Company issued Class O Warrant Agreements to
a related party 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. The warrants vested upon issuance and expire on
March 17, 2019. On March 1, 2019, the Company extended the
expiration date to June 28, 2019.
In
2018, the Company issued Class O Warrant Agreements to a vendor to
purchase 600,000 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 their respective
grant dates was $159,370 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 March 1, 2019, the Company extended the expiration date to
June 28, 2019.
In
August 2017, the Company, in connection with the Third Amendment
(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.
F-24
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
15.
Warrants
(continued)
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.
The
Class K Warrants and the Series A 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 have been classified as
Level 3 instruments and 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 which ranged from 0.21 to 8.6 years, the volatility of
the Company’s common stock price which ranged from 112% to
134%, and the risk-free interest rate which ranged from 2.43% to
2.64% for the year ended December 31, 2018. The remaining
life of the warrants which ranged from 1.21 to 9.6 years, the
volatility of the Company’s common stock price which ranged
from 109% to 133%, and the risk-free interest rate which ranged
from 1.79% to 2.39% for the year ended December 31, 2017. In
addition, as of the valuation dates, management assessed the
probabilities of future financing and other re-pricing events in
the binominal valuation models.
F-25
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
15.
Warrants
(continued)
A
summary of the changes in the warrant liability during the years
ended December 31, 2018 and 2017, is as follows:
|
|
Class
K
|
Series
A
|
|
|
|
Warrants
|
Warrants
|
Total
|
|
|
|
|
|
|
Warrant liability
as of December 31, 2016
|
$
884,000
|
$
358,120
|
$
1,242,120
|
|
Issued
|
200,000
|
-
|
200,000
|
|
Redeemed
|
-
|
(66,966
)
|
(66,966
)
|
|
Change in fair
value
|
532,000
|
36,729
|
568,729
|
|
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
|
(74,000
)
|
18,624
|
(55,376
)
|
|
Warrant liability
as of December 31, 2018
|
$
1,542,000
|
$
227,669
|
$
1,769,669
|
16.
Commitments
and contingencies
Operating Leases
The
Company leases office and storage space. Rent expense for the years
ended December 31, 2018 and 2017, was $157,395 and $159,583,
respectively. Minimum future lease payments under the operating
lease consist of the following:
|
Year ending
December 31,
|
Amount
|
|
|
|
|
2019
|
$
186,132
|
|
2020
|
191,712
|
|
2021
|
197,464
|
|
Total
|
$
575,308
|
The
Company has recorded a liability for deferred rent and is expensing
rent on a straight line basis over the life of the
lease.
Litigation
The
Company is involved in various legal matters that have arisen in
the ordinary course of business. While the ultimate outcome of
these matters is not presently determinable, it is the opinion of
management that the resolution will not have a material adverse
effect on the financial position or results of operations of the
Company.
F-26
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
16.
Commitments
and contingencies (continued)
Potential Liability Related to Issuances of Equity
Securities
The
Company may have potential liability for certain sales, offers or
issuances of equity securities of the Company in possible violation
of federal securities laws. Pursuant to a Registration Statement on
Form S-1 (Registration No. 333-208676), declared effective on
February 16, 2016 (the “2016 Registration Statement”),
the Company sought to register: a primary offering of up to
$4,000,000 units, the Common Stock included as part of the units,
the warrants included as part of the units, and the Common Stock
issuable upon exercise of such warrants; a primary offering of up
to $400,000 placement agent warrants and the Common Stock issuable
upon exercise of such placement agent warrants; and a secondary
offering of 23,545,144 shares of Common Stock held by certain
selling stockholders named in the 2016 Registration Statement. The
SEC Staff’s interpretations provide that, when an issuer is
registering units composed of common stock, common stock purchase
warrants, and the common stock underlying the warrants, the
registration fee is based on the offer price of the units and the
exercise price of the warrants. The registration fee paid did
include the fee based on the offer price of the units, allocated to
the unit line item in the fee table. Although the fee table in the
2016 Registration Statement included a line item for the Common
Stock underlying the warrants, the Company did not include in that
line item the fee payable based on the exercise price of $0.08 per
share for such warrants, which amount should have been allocated to
such line item based on the SEC Staff’s interpretations. As a
result, a portion of the securities intended to be registered by
the 2016 Registration Statement was not registered. In addition, in
a post-effective amendment to the 2016 Registration Statement filed
on September 23, 2016, too many placement agent warrants were
inadvertently deregistered. The post-effective amendment stated
that the Company had issued $180,100, based on 2,251,250 Class L
warrants issued with a $0.08 exercise price of warrants to the
placement agent and therefore deregistered $219,900, based on
2,748,750 Class L warrants issued with a $0.08 exercise price of
placement agent warrants from the $400,000, based on 5,000,000
Class L warrants issued with a $0.08 exercise price total offering
amount included in the Registration Statement. The actual warrants
issued to the placement agent totaled $240,133.36, based on
3,001,667 Class L warrants issued with a $0.08 exercise price, and
only $159,867, based on 1,998,338 Class L warrants issued with a
$0.08 exercise price should have been deregistered in such
post-effective amendment. To the extent that the Company has not
registered or failed to maintain an effective registration
statement with respect to any of the transactions in securities
described above and with respect to the ongoing offering of shares
of Common Stock underlying the warrants, and a violation of Section
5 of the Securities Act did in fact occur or is occurring, eligible
holders of securities that participated in these offerings would
have a right to rescind their transactions, and the Company may
have to refund any amounts paid for the securities, which could
have a materially adverse effect on the Company’s financial
condition. Eligible securityholders have not filed a claim against
the Company alleging a violation of Section 5 of the Securities Act
with respect to these transactions, but they could file a claim in
the future. Furthermore, the ongoing offering of and issuance of
shares of Common Stock underlying certain of the warrants from the
2016 Registration Statement may have been, and may continue to be,
in violation of Section 5 of the Securities Act and the rules and
regulations under the Securities Act, because the Company did not
update the prospectus in the 2016 Registration Statement for a
period of time after the 2016 Registration Statement was declared
effective and because the Company's reliance on Rule 457(p) under
the Securities Act in an amendment to the Registration Statement on
Form S-1 (Registration No. 333-213774) filed on September 23, 2016
effected a deregistration of the securities registered under the
2016 Registration Statement. Eligible securityholders have not
filed a claim against the Company alleging a violation of Section 5
of the Securities Act, but they could file such a claim in the
future. If a violation of Section 5 of the Securities Act did in
fact occur or is occurring, eligible securityholders would have a
right to rescind their transactions, and the Company may have to
refund any amounts paid the securities, which could have a
materially adverse effect on the Company’s financial
condition.
F-27
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
17.
Revenue
The
Company began accounting for revenue in accordance with ASC 606,
which we adopted beginning January 1, 2018, using the modified
retrospective method (see Note 2).
The core principle of
ASC 606 requires
that an entity
recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. ASC 606 defines a five-step process to achieve
this core principle and, in doing so, it is possible more judgment
and estimates may be required within the revenue recognition
process than required under GAAP, including identifying performance
obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating
the transaction price to each separate performance
obligation.
Pursuant to ASC
606, we apply the following the five-step model:
1.
Identify the
contract(s) with a customer. A contract with a customer exists when
(i) we enter into an enforceable contract with a customer that
defines each party’s rights regarding the goods to be
transferred and identifies the payment terms related to these
goods, (ii) the contract has commercial substance and, (iii) we
determine that collection of substantially all consideration for
services that are transferred is probable based on the
customer’s intent and ability to pay the promised
consideration.
2.
Identify the
performance obligation(s) in the contract. If a contract promises
to transfer more than one good or service to a customer, each good
or service constitutes a separate performance obligation if the
good or service is distinct or capable of being
distinct.
3.
Determine the
transaction price. The transaction price is the amount of
consideration to which the entity expects to be entitled in
exchanging the promised goods or services to the
customer.
4.
Allocate the
transaction price to the performance obligations in the contract.
For a contract that has more than one performance obligation, an
entity should allocate the transaction price to each performance
obligation in an amount that depicts the amount of consideration to
which an entity expects to be entitled in exchange for satisfying
each performance obligation.
5.
Recognize revenue
when (or as) the Company satisfies a performance obligation. For
each performance obligation, an entity should determine whether the
entity satisfies the performance obligation at a point in time or
over time. Appropriate methods of measuring progress include output
methods and input methods.
The
Company recognizes revenue primarily from the following types of
contracts:
Product sales
Product
sales include devices and applicators (new and refurbished).
Product sales revenue is recognized at the point in time where
the customer obtains control of the goods and the Company satisfies
its performance obligation, which is generally at the time the
Company ships the product to the customer.
Licensing transactions
Licensing
transaction include distribution licenses and intellectual property
licenses. The Company’s licenses are primarily symbolic
licenses, with no significant stand-alone functionality. Symbolic
licensing fee revenue is recognized over the time period that
the Company satisfies its performance obligations, which is
generally the term of the licensing agreement.
F-28
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
17.
Revenue
(continued)
Other activities
Other
activities primarily include extended warranties, repairs and
billed freight. Device product sales are bundled with an
initial one-year warranty and the Company offers a separately
priced second-year warranty. The Company allocates the device
sales price to the product and the embedded warranty by reference
to the stand-alone extended warranty price. Because the extended
warranty represents a stand-ready obligation, revenue is recognized
over the time period that the Company satisfies its performance
obligations, which is generally the warranty term. Repairs (parts
and labor) and billed freight revenue are recognized at the point
in time that the service is performed, or the product is shipped,
respectively.
Disaggregation of Revenue
The
disaggregation of revenue is based on geographical region. The
following table presents revenue from contracts with customers
for the years ended December 31, 2018 and 2017:
|
|
Year ended
December 31, 2018
|
Year ended
December 31, 2017
|
||||
|
|
United
States
|
International
|
Total
|
United
States
|
International
|
Total
|
|
|
|
|
|
|
|
|
|
Product
|
$
209,842
|
$
739,759
|
$
949,601
|
$
-
|
$
456,765
|
$
456,765
|
|
License
fees
|
25,000
|
794,696
|
819,696
|
25,000
|
210,878
|
235,878
|
|
Other
Revenue
|
-
|
80,763
|
80,763
|
-
|
45,884
|
45,884
|
|
|
$
234,842
|
$
1,615,218
|
$
1,850,060
|
$
25,000
|
$
713,527
|
$
738,527
|
18.
Related
party transactions
On
February 13, 2018, the Company entered into an Agreement for
Purchase and Sale, Limited Exclusive Distribution and
Royalties, and Servicing and Repairs with Premier Shockwave Wound
Care, Inc., a Georgia Corporation (“PSWC”), and
Premier Shockwave, Inc., a Georgia Corporation (“PS”).
The agreement provides for the purchase by PSWC and PS of dermaPACE
System and related equipment sold by the Company and includes
a minimum purchase of 100 units over 3 years. The agreement grants
PSWC and PS limited but exclusive distribution rights to provide
dermaPACE Systems to certain governmental healthcare facilities in
exchange for the payment of certain royalties to the Company. No
royalties were earned during the year ended December 31, 2018.
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 year ended December 31, 2018, the Company recorded $207,457 in
product revenue from this related party. The Contract
liabilities balance includes a balance of $156,565 from this
related party.
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%. The line of credit
may be called for payment upon demand. The outstanding balance as
of December 31, 2017 with accrued interest was $370,179 and $0
interest was paid for the period ending December 31,
2017.
F-29
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
18.
Related
party transactions (continued)
On
November 12, 2018, the Company entered into an amendment to the
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 was
increased to $1,000,000 with an annualized interest rate of 6%. The
line of credit may be called for payment upon demand of the
holder.
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. 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.
On
March 27, 2017, the Company began offering subscriptions for 10%
convertible promissory notes (the
“
10% Convertible Promissory
Notes
”
) to selected
accredited investors. The 10% Convertible Promissor
Notes include a warrant agreement (the
“
Class N Warrant
Agreement
”
) 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
Agreement expires March 17, 2019. On January 23, 2019, the Company
amended the expiration date of the Class N Warrants from March 17,
2019 to May 1, 2019, effective as of January 23, 2019. 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 amount of $330,000. 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 10%
Convertible Promissory Notes associated with these subscriptions
were issued in January 2018.
19.
Stock-based
compensation
On
November 1, 2010, the Company approved the Amended and Restated
2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of
January 1, 2010 (the “Stock Incentive Plan”). The Stock
Incentive Plan permits grants of awards to selected employees,
directors and advisors of the Company in the form of restricted
stock or options to purchase shares of common stock. Options
granted may include non-statutory options as well as qualified
incentive stock options. The Stock Incentive Plan is currently
administered by the board of directors of the Company. The Stock
Incentive Plan gives broad powers to the board of directors of the
Company to administer and interpret the particular form and
conditions of each option. The stock options granted under the
Stock Incentive Plan are non-statutory options which generally vest
over a period of up to three years and have a ten year term. The
options are granted at an exercise price determined by the board of
directors of the Company to be the fair market value of the common
stock on the date of the grant. As of December 31, 2018 and 2017,
the Stock Incentive Plan reserved a total of 35,000,000 and
22,500,000, respectively, shares of common stock for grant.
On December 31, 2018, there were
4,628,281 shares of common stock available for grant under the
Stock Incentive Plan.
During
the year ended December 31, 2018, the Company granted to employees,
members of the board of directors and members of the
Company’s Medical Advisory Board options to purchase an
aggregate of 10,110,000 shares of common stock under a
previously issued incentive plan. The options have an exercise
price between $0.11 and $0.42 per share for an aggregate
grant
date value of approximately $2,500,000
. The options vested
upon issuance and have a term of ten years.
F-30
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
19.
Stock-based
compensation (continued)
On June
15, 2017, the Company granted to the active employees, members of
the board of directors and three members of the Company’s
Medical Advisory Board options to purchase an aggregate total of
5,550,000 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 $0.0869 per option
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 years ended December 31, 2018
and 2017:
|
|
2018
|
|
2017
|
|
Weighted
average expected life in years
|
5.00
|
|
5.0
|
|
Weighted
average risk free interest rate
|
2.84% -
3.21%
|
|
1.76%
|
|
Weighted
average volatility
|
134% -
144.15%
|
|
120.00%
|
|
Forfeiture
rate
|
0.0%
|
|
0.0%
|
|
Expected
dividend yield
|
0.0%
|
|
0.0%
|
The
expected life of options granted represent the period of time that
options granted are expected to be outstanding and are derived from
the contractual terms of the options granted. The risk-free rate
for periods within the contractual life of the option is based on
the United States Treasury yield curve in effect at the time of the
grant. The expected volatility is based on the average volatility
of the Company and that of peer group companies similar in size and
value to us. We estimate pre-vesting forfeitures at the time of
grant and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. The expected dividend
yield is based on our historical dividend experience, however,
since our inception, we have not declared dividends. The amount of
stock-based compensation expense recognized during a period is
based on the portion of the awards that are ultimately expected to
vest. Ultimately, the total expense recognized over the vesting
period will equal the fair value of the awards that actually
vest.
For the
years ended December 31, 2018 and 2017, the Company recognized
$2,480,970 and $482,295, respectively, as compensation cost related
to options granted. As of December 31, 2018, and 2017, there are no
unamortized compensation costs related to options
granted.
F-31
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
19.
Stock-based
compensation (continued)
A
summary of option activity as of December 31, 2018 and 2017, and
the changes during the years then ended, is presented as
follows:
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Exercise
Price
|
|
|
Options
|
per
share
|
|
Outstanding at
December 31, 2016
|
16,203,385
|
$
0.38
|
|
Granted
|
5,550,000
|
$
0.11
|
|
Exercised
|
-
|
$
-
|
|
Forfeited or
expired
|
(160,000
)
|
$
0.22
|
|
Outstanding at
December 31, 2017
|
21,593,385
|
$
0.31
|
|
Granted
|
10,110,000
|
$
0.25
|
|
Exercised
|
-
|
$
-
|
|
Forfeited or
expired
|
-
|
$
-
|
|
Outstanding at
December 31, 2018
|
31,703,385
|
$
0.29
|
|
|
|
|
|
Vested and
exercisable at December 31, 2018
|
31,703,385
|
$
0.29
|
The
range of exercise prices for options was $0.04 to $2.00 for options
outstanding at December 31, 2018 and 2017, respectively. The
aggregate intrinsic value for outstanding options was $2,085,866
and $2,073,641 at December 31, 2018 and 2017, respectively. The
aggregate intrinsic value for all vested and exercisable options
was $2,085,866 and $2,073,641 at December 31, 2018 and 2017,
respectively.
The
weighted average remaining contractual term for outstanding
exercisable stock options is 7.4 years and 7.37 years as of
December 31, 2018 and 2017, respectively.
A
summary of the Company’s nonvested options as of December 31,
2018 and 2017, and changes during the years then ended, is
presented as follows:
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Exercise
Price
|
|
|
Options
|
per
share
|
|
Outstanding at
December 31, 2016
|
-
|
$
-
|
|
Granted
|
5,550,000
|
$
0.11
|
|
Vested
|
(5,550,000
)
|
$
0.11
|
|
Forfeited or
expired
|
-
|
$
-
|
|
Outstanding at
December 31, 2017
|
-
|
$
-
|
|
Granted
|
10,110,000
|
$
0.25
|
|
Vested
|
(10,110,000
)
|
$
0.25
|
|
Forfeited or
expired
|
-
|
$
-
|
|
Outstanding at
December 31, 2018
|
-
|
$
-
|
F-32
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
20.
Joint
ventures
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 committed to enter into a joint venture for
the manufacture, sale and distribution of the Company’s
dermaPACE and orthoPACE devices. 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, Brunei, Cambodia,
Myanmar, Laos, Indonesia, Thailand, Philippines and Vietnam (the
“SEA Region”) to be paid in the first quarter of 2019.
On September 21, 2018, the Company entered into a joint venture
agreement (the “JV Agreement”) with FKS setting forth
the terms of the operation, management and control of a joint
venture entity initially with the name of Holistic Health Institute
Pte. Ltd., a private limited company to be incorporated in the
Republic of Singapore, but with such company name subject to
confirmation by Singapore Government. On November 9, 2018, the
joint venture entity was incorporated in the Republic of Singapore
with the name of Holistic Wellness Alliance Pte. Ltd.
(“HWA”). HWA was formed as a joint venture of the
Company and FKS for the manufacture, sale and distribution of the
Company’s dermaPACE and orthoPACE devices. Under the JV
Agreement, the Company and FKS each hold shares constituting fifty
percent of the issued share capital of HWA. The Company provides to
HWA FDA and CE approved products for an agreed cost, access to
treatment protocols, training, marketing and sales materials and
management expertise, and FKS provides to HWA capital, human
capital and sales resources in Singapore, Malaysia, Brunei,
Cambodia, Myanmar, Laos, Indonesia, Thailand, Philippines and
Vietnam, certain reports and identification of new key opinion
leaders as well as clinical trial and poster access availability.
The V Agreement also established the corporate governance of HWA,
including a five-person board of directors consisting of two
directors designated by the Company, two directors designated by
FKS, and a third director appointed jointly by the parties.
Initially, net profits under the JV Agreement shall be used to
repay FKS for (i) the payment of $500,000 on June 22, 2018 to the
Company for initial distribution rights in Taiwan and (ii) the cash
advance to HWA per the terms of the JV Agreement. The JV Agreement
includes other customary terms, including regarding the transfer of
shares, indemnification and
confidentiality.
On September 27, 2017, the Company entered into a
binding term sheet with MundiMed
Distribuidora
Hospitalar
LTDA
(“MundiMed”),
for a joint venture for the manufacture, sale and distribution of
our dermaPACE
device.
Under the binding term sheet, MundiMed was to 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 were to be 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 aggregating
$372,222. In August 2018, MundiMed advised the Company that it did
not anticipate being able to make further payments under the
binding term sheet due to operational and cash flow difficulties.
On September 14, 2018, the Company sent a letter to MundiMed
informing them of a breach in our agreement regarding payment of
the upfront distribution fee. On September 28, 2018, the Company
received a response letter stating that the Company was in default
of the agreement. On October 9, 2018, the Company sent MundiMed a
letter of termination of the agreement effective as of October 8,
2018. Accordingly, the Company derecognized the contract assets and
contract liabilities associated with the MundiMed
contract.
21.
Income
taxes
The
Company files income tax returns in the United States federal
jurisdiction and various state and foreign jurisdictions. The
Company is subject to United States federal and state income tax
examinations by tax authorities for any years that have net
operating losses open until the net operating losses are
used.
The
components of net loss before provision for income taxes for the
years ended December 31, 2018 and 2017 are as follows:
|
|
2018
|
2017
|
|
Domestic
|
$
(12,031,115
)
|
$
(5,857,851
)
|
|
Foreign
|
399,721
|
319,915
|
|
|
$
(11,631,394
)
|
$
(5,537,936
)
|
F-33
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
21.
Income
taxes (continued)
Deferred income
taxes are provided for temporary differences between the carrying
amounts and tax basis of assets and liabilities. Deferred taxes are
classified as current or noncurrent based on the financial
statement classification of the related asset or liability giving
rise to the temporary difference. For those deferred tax assets or
liabilities (such as the tax effect of the net operating loss
carryforwards) which do not relate to a financial statement asset
or liability, the classification is based on the expected reversal
date of the temporary difference. The income tax provision
(benefit) from continuing operations consists of the following at
December 31, 2018 and 2017:
|
|
2018
|
2017
|
|
Current:
|
|
|
|
Federal
|
$
-
|
$
-
|
|
State
|
-
|
-
|
|
Foreign
|
-
|
-
|
|
|
-
|
-
|
|
Deferred:
|
|
|
|
Federal
|
(2,157,035
)
|
8,371,516
|
|
State
|
(383,705
)
|
1,489,172
|
|
Foreign
|
2,673
|
(19,224
)
|
|
Change in valuation
allowance
|
2,538,067
|
(9,841,464
)
|
|
|
$
-
|
$
-
|
On
December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs
Act (the “Act”) was signed into law. The Act reduced
the Company’s corporate federal tax rate from 35% to 21%
effective January 1, 2018 and changed certain other provisions.
As a result, the Company is required
to re-measure the deferred tax assets and liabilities using the
enacted rate at which they expect them to be recovered or settled.
The effect of this re-measurement is recorded to income tax expense
in the year the tax law is enacted. For 2017, the re-measurement of
our net deferred tax asset resulted in a $11.1 million adjustment
to the income tax provision (benefit) at December 31,
2017.
The
transition tax is based on total post-1986 earnings and profits
which were previously deferred from U.S. income taxes. At December
31, 2018 and 2017, the Company did not have any undistributed
earnings of our foreign subsidiaries. As a result, no additional
income or withholding taxes have been provided for. The Company
does not anticipate any impacts of the global intangible low taxed
income (“GILTI”) and base erosion anti-abuse tax
(“BEAT”) and as such, the Company has not recorded any
impact associated with either GILTI or BEAT.
F-34
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
21.
Income
taxes (continued)
The
income tax provision (benefit) amounts differ from the amounts
computed by applying the United States federal statutory income tax
rate of 21% for the years ended December 31, 2018 and 2017 to
pretax loss from operations as a result of the following for the
years ended December 31, 2018 and 2017:
|
|
2018
|
2017
|
|
|
|
|
|
Tax benefit at
statutory rate
|
$
(2,442,593
)
|
$
(1,938,278
)
|
|
Increase
(reduction) in income taxes resulting from:
|
|
|
|
State income
benefit, net of federal benefit
|
(343,257
)
|
(136,538
)
|
|
Non-deductible loss
on warrant valuation adjustment
|
(11,629
)
|
199,055
|
|
Income (loss) from
foreign subsidiaries
|
6,699
|
(34,552
)
|
|
Change in valuation
allowance
|
2,538,067
|
(9,841,464
)
|
|
Tax reform rate
adjustment
|
-
|
11,827,143
|
|
Other
|
252,713
|
(75,366
)
|
|
Income
tax expense (benefit)
|
$
-
|
$
-
|
The tax
effects of temporary differences that give rise to the deferred tax
assets at December 31, 2018 and 2017 are as follows:
|
|
2018
|
2017
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforwards
|
$
21,320,935
|
$
19,406,373
|
|
Net operating loss
carryforwards - foreign
|
16,551
|
139,675
|
|
Excess of tax basis
over book value of
|
|
|
|
property
and equipment
|
(2,229
)
|
6,978
|
|
Excess of tax basis
over book value
|
|
|
|
of
intangible assets
|
146,943
|
220,180
|
|
Stock-based
compensation
|
1,520,209
|
906,526
|
|
Accrued employee
compensation
|
83,393
|
-
|
|
Captialized equity
costs
|
49,471
|
49,471
|
|
Inventory
reserve
|
29,510
|
17,962
|
|
|
23,164,783
|
20,747,165
|
|
Valuation
allowance
|
(23,164,783
)
|
(20,747,165
)
|
|
Net
deferred tax assets
|
$
-
|
$
-
|
The
Company’s ability to use its net operating loss 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 net operating loss carryforwards accumulated to
date to reduce future taxable income and tax liabilities.
Additionally, because United States tax laws limit the time during
which net operating loss carryforwards may be applied against
future taxable income and tax liabilities, the Company may not be
able to take advantage of all or portions of its net operating loss
carryforwards for federal income tax purposes.
F-35
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018 and 2017
21.
Income
taxes (continued)
The
federal and state net operating loss carryforwards of approximately
$77.9M from years ending December 31, 2005 through December 31,
2017 will begin to expire in 2025. The federal and state net
operating loss carryforward for the year ended December 31, 2018 of
$8.3M will not expire. The foreign net operating loss carryforward
at December 31, 2018 of $86K will begin to expire in
2024.
22.
Segment
and geographic information
The
Company has one line of business with revenues being generated from
sales in Europe, Canada, Asia and Asia/Pacific. All significant
expenses are generated in the United States. All significant assets
are located in the United States.
23.
Subsequent
events
The
Company evaluates events that occur after the year-end date through
the date the financial statements are available to be
issued.
Cashless Warrant Exercise
Subsequent
to December 31, 2018, the Company issued 704,108 shares of common
stock upon the exercise of 1,313,258 Class N Warrants and Class L
Warrants to purchase shares of stock under the terms of the
respective warrant agreements.
Warrant Exercise
Subsequent
to December 31, 2018, the Company issued 3,953,334 shares of common
stock upon the exercise of 3,953,334Class L Warrants and Class O
Warrants to purchase shares of stock under the terms of the
respective warrant agreements.
Short term notes payable
Subsequent to
December 31, 2018, the Company entered into short term notes
payable with individuals in the total principal amount of
$965,000 with an interest rate of 10% per annum. The principal and
accrued interest are due and payable six months from the date
of issuance or receipt of notice of warrant exercise.
Contractual Obligations
On
January 2, 2019, we entered into a second amendment to the lease
agreement for an additional 2,297 square feet of office space for
office space which expires on December 31, 2021.
F-36
I
tem 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
I
tem 9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, as defined in Rule
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), that are
designed to provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its
principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
We
carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive
Officer (principal executive officer) and Chief Financial Officer
(principal financial officer and accounting officer), of the
effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2018. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not
operating effectively as of December 31, 2018. Our disclosure
controls and procedures were not effective because of the
“material weakness” described below under
“Management’s Annual Report on Internal Control over
Financial Reporting.”
Management’s Annual Report on Internal Control over Financial
Reporting
Management
is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the
Company. The Company’s internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. GAAP.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only
reasonable assurance of achieving their control
objectives.
Management,
with the participation of the Chief Executive Officer (principal
executive officer) and the Chief Financial Officer (principal
financial and accounting officer), evaluated the effectiveness of
the Company’s internal control over financial reporting as of
December 31, 2018. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control — Integrated
Framework (2013).
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 a result of its review, management concluded that we
had three material weaknesses in our internal control over
financial reporting process. The first material weakness is 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 is 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 relates to our
information technology infrastructure. This material weakness is
due to cybersecurity breaches from email spoofing. As a result,
management concluded that our internal control over reporting was
not effective as of December 31, 2018.
50
Management’s Plan to Remediate Material
Weaknesses
Management
has developed a 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 remediation plan consists of, among other things,
engaging a third party financial reporting consulting firm to
assist the Company in its financial reporting compliance and
redesigning the procedures to enhance the 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 has engaged a third
party consultant, who is a technical accounting professional, to
assist us in the interpretation and application of new and complex
accounting guidance. Management will continue to review and make
necessary changes to the overall design of our internal control
environment. These measures are intended both to address the
identified material weaknesses and to enhance our overall internal
control environment.
Management
will develop a remediation plan to address the material weakness
related to its information technology infrastructure. The
remediation plan
will
include, but not be limited to
cyber security training for
all employees and redesign of procedures that cyber security
breaches may impact.
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.”
I
tem 9B. OTHER
INFORMATION
None.
51
PART III
I
tem 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
MANAGEMENT
Below
are the names and certain information regarding the Company’s
executive officers and directors.
|
Name
|
|
Age
|
|
Position
Held
|
|
Kevin
A. Richardson, II
|
|
50
|
|
Director,
Chairman and Chief Executive Officer
|
|
Lisa E.
Sundstrom
|
|
49
|
|
Chief
Financial Officer
|
|
Shri P.
Parikh
|
|
47
|
|
President,
Healthcare
|
|
Peter
Stegagno
|
|
59
|
|
Chief
Operating Officer
|
|
Iulian
Cioanta, PhD
|
|
56
|
|
Chief
Science and Technology Officer
|
|
John F.
Nemelka
|
|
53
|
|
Director
|
|
Alan L.
Rubino
|
|
64
|
|
Director
|
|
A.
Michael Stolarski
|
|
48
|
|
Director
|
|
Maj-Britt
Kaltoft
|
|
55
|
|
Director
|
Kevin A.
Richardson, II
joined the Company as
chairman of the board of directors in October of 2009 and
joined SANUWAVE, Inc. as chairman of
the board of directors in August of 2005. In November 2012, upon
the resignation of the Company’s former President and Chief
Executive Officer, Christopher M. Cashman, Mr. Richardson assumed
the role of Active Chief Executive Officer, in addition to
remaining Chairman of the Board, through the hiring of Mr.
Chiarelli in February 2013. In April 2014, Mr. Richardson assumed
the role of Co-Chief Executive Officer. When Mr. Chiarelli departed
the Company in 2014, Mr. Richardson again assumed the role as
Acting Chief Executive Officer. In November 2018, Mr. Richardson
was appointed as Chief Executive Officer. Mr. Richardson brings to
our board of directors a broad array of financial knowledge for
healthcare and other industries. Since 2004, Mr. Richardson served
as managing partner of Prides Capital LLC, an investment management
firm, until its liquidation in September 2015.
Lisa E.
Sundstrom
joined the Company as Controller in October of
2006, and in August of 2015, assumed the responsibilities of
Interim Chief Financial Officer.
In
December 2015, Ms. Sundstrom was promoted to Chief Financial
Officer. Ms. Sundstrom has extensive financial accounting
experience with Automatic Data Processing (ADP) and Mitsubishi
Consumer Electronics. She began her career with a small public
accounting firm, Carnevale & Co., P.C., was Senior Accountant
at Mitsubishi Consumer Electronics responsible for the close
process and was Accounting Manager for the Benefit Services
division of ADP and assisted in the documentation of internal
controls for Sarbanes-Oxley compliance. Ms. Sundstrom holds a
Bachelor of Science in Accounting from the State University of New
York at Geneseo.
Shri
P. Parikh
joined the Company as President, Healthcare in May
of 2018. Mr. Parikh most recently served as Vice President, Sales
and Marketing at Molnycke Health Care from April 2013 to May 2018.
Prior to Molnlycke, from 2011 to 2013 Mr. Parikh was the Director
of National Accounts at Stryker Corporation, a leading medical
technology company with products and services in Orthopaedics,
Medical and Surgical Equipment, and Neurotechnology and Spine. Mr.
Parikh began his career in sales at Bristol-Myers Squibb and held
various roles with increasing sales, marketing and corporate
accounts responsibility at Guidant and St. Jude Medical before
joining Stryker Corporation. Mr. Parikh holds a Bachelor of Arts
degree in Medical Ethics and Economics from Davison College, a
Master of Business Administration from Jacksonville University and
an Advanced Management Program degree from the University of
Chicago.
Peter
Stegagno
joined the Company as
Vice President, Operations in March 2006. Mr. Stegagno brings to
the Company sixteen years of experience in the medical device
market encompassing manufacturing, design and development, quality
assurance and international and domestic regulatory affairs. He
most recently served as Vice President of Quality and Regulatory
Affairs for Elekta, and other medical device companies including
Genzyme Biosurgery. Before focusing on the medical field, Mr.
Stegagno enjoyed a successful career encompassing production roles
in the space industry, including avionics guidance systems for
military applications and control computers for the space shuttle.
Mr. Stegagno graduated from Tufts University with a Bachelor of
Science degree in Chemical
Engineering.
52
Iulian
Cioanta, PhD
joined the Company
in June 2007 as Vice President of Research and Development. Dr.
Cioanta most recently served as Business Unit Manager with Cordis
Endovascular, a Johnson & Johnson company. Prior to that, Dr.
Cioanta worked as Director of Development Engineering with Kensey
Nash Corporation, Research Manager at ArgoMed Inc. and Project
Manager and Scientist with the Institute for the Design of Research
Apparatus. Dr. Cioanta also worked in academia at Polytechnic
University of Bucharest in Romania, Leicester University in the
United Kingdom and Duke University in the United States. Dr.
Cioanta received a Master of Science degree in Mechanical
Engineering and Technology form the Polytechnic University of
Bucharest and he earned his PhD degree in Biomedical Engineering
from Duke University in the field of extracorporeal shock wave
lithotripsy.
John F.
Nemelka
joined the Company as a
member of the board of directors in October of 2009 and joined
SANUWAVE, Inc. as a member of the board of directors in August of
2005. Mr. Nemelka founded NightWatch Capital Group, LLC, an
investment management business, and served as its Managing
Principal since its incorporation in July 2001 until its
liquidation in December 2015. From 1997 to 2000, he was a Principal
at Graham Partners, a private investment firm and affiliate of the
privately-held Graham Group. From 2000 to 2001, Mr. Nemelka was a
Consultant to the Graham Group. Mr. Nemelka brings to
our board of directors a diverse background with both financial and
operations experience. He holds a B.S. degree in Business
Administration from Brigham Young University and an M.B.A. degree
from the Wharton School at the University of
Pennsylvania.
Alan L.
Rubino
joined the Company as a member of the board of
directors in September of 2013. Mr. Rubino has served as President
and Chief Executive Officer of Emisphere Technologies, Inc. since
September, 2012. Previously, Mr. Rubino served as the CEO and
President of New American Therapeutics, Inc., CEO and President of
Akrimax Pharmaceuticals, LLC., and President and COO of Pharmos
Corporation. Mr. Rubino has continued to expand upon a highly
successful and distinguished career that included Hoffmann-La Roche
Inc. where he was a member of the U.S. Executive and Operating
Committees and a Securities and Exchange Commission (SEC) corporate
officer. During his Roche tenure, he held key executive positions
in marketing, sales, business operations, supply chain and human
resource management, and was assigned executive committee roles in
marketing, project management, and globalization. Mr. Rubino also
held senior executive positions at PDI, Inc. and Cardinal Health.
He holds a BA in economics from Rutgers University with a minor in
biology/chemistry and completed post-graduate educational programs
at the University of Lausanne and Harvard Business School. Mr.
Rubino serves on the boards of Aastrom Biosciences, Inc. and
Genisphere, LLC and is also on the Rutgers University Business
School Board of Advisors.
A. Michael Stolarski
joined the Company as a member of the board of directors in April
2016. Mr. Stolarski founded Premier Shockwave, Inc. in October 2008
and has since served as its President & CEO. From 2005 to 2008,
Mr. Stolarski was the Vice President of Business Development and,
previously, Acting CFO of SANUWAVE, Inc. From 2001 to 2005, he was
the President – Orthopedic Division and Vice President of
Finance for HealthTronics Surgical Services, Inc. From 1994 to
2001, he was the CFO and Controller of the Lithotripsy Division,
Internal Auditor, and Paralegal of Integrated Health Services, Inc.
Mr. Stolarski brings to our board an in-depth understanding of the
orthopedic and podiatric shock wave market. In addition to being a
Certified Public Accountant in the state of Maryland (inactive), he
holds a M.S. in Finance from Loyola College, Baltimore a B.S. in
Accounting and a B.S. in Finance from the University of Maryland,
College Park.
Dr. Maj-Britt
Kaltoft
joined the Company as a member of the board of
directors in June 2017. Since January 2017, Dr. Kaltoft heads the
business development and patent functions at the Danish State Serum
Institute, an institution under the Danish Ministry of Health. From
2011 to 2016, she was the Vice President – Corporate Alliance
Management, Licensing Director and Business Development with Novo
Nordisk headquartered in Bagsvaerd, Denmark. She has obtained
outstanding results in the areas of business development, licensing
and alliance management in the pharmaceutical and biotech industry
at Lundbeck, Nycomed, and EffRx. Dr. Kaltoft brings 20 years of
international specialization in development and successful
execution of business development strategies, contractual
structures and alliance management within all sectors of the life
science industry.
CORPORATE GOVERNANCE AND BOARD MATTERS
The
Company adopted a formal Corporate Governance policy in January
2012 which included establishing formal board committees and a code
of conduct for the board of directors and the Company.
53
The Board of Directors
Recent Developments
The
Company’s current board of directors consists of five
members, two of whom have been determined by the board to be
“independent” as defined under the rules of the Nasdaq
stock market. The Company expects to add additional independent
directors in 2019.
Board’s Leadership Structure
The
Company’s board of directors elects the Company’s chief
executive officer and its chairman, and each of these positions may
be held by the same person or may be held by two persons. The
chairman’s primary responsibilities are to manage the board
and serve as the primary liaison between the board of directors and
the chief executive officer, while the primary responsibility of
the chief executive officer is to manage the day-to-day affairs of
the Company, taking into account the policies and directions of the
board of directors. Such an arrangement promotes more open and
robust communication among the board, and provides an efficient
decision making process with proper independent oversight. The
Company’s board of directors has determined that it is
currently in the best interest of the Company and its shareholders
to combine the roles of chairman of the board and chief executive
officer.
The
Company believes, however, that there is no single leadership
structure that is the best and most effective in all circumstances
and at all times. Accordingly, the board of directors retains the
authority to later combine these roles if doing so would be in the
best interests of the Company and its shareholders.
The
Company’s board of directors is authorized to have an audit
committee, a compensation committee and a nominating and corporate
governance committee, to assist the Company’s board of
directors in discharging its responsibilities. The Company’s
current board of directors consists of five members, two of whom
has been determined by the board to be “independent” as
defined under the rules of the Nasdaq stock market. The board of
directors has determined that Mr. Richardson, Mr. Nemelka and Mr.
Stolarski are not independent under the applicable marketplace
rules of the Nasdaq stock market and Rule 10A-3 under the Exchange
Act. The Company expects to add additional independent directors in
2019.
Board’s Role in Risk Oversight
While
the Company’s management is responsible for the day-to-day
management of risk to the Company, the board of directors has broad
oversight responsibility for the Company’s risk management
programs. The various committees of the board of directors assist
the board of directors in fulfilling its oversight responsibilities
in certain areas of risk. In particular, the audit committee
focuses on financial and enterprise risk exposures, including
internal controls, and discusses with management and the
Company’s independent registered public accountants the
Company’s policies with respect to risk assessment and risk
management. The compensation committee is responsible for
considering those risks that may be implicated by the
Company’s compensation programs and reviews those risks with
the Company’s board of directors and chief executive
officer.
Audit Committee
The
current members of the Company’s audit committee are John F.
Nemelka (Chairperson), Kevin A. Richardson, II, and A. Michael
Stolarski. Mr. Nemelka, who chairs the committee, has been
determined by the board of directors to be an audit committee
financial expert as defined pursuant to the rules of the SEC.
Pursuant to the Company’s Audit Committee Charter, the audit
committee is required to consist of at least two independent
directors. The Company expects to add additional independent
directors to the board of directors in 2019.
The
audit committee operates under a written charter adopted by the
board of directors which is available on the Company’s
website at
www.sanuwave.com
.
The primary responsibility of the audit committee is to oversee the
Company’s financial reporting process on behalf of the board
of directors. Among other things, the audit committee is
responsible for overseeing the Company’s accounting and
financial reporting processes and audits of the Company’s
financial statements, reviewing and discussing with the independent
auditors the critical accounting policies and practices for the
Company, engaging in discussions with management and the
independent auditors to assess risk for the Company and management
thereof, and reviewing with management the effectiveness of the
Company’s internal controls and disclosure controls and
procedures. The audit committee is directly responsible for the
appointment, compensation, retention and oversight of the work of
the Company’s independent auditors, currently Marcum LLP,
including the resolution of disagreements, if any, between
management and the auditors regarding financial reporting. In
addition, the audit committee is responsible for reviewing and
approving any related party transaction that is required to be
disclosed pursuant to Item 404 of Regulation S-K promulgated under
the Exchange Act.
54
Compensation Committee
The
current members of the Company’s compensation committee are
Alan L. Rubino (Chairperson), Kevin A. Richardson II, A. Michael
Stolarski and Maj-Britt Kaltoft. The primary purpose of the
compensation committee is to discharge the responsibilities of the
board of directors relating to compensation of the Company’s
executive officers. Pursuant to the Company’s Compensation
Committee Charter, the compensation committee is required to
consist of at least two independent directors. The Company expects
to add additional independent directors to the board of directors
in 2019.
The
compensation committee operates under a written charter adopted by
the board of directors which is available on the Company’s
website at
www.sanuwave.com
.
Specific responsibilities of the compensation committee include
reviewing and recommending approval of compensation of the
Company’s named executive officers, administering the
Company’s stock incentive plan, and reviewing and making
recommendations to the Company’s board of directors with
respect to incentive compensation and equity plans.
Nominating and Corporate Governance Committee
The
current members of the Company’s nominating and corporate
governance committee are Maj-Britt Kaltoft (Chairperson), Kevin A.
Richardson, II, John F. Nemelka, and Alan L. Rubino. Pursuant to
the Company’s Nominating and Corporate Governance Committee
Charter, the nominating and corporate governance committee is
required to consist of at least two independent directors. The
Company expects to add additional independent directors to the
board of directors in 2019.
The
nominating and corporate governance committee operates under a
written charter adopted by the board of directors which is
available on the Company’s website at
www.sanuwave.com
.
Specific responsibilities of the nominating and corporate
governance committee include: identifying and recommending nominees
for election to the Company’s board of directors; developing
and recommending to the board of directors the Company’s
corporate governance principles; overseeing the evaluation of the
board of directors; and reviewing and approving compensation for
non-employee members of the board of directors.
The
nominating and corporate governance committee’s charter
outlines how the nominating and corporate governance committee
fulfills its responsibilities for assessing the qualifications and
effectiveness of the current board members, assessing the needs for
future board members, identifying individuals qualified to become
members of the board and its committees, and recommending
candidates for the board of director’s selection as director
nominees for election at the next annual or other properly convened
meeting of shareholders.
The
nominating and corporate governance committee considers director
candidates recommended by shareholders for nomination for election
to the board of directors. The committee applies the same standards
in considering director candidates recommended by the shareholders
as it applies to other candidates. Any shareholder entitled to vote
for the election of directors may recommend a person or persons for
consideration by the committee for nomination for election to the
board of directors. The Company must receive written notice of such
shareholder’s recommended nominees(s) no later than January
31
st
of
the year in which the shareholder wishes such recommendation to be
considered by the committee in connection with the next meeting of
shareholders at which the election of directors will be held. To
submit a recommendation, a shareholder must give timely notice
thereof in writing to the Secretary of the Company. A
shareholder’s notice to the Secretary shall set forth: (i)
the name and record address of the shareholder making such
recommendation and any other shareholders known by such shareholder
to be supporting such recommendation; (ii) the class and number of
shares of the Company which are beneficially owned by the
shareholder and by any other shareholders known by such shareholder
to be supporting such recommendation; (iii) the name, age and five
year employment history of such recommended nominee; (iv) the
reasons why the shareholder believes the recommended nominee meets
the qualifications to serve as a director of the Company; and (v)
any material or financial interest of the shareholder and, if
known, the recommended nominee in the Company.
Shareholder Communications with the Board of Directors
The
board of directors has implemented a process for shareholders to
send communications to the board of directors. Shareholders who
wish to communicate directly with the board of directors or any
particular director should deliver any such communications in
writing to the Secretary of the Company. The Secretary will
compile any communications they receive from shareholders and
deliver them periodically to the board of directors or the specific
directors requested. The Secretary of the Company will not screen
or edit such communications, but will deliver them in the form
received from the shareholder.
55
Code of Conduct and Ethics
It
is the Company’s policy to conduct its affairs in accordance
with all applicable laws, rules and regulations of the
jurisdictions in which it does business. The Company has adopted a
code of business conduct and ethics with policies and procedures
that apply to all associates (all employees are encompassed by this
term, including associates who are officers) and directors,
including the chief executive officer, chief financial officer,
controller, and persons performing similar functions.
The Company has made the code of business conduct
and ethics available on its website at
www.sanuwave.com
.
If any substantive amendments to the
code of business conduct and ethics are made or any waivers are
granted, including any implicit waiver, the Company will disclose
the nature of such amendment or waiver on its website or in a
report on Form 8-K.
No Family Relationships Among Directors and Officers
There
are no family relationships between any director or executive
officer of the Company and any other director or executive officer
of the Company.
Director Independence
Our
board of directors has determined that Alan L. Rubino and Dr.
Maj-Britt Kaltoft qualify as independent directors based on the
Nasdaq stock market definition of “independent
director.”
Limitation of Directors Liability and Indemnification
The
Nevada Revised Statutes authorize corporations to limit or
eliminate, subject to certain conditions, the personal liability of
directors to corporations and their stockholders for monetary
damages for breach of their fiduciary duties. Our certificate of
incorporation limits the liability of our directors to the fullest
extent permitted by Nevada law.
We have
director and officer liability insurance to cover liabilities our
directors and officers may incur in connection with their services
to us, including matters arising under the Securities Act of 1933,
as amended. Our certificate of incorporation and bylaws also
provide that we will indemnify our directors and officers who, by
reason of the fact that he or she is one of our officers or
directors, is involved in a legal proceeding of any
nature.
There
is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification
will be required or permitted. We are not aware of any threatened
litigation or proceeding that may result in a claim for such
indemnification.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section
16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of our equity
securities which are registered pursuant to Section 12 of the
Exchange Act, to file with the SEC initial reports of ownership and
reports of changes in ownership of our equity securities. Officers,
directors and greater than 10% shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a)
reports they file.
Except
as set forth herein, based solely upon a review of the Forms 3, 4
and 5 (and amendments thereto) furnished to us for our fiscal year
ended December 31, 2018, we have determined that our directors,
officers and greater than 10% beneficial owners complied with all
applicable Section 16 filing requirements. Forms 4 filed on behalf
of Mr. Stolarski, Mr. Nemelka, Mr. Rubino, Mr. Richardson and Mr.
Parikh were inadvertently filed late to report the grant of stock
options that occurred on September 20, 2018. A Form 3 and a Form 4
filed on behalf of Mr. Parikh on June 12, 2018 were inadvertently
filed late to report his appointment and the grant of stock options
that occurred on May 31, 2018. Forms 4 filed on January 19, 2018
for Mr. Stolarski, Ms. Sundstrom, Mr. Richardson, Mr. Nemelka and
Mr. Rubino were inadvertently filed late to report grants of
certain warrants of the Company.
56
I
tem 11. EXECUTIVE
COMPENSATION
Summary Compensation Table for Fiscal Years 2018 and
2017
The
following table provides certain information concerning
compensation earned for services rendered in all capacities by our
named executive officers during the fiscal years ended
December 31, 2018 and 2017.
|
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock Awards
($)
|
Option Awards
($)
|
Non Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All Other
Compensation ($)
(3)
|
Total
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin A.
Richardson, II
|
2018
|
$
235,000
(1)
|
-
|
$
226,600
(2)
|
-
|
-
|
-
|
$
2,459
|
$
464,059
|
|
Chairman of the
Board and Chief Executive Officer (principal executive
officer)
|
2017
|
$
120,000
(1)
|
-
|
$
130,882
(2)
|
-
|
-
|
-
|
-
|
$
250,882
|
|
|
|
|
|
|
|
|
|
|
|
|
Lisa E.
Sundstrom
|
2018
|
$
192,917
|
-
|
$
154,500
(2)
|
-
|
-
|
-
|
$
15,960
|
$
363,377
|
|
Chief Financial
Officer (principal financial officer)
|
2017
|
$
115,000
|
-
|
$
88,352
(2)
|
-
|
-
|
-
|
$
12,652
|
$
216,004
|
|
|
|
|
|
|
|
|
|
|
|
|
Shri P.
Parikh
|
2018
|
$
182,496
(4)
|
-
|
$
206,000
(2)
|
-
|
-
|
-
|
$
10,702
|
$
399,198
|
|
President,
Healthcare
|
2017
|
$
-
|
-
|
-
|
-
|
-
|
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
Stegano
|
2018
|
$
200,000
|
-
|
$
154,500
(2)
|
-
|
-
|
-
|
$
15,142
|
$
369,642
|
|
Chief Operating
Officer
|
2017
|
$
200,000
|
-
|
$
88,352
(2)
|
-
|
-
|
-
|
$
13,498
|
$
301,850
|
|
|
|
|
|
|
|
|
|
|
|
|
Iulian
Cioanta
|
2018
|
$
200,000
|
-
|
$
154,500
(2)
|
-
|
-
|
-
|
$
23,610
|
$
378,110
|
|
Chief Science and
Technology Officer
|
2017
|
$
200,000
|
-
|
$
88,352
(2)
|
-
|
-
|
-
|
$
19,583
|
$
307,935
|
(1)
Mr.
Richardson has been the Company's Chairman of the Board since the
Company's inception. Since 2014, Mr. Richardson has also been our
Acting Chief Executive Officer. We continue to compensate Mr.
Richardson as a director as described in "Discussion of Director
Compensation" below, however we pay him an additional $10,000 per
month in recognition of his additional role as Acting Chief
Executive Officer. On November 30, 2018 Mr. Richardson was named
Chief Executive Officer of the Company.
(2)
This
dollar amount reflects the full fair value of the grant at the date
of issuance and is recognized for financial statement reporting
purposes with respect to each fiscal year over the vesting terms in
accordance with ASC 718-10.
(3)
Includes health,
dental, life and disability insurance premiums and 401(k) matching
contributions.
(4)
Mr. Parikh was
named President, Healthcare of the Company effective May 31,
2018.
57
Stock Incentive Plan
On October 24, 2006, SANUWAVE, Inc.’s board
of directors adopted the 2006 Stock Incentive Plan of SANUWAVE,
Inc. (the “2006 Plan”).
On November 1, 2010, the
Company approved the Amended and Restated 2006 Stock Incentive Plan
of SANUWAVE Health, Inc. effective as of January 1, 2010
(previously defined as the “Stock Incentive Plan”). The
Stock Incentive Plan permits grants of awards to selected
employees, directors and advisors of the Company in the form of
restricted stock or options to purchase shares of common stock.
Options granted may include nonstatutory options as well as
qualified incentive stock options. The Stock Incentive Plan is
currently administered by the board of directors of the Company.
The Stock Incentive Plan gives broad powers to the board of
directors of the Company to administer and interpret the particular
form and conditions of each option. The stock options granted under
the Stock Incentive Plan are nonstatutory options which vest over a
period of up to three years and have a maximum ten year term. The
options are granted at an exercise price equal to the fair market
value of the common stock on the date of the grant which is
approved by the board of directors of the Company. The Stock
Incentive Plan had 35,000,000 and 22,500,000 shares of common stock
reserved for grant at December 31, 2018 and 2017,
respectively.
The
terms of the options granted under the Stock Incentive Plan expire
as determined by individual option agreements (or on the tenth
anniversary of the grant date), unless terminated earlier, on the
first to occur of the following: (1) the date on which the
participant’s service with the Company is terminated by the
Company for cause; (2) 60 days after the participant’s death;
or (3) 60 days after the termination of the participant’s
service with the Company for any reason other than cause or the
participant’s death; provided that, if during any part of
such 60 day period the option is not exercisable solely because of
specified securities law restrictions, the option will not expire
until the earlier of the expiration date or until it has been
exercisable for an aggregate period of 60 days after the
termination of the participant’s service with the Company.
The options vest as provided for in each individual’s option
agreement and the exercise prices for the options are determined by
the board of directors at the time the option is granted; provided
that the exercise price shall in no event be less than the fair
market value per share of the Company’s common stock on the
grant date. In the event of any change in the common stock
underlying the options, by reason of any merger or exchange of
shares of common stock, the board of directors shall make such
substitution or adjustment as it deems to be equitable to (1) the
class and number of shares underlying such option, (2) the exercise
price applicable to such option, or (3) any other affected terms of
such option.
In
the event of a change of control, unless specifically modified by
an individual option agreement: (1) all options outstanding as of
the date of such change of control will become fully vested; and
(2) notwithstanding (1) above, in the event of a merger or share
exchange, the board of directors may, in its sole discretion,
determine that any or all options granted pursuant to the Stock
Incentive Plan will not vest on an accelerated basis if the board
of directors, the surviving corporation or the acquiring
corporation, as the case may be, has taken such action that in the
opinion of the board of directors is equitable or appropriate to
protect the rights and interests of the participants under the
Stock Incentive Plan.
On
December 31, 2018, there were 4,628,281 shares of common stock
available for grant under the Stock Incentive Plan. For the years
ended December 31, 2018 and 2017, there were 6,350,000 and
2,700,000 options, respectively, granted to the Company’s
executive officers under the Stock Incentive Plan.
58
Outstanding Equity Awards at 2018 Fiscal Year End
The
following table provides certain information concerning the
outstanding equity awards for each named executive officer as of
December 31, 2018.
|
Name
|
Number of
Securities Underlying Unexercised Options/ Warrants (#)
Exercisable
|
Number of
Securities Underlying Unexercised Options/ Warrants (#)
Unexercisable
|
Equity Incentive
Plan Awards: Number of Securities Underlying Unexercised Unearned
Options (#)
|
Option/ Warrant
Exercise Price ($)
|
Option/ Warrant
Expiration Date
|
Number of Shares
or Units of Stock That Have Not Vested (#)
|
Market Value of
Shares or Units of Stock That Have Not Vested ($)
|
Equity Incentive
Plan Awards: Number of Unearned Shares, Units or Other Rights That
Have Not Vested (#)
|
Equity Incentive
Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested ($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
Kevin A.
Richardson, II
|
115,000
(1)
|
-
|
-
|
$
0.35
|
02/21/2023
|
-
|
-
|
-
|
-
|
|
Chairman of the
Board and
|
452,381
(3)
|
-
|
-
|
$
0.11
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
Chief Executive
Officer
|
297,619
(3)
|
-
|
-
|
$
0.06
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
(principal
executive officer)
|
700,000
(4)
|
-
|
-
|
$
0.04
|
6/16/2026
|
-
|
-
|
-
|
-
|
|
|
594,300
(5)
|
-
|
-
|
$
0.18
|
11/9/2026
|
-
|
-
|
-
|
-
|
|
|
900,000
(6)
|
-
|
-
|
$
0.11
|
6/14/2027
|
-
|
-
|
-
|
-
|
|
|
640,000
(7)
|
-
|
-
|
$
0.11
|
3/17/2019
|
-
|
-
|
-
|
-
|
|
|
1,100,000
(8)
|
-
|
-
|
$
0.21
|
9/20/2028
|
-
|
-
|
-
|
-
|
|
Lisa
Sundstrom
|
65,000
(1)
|
-
|
-
|
$
0.35
|
02/21/2023
|
-
|
-
|
-
|
-
|
|
Chief Finanical
Officer
|
25,000
(2)
|
-
|
-
|
$
0.55
|
5/7/2024
|
-
|
-
|
-
|
-
|
|
(principal
financial officer)
|
301,587
(3)
|
-
|
-
|
$
0.11
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
|
198,413
(3)
|
-
|
-
|
$
0.06
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
|
500,000
(4)
|
-
|
-
|
$
0.04
|
6/16/2026
|
-
|
-
|
-
|
-
|
|
|
424,500
(5)
|
-
|
-
|
$
0.18
|
11/9/2026
|
-
|
-
|
-
|
-
|
|
|
600,000
(6)
|
-
|
-
|
$
0.11
|
6/14/2027
|
-
|
-
|
-
|
-
|
|
|
440,000
(7)
|
-
|
-
|
$
0.11
|
3/17/2019
|
-
|
-
|
-
|
-
|
|
|
750,000
(8)
|
-
|
-
|
$
0.21
|
9/20/2028
|
-
|
-
|
-
|
-
|
|
Shri
Parikh
|
2,000,000
(9)
|
-
|
-
|
$
0.42
|
5/31/2028
|
-
|
-
|
-
|
-
|
|
President,
Healthcare
|
1,000,000
(8)
|
-
|
-
|
$
0.21
|
9/20/2028
|
-
|
-
|
-
|
-
|
|
Peter
Stegano
|
333,644
(1)
|
-
|
-
|
$
0.35
|
02/21/2023
|
-
|
-
|
-
|
-
|
|
Chief Operating
Officer
|
50,000
(2)
|
-
|
-
|
$
0.55
|
5/7/2024
|
-
|
-
|
-
|
-
|
|
|
301,587
(3)
|
-
|
-
|
$
0.11
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
|
198,413
(3)
|
-
|
-
|
$
0.06
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
|
500,000
(4)
|
-
|
-
|
$
0.04
|
6/16/2026
|
-
|
-
|
-
|
-
|
|
|
424,500
(5)
|
-
|
-
|
$
0.18
|
11/9/2026
|
-
|
-
|
-
|
-
|
|
|
600,000
(6)
|
-
|
-
|
$
0.11
|
6/14/2027
|
-
|
-
|
-
|
-
|
|
|
440,000
(7)
|
-
|
-
|
$
0.11
|
3/17/2019
|
-
|
-
|
-
|
-
|
|
|
750,000
(8)
|
-
|
-
|
$
0.21
|
9/20/2028
|
-
|
-
|
-
|
-
|
|
Iulian
Cioanta
|
296,241
(1)
|
-
|
-
|
$
0.35
|
02/21/2023
|
-
|
-
|
-
|
-
|
|
Chief Science
and
|
50,000
(2)
|
-
|
-
|
$
0.55
|
5/7/2024
|
-
|
-
|
-
|
-
|
|
Technology
Officer
|
301,587
(3)
|
-
|
-
|
$
0.11
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
|
198,413
(3)
|
-
|
-
|
$
0.06
|
10/1/2025
|
-
|
-
|
-
|
-
|
|
|
500,000
(4)
|
-
|
-
|
$
0.04
|
6/16/2026
|
-
|
-
|
-
|
-
|
|
|
424,500
(5)
|
-
|
-
|
$
0.18
|
11/9/2026
|
-
|
-
|
-
|
-
|
|
|
600,000
(6)
|
-
|
-
|
$
0.11
|
6/14/2027
|
-
|
-
|
-
|
-
|
|
|
440,000
(7)
|
-
|
-
|
$
0.11
|
3/17/2019
|
-
|
-
|
-
|
-
|
|
|
750,000
(8)
|
-
|
-
|
$
0.21
|
9/20/2028
|
-
|
-
|
-
|
-
|
(1)
On
February 21, 2013, the Company, by mutual agreement with all active
employees and directors of the Company, cancelled options granted
to the active employees and directors in the year ended December
31, 2011 and prior. In exchange for these options, the active
employees and directors received new options to purchase shares of
common stock at an exercise price of $0.35 per share. The Company
cancelled all options which were previously granted to Mr.
Richardson, Ms. Sundstrom, Mr. Stegagno and Dr. Cioanta. The
Company granted Mr. Richardson 115,000 options, Ms. Sundstrom
65,000 options, Mr. Stegagno 333,644 options and Dr. Cioanta
296,241 options on February 21, 2013 which vests one-third at grant
date, one-third on February 21, 2014 and one-third on February 21,
2015.
(2)
The
Company granted Ms. Sundstrom 25,000 options, Mr. Stegagno 50,000
options and Dr. Cioanta 50,000 options on May 7, 2014 which vests
one-third at grant date, one-third on May 7, 2015 and one-third on
May 7, 2016.
(3)
The
Company granted Mr. Richardson 750,000 options, Ms. Sundstrom
500,000 options, Mr. Stegagno 500,000 options and Dr. Cioanta
500,000 options on October 1, 2015 which vests at grant
date.
(4)
The
Company granted Mr. Richardson 700,000 options, Ms. Sundstrom
500,000 options, Mr. Stegagno 500,000 options and Dr. Cioanta
500,000 options on June 16, 2016 which vests at grant
date.
(5)
The
Company granted Mr. Richardson 594,300 options, Ms. Sundstrom
424,500 options, Mr. Stegagno 424,500 options and Dr. Cioanta
424,500 options on November 9, 2016 which vests at grant
date.
(6)
The
Company granted Mr. Richardson 900,000 options, Ms. Sundstrom
600,000 options, Mr. Stegagno 600,000 options and Dr. Cioanta
600,000 options on June 15, 2017 which vests at grant
date.
(7)
The
Company granted Mr. Richardson 640,000 warrants, Ms. Sundstrom
440,000 warrants, Mr. Stegagno 440,000 warrants and Dr. Cioanta
440,000 warrants on Deccember 11, 2017 which vests at grant
date.
(8)
The
Company granted Mr. Richardson 1,100,000 options, Ms. Sundstrom
750,000 options, Mr. Parikh 1,000,000 options, Mr. Stegagno 750,000
options and Dr. Cioanta 750,000 options on September 20, 2018 which
vests at grant date.
(9)
The
Company granted Mr. Parikh 2,000,000 options on May 31, 2018 which
vests at grant date.
59
Director Compensation Table for Fiscal Year 2018
The
following table provides certain information concerning
compensation for each director during
the fiscal year
ended December 31,
2018.
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Stock Awards
($)
|
Option Awards
($)
|
Non Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All Other
Compensation ($)
|
Total
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
|
|
|
|
|
|
|
|
|
Kevin A.
Richardson, II
(1)
|
$
40,000
|
-
|
$
226,600
|
-
|
-
|
-
|
$
266,600
|
|
|
|
|
|
|
|
|
|
|
John F.
Nemelka
|
$
40,000
|
-
|
$
72,100
|
-
|
-
|
-
|
$
112,100
|
|
|
|
|
|
|
|
|
|
|
Alan L.
Rubino
|
$
40,000
|
-
|
$
72,100
|
-
|
-
|
-
|
$
112,100
|
|
|
|
|
|
|
|
|
|
|
A. Michael
Stolarski
|
$
40,000
|
-
|
$
72,100
|
-
|
-
|
-
|
$
112,100
|
|
|
|
|
|
|
|
|
|
|
Maj-Britt
Kaltoft
|
$
40,000
|
-
|
$
72,100
|
-
|
-
|
-
|
$
112,100
|
(1)
Mr.
Richardson has been the Company's Chairman of the Board since the
Company's inception. Since 2014, Mr. Richardson has also been our
Acting Chief Executive Officer. We continue to compensate Mr.
Richardson as a director as described in "Discussion of Director
Compensation" below, however we pay him an additional $10,000 per
month in recognition of his additional role as Acting Chief
Executive Officer. On November 30, 2018 Mr. Richardson was named
Chief Executive Officer of the Company.
Discussion of Director Compensation
Effective January 1, 2018, the Company began to
compensate its directors at an annual rate of $40,000 each.
On September 20, 2018, the Company issued an option to purchase
1,100,000 shares of the Company’s common stock at $0.21 per
share to non-employee director Kevin A. Richardson II and the
Company issued options to purchase 350,000 shares of the
Company’s common stock at $0.21 per share to non-employee
directors John F. Nemelka, Alan L. Rubino, A. Michael Stolarski and
Maj-Britt Kaltoft. On June 15, 2017, the Company issued an option
to purchase 900,000 shares of the Company’s common stock at
$0.11 per share to non-employee director Kevin A. Richardson II and
the Company issued options to purchase 300,000 shares of the
Company’s common stock at $0.11 per share to non-employee
directors John F. Nemelka, Alan L. Rubino, A. Michael Stolarski and
Maj-Britt Kaltoft.
On November 9,
2016, the Company issued an option to purchase 594,300 shares of
the Company’s common stock at $0.18 per share to director
Kevin A. Richardson, II and the Company issued options to purchase
169,800 shares of the Company’s common stock at $0.18 per
share to directors John F. Nemelka, Alan L. Rubino and A. Michael
Stolarski. On June 16, 2016, the Company issued an option to
purchase 700,000 shares of the Company’s common stock at
$0.04 per share to director Kevin A. Richardson, II and the Company
issued options to purchase 200,000 shares of the Company’s
common stock at $0.04 per share to directors John F. Nemelka, Alan
L. Rubino and A. Michael Stolarski. On October 1, 2015, the Company
issued an option to purchase 452,381 shares of the Company’s
common stock at $0.11 per share and an option to purchase 297,619
shares of the Company’s common stock at $0.50 per share to
director Kevin A. Richardson, II and the Company issued options to
purchase 150,795 shares of the Company’s common stock at
$0.11 per share and options to purchase 99,205 shares of the
Company’s common stock at $0.50 per share to directors John
F. Nemelka and Alan L. Rubino. The options above issued at $0.50
per share were re-priced to $0.06 per share in March 2016 as the
result of the public offering. On September 3, 2013, the Company
issued an option to purchase 100,000 shares of the Company’s
common stock at $0.65 per share to director Alan L. Rubino.
On February 21, 2013, the Company, by mutual agreement with all the
active employees and directors of the Company, cancelled options
granted to the active employees and directors in the year ended
December 31, 2011 and prior. In exchange for these options, the
active employees and directors received new options to purchase
shares of common stock at an exercise price of $0.35 per share.
Kevin A. Richardson, II, and John F. Nemelka, each cancelled
options to purchase 15,000 shares of the Company’s Common
Stock and were each issued options to purchase 115,000 shares of
the Company’s Common Stock at an exercise price of $0.35 per
share.
60
The
following are the aggregate number of option awards outstanding
that have been granted to each of our non-employee directors as of
December 31, 2018: Kevin A. Richardson, II – 4,159,300,
John F. Nemelka – 1,384,800, Alan L. Rubino –
1,369,800, A. Michael Stolarski – 1,019,800 and Maj-Britt
Kaltoft – 650,000.
I
tem 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth certain information, as of March 28,
2019, with respect to the beneficial ownership of the
Company’s outstanding common stock by (i) any holder of more
than five percent, (ii) each of the Company’s named executive
officers and directors, and (iii) the Company’s directors and
executive officers as a group.
|
|
Number of
Shares
|
Percent
of
|
|
|
Beneficially
|
Shares
|
|
Name of
Beneficial Owner
(1)
|
Owned
|
Outstanding
(2)
|
|
Kevin A. Richardson
II
(4)
|
17,564,160
|
10.6
%
|
|
A. Michael
Stolarski
(3)
|
16,789,333
|
9.9
%
|
|
Peter Stegagno
(5)
|
4,261,780
|
2.7
%
|
|
Iulian Cioanta
(6)
|
3,576,146
|
2.2
%
|
|
Lisa E. Sundstrom
(7)
|
3,304,500
|
2.1
%
|
|
John F. Nemelka
(8)
|
1,596,055
|
1.0
%
|
|
Alan Rubino
(9)
|
1,569,800
|
1.0
%
|
|
Maj-Britt Kaltoft
(10)
|
850,000
|
0.5
%
|
|
All directors and
executive officers as a group (8 persons)
|
49,511,774
|
30.0
%
|
|
5%
Beneficial Owner:
|
|
|
|
Jerome Gildner
(11)
|
13,333,334
|
8.2
%
|
|
John McDermott
(11)
|
12,575,756
|
7.7
%
|
|
Nicholas Carosi III
(11)
|
11,818,182
|
7.2
%
|
|
James McGraw
(11)
|
11,610,694
|
7.1
%
|
(1)
Unless
otherwise noted, each beneficial owner has the same address as
us.
(2)
Applicable
percentage ownership is based on 160,322,580 shares of common stock
outstanding as of March 28, 2019, “Beneficial
ownership” includes shares for which an individual, directly
or indirectly, has or shares voting or investment power, or both,
and also includes options that are exercisable within 60 days of
March 28, 2019. Unless otherwise indicated, all of the listed
persons have sole voting and investment power over the shares
listed opposite their names. Beneficial ownership as reported in
the above table has been determined in accordance with Rule 13d-3
of the Exchange Act.
(3)
Includes options
to purchase up to 1,019,800 shares of common stock, warrants to
purchase up to 7,499,452 shares of common stock and 4,545,455
common shares available upon conversion of convertible promissory
note.
(4)
Includes options
to purchase up to 4,159,300 shares of common stock, warrants to
purchase up to 3,222,583 shares of common stock and 2,363,636
common shares available upon conversion of convertible promissory
note. In addition, this amount includes 138,782 shares of common
stock owned directly by Prides Capital Fund I, L.P. Prides Capital
Partners LLC is the general partner of Prides Capital Fund I, L.P.
and Mr. Richardson is the controlling shareholder of Prides Capital
Partners LLC; therefore, under certain provisions of the Exchange
Act, he may be deemed to be the beneficial owner of such
securities. Mr. Richardson has also been deputized by Prides
Capital Partners LLC to serve on the board of directors of the
Company. Mr. Richardson disclaims beneficial ownership of all such
securities except to the extent of any indirect pecuniary interest
(within the meaning of Rule 16a-1 of the Exchange Act)
therein.
(5)
Consists of
options to purchase up to 3,158,144 shares of common stock,
warrants to purchase up to 771,818 shares of common stock and
331,818 common shares available upon conversion of convertible
promissory note.
(6)
Consists of
options to purchase up to 3,120,741 shares of common stock and
warrants to purchase up to 440,000 shares of common
stock.
(7)
Consists of
options to purchase up to 2,864,500 shares of common stock and
warrants to purchase up to 440,000 shares of common
stock.
(8)
Includes options
to purchase up to 1,384,800 shares of common stock and warrants to
purchase up to 200,000 shares of common stock.
(9)
Includes options
to purchase up to 1,369,800 shares of common stock and warrants to
purchase up to 200,000 shares of common stock.
(10)
Includes options
to purchase up to 650,000 shares of common stock and warrants to
purchase up to 200,000 shares of common stock.
(11)
Based
on records of the Company.
61
Securities Authorized for Issuance Under Equity Compensation
Plans
Information on
securities authorized for issuance under the Company's equity
compensation plans can be found in Item 5 under the same caption in
this Annual Report on Form 10-K.
I
tem 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Other
than as described below, since January 1, 2017, there have been no
transactions with related persons required to be disclosed in this
report.
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”). 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. 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.
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%. The line of credit may be called
for payment upon demand. The outstanding balance as of December 31,
2017 with accrued interest was $370,179 and $0 interest was paid
for the period ending December 31, 2017.
On
November 12, 2018, the Company entered into an amendment to the
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 was increased to $1,000,000 with an
annualized interest rate of 6%. The line of credit may be called
for payment upon demand of the holder.
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.
On March 1, 2019,
the Company amended the expiration date of the Class O Warrants
from March 17, 2019 to June 28, 2019 to be effective on March 1,
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.
On March 27, 2017,
the Company began offering subscriptions for 10% convertible
promissory notes (the
“
10% Convertible Promissory
Notes
”
) to selected
accredited investors. The 10% Convertible Promissory Notes include
a warrant agreement (the
“
Class N Warrant
Agreement
”
) 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
Agreement expires March 17, 2019. On January 23, 2019, the Company
amended the expiration date of the Class N Warrants from March 17,
2019 to May 1, 2019, effective as of January 23, 2019.
On March 1, 2019,
the Company amended the expiration date of the Class N Warrants
from March 17, 2019 to June 28, 2019 to be effective on March 1,
2019.
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 amount of
$330,000. 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 10% Convertible Promissory Notes
associated with these subscriptions were issued in January
2018.
62
Director Independence
Our board of directors has determined that Alan L. Rubino and
Maj-Britt Kaltoft qualify as independent directors based on the
Nasdaq stock market definition of “independent
director.” Our board of directors has determined that our
other three directors, Kevin A. Richardson II, John F. Nemelka and
A. Michael Stolarski, do not qualify as independent directors based
on the Nasdaq stock market definition of “independent
director.” There are no family relationships among any of the
directors or executive officers of the Company.
I
tem 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The
following table summarizes the fees that we have paid or accrued
for audit and other services provided by our prior principal
independent registered public accounting firm, Cherry Bekaert LLP,
for the years ended December 31, 2018 and 2017 and audit and other
services provided by our current principal independent registered
public accounting firm, Marcum LLP for the year ended December 31,
2018:
|
Fee
Category
|
2018
|
2017
|
|
Audit
fees
|
$
226,000
|
$
199,620
|
|
Tax
fees
|
18,000
|
21,600
|
|
All other
fees
|
-
|
-
|
|
Total
fees
|
$
244,000
|
$
221,220
|
For
purposes of the preceding table:
●
Audit fees
consist of fees for the annual audit of our
consolidated financial statements, the review of the interim
financial statements included in our quarterly reports on Form
10-Q, and other professional services provided in connection with
statutory and regulatory filings and consents related to capital
markets transactions and engagements for those fiscal
years.
●
Tax fees
consist of fees for tax compliance, tax advice and
tax planning services for those fiscal years.
●
Audit related fees
consist of fees for assurance and
related services that are reasonably related to the performance of
the audit or review.
●
All other fees
consist of fees for all other products
and services.
The
board of directors must pre-approve all audits and permitted
non-audit services to be provided by our principal independent
registered public accounting firm unless an exception to such
pre-approval exists under the Exchange Act or the rules of the SEC.
Each year, the board of directors approves the retention of the
independent auditor to audit our consolidated financial statements,
including the associated fee. At this time, the board of directors
evaluates other known potential engagements of the independent
auditor, including the scope of audit-related services, tax
services and other services proposed to be performed and the
proposed fees, and approves or rejects each service, taking into
account whether the services are permissible under applicable law
and the possible impact of each non-audit service on the
independent auditor’s independence from
management.
Audit Committee Report
The
audit committee oversees the accounting and financial reporting
processes of the Company on behalf of the board of directors.
Management has primary responsibility for the Company’s
financial statements, financial reporting process and internal
controls over financial reporting. The independent auditors are
responsible for performing an independent audit of the
Company’s consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight Board
(United States). The audit committee's responsibility is to select
the independent auditors and monitor and oversee the accounting and
financial reporting processes of the Company, including the
Company’s internal controls over financial reporting, and the
audits of the consolidated financial statements of the
Company.
63
During
the course of 2018 and the first quarter of 2019, the audit
committee met and held discussions with management and the
independent auditors. In the discussions related to the
Company’s consolidated financial statements for fiscal year
2018, management represented to the audit committee that such
consolidated financial statements were prepared in accordance with
United States generally accepted accounting principles. The audit
committee reviewed and discussed with management and the
independent auditors the audited consolidated financial statements
for fiscal year 2018.
In fulfilling its responsibilities, the audit
committee discussed with the independent auditors the matters that
are required to be discussed by PCAOB Auditing Standards
No. 1301,
Communication with Audit
Committees
. In addition, the
audit committee received from the independent auditors the written
disclosures and letter required by applicable requirements of the
Public Company Accounting Oversight Board regarding the independent
auditor's communications with the audit committee concerning
independence, and the audit committee discussed with the
independent auditors that firm’s independence. In connection
with this discussion, the audit committee also considered whether
the provision of services by the independent auditors not related
to the audit of the Company’s financial statements for fiscal
year 2018 were compatible with maintaining the independent
auditors’ independence. The audit committee’s policy
requires that the audit committee approve any audit or permitted
non-audit service proposed to be performed by its independent
auditors in advance of the performance of such
service.
Based
upon the audit committee’s discussions with management and
the independent auditors and the audit committee's review of the
representations of management and the written disclosures and
letter of the independent auditors provided to the audit committee,
the audit committee recommended to the board of directors that the
audited consolidated financial statements for the year ended
December 31, 2018 be included in the Company’s Annual
Report on Form 10-K, for filing with the SEC.
|
|
|
The Audit Committee
|
|
|
|
John
F. Nemelka (Chair)
|
|
Kevin
A. Richardson II
|
|
A.
Michael Stolarski
|
|
|
|
April 1, 2019
|
|
|
64
PART IV
I
tem 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
1. All financial statements
The
following financial statements are included in this Annual Report
on Form 10-K in Item 8 of Part II:
|
|
|
Page
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
F-7
|
2. Financial statement schedules
No
schedules are required because either the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes
thereto.
3. Exhibits
The
exhibits below are furnished or filed and, as applicable, are
incorporated by reference herein as part of this Annual Report on
Form 10-K.
65
|
Exhibit No.
|
|
Description
|
|
|
Agreement
and Plan of Merger, dated as of September 25, 2009, by and between
Rub Music Enterprises, Inc., RME Delaware Merger Sub, Inc. and
SANUWAVE, Inc. (Incorporated by reference to Form 8-K filed with
the SEC on September 30, 2009).
|
|
|
|
Articles
of Incorporation (Incorporated by reference to the Form 10-SB filed
with the SEC on December 18, 2007).
|
|
|
|
Certificate
of Amendment to the Articles of Incorporation (Incorporated by
reference to Appendix A to the Definitive Schedule 14C filed with
the SEC on October 16, 2009).
|
|
|
|
Certificate
of Amendment to the Articles of Incorporation (Incorporated by
reference to Appendix A to the Definitive Schedule 14C filed with
the SEC on April 16, 2012).
|
|
|
|
Bylaws
(Incorporated by reference to the Form 10-SB filed with the SEC on
December 18, 2007).
|
|
|
|
Certificate
of Designation of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock of the Company dated March 14, 2014
(Incorporated by reference to the Form 8-K filed with the SEC on
March 18, 2014).
|
|
|
|
Certificate
of Amendment to the Articles of Incorporation, dated September 8,
2015 (Incorporated by reference to the Form 10-K filed with the SEC
on March 30, 2016).
|
|
|
|
Certificate
of Designation of Preferences, Rights and Limitations of Series B
Convertible
|
|
|
|
Form of
Class A Warrant Agreement (Incorporated by reference to Form 8-K
filed with the SEC on September 30, 2009).
|
|
|
|
Form of
Class B Warrant Agreement (Incorporated by reference to Form 8-K
filed with the SEC on September 30, 2009).
|
|
|
|
Form of
Class D Warrant Agreement (Incorporated by reference to Form 8-K
filed with the SEC on October 14, 2010).
|
|
|
|
Form of
Class E Warrant Agreement (Incorporated by reference to Form 8-K
filed with the SEC on April 7, 2011).
|
|
|
|
Form of
Series A Warrant (Incorporated by reference to the Form 8-K filed
with the SEC on March 18, 2014).
|
|
|
|
Form of
Series B Warrant (Incorporated by reference to the Form 8-K filed
with the SEC on March 18, 2014).
|
|
|
|
Form of
18% Senior Secured Convertible Promissory Note issued by the
Company to select accredited investors (Incorporated by reference
to Form 8-K filed with the SEC on February 27, 2013).
|
|
|
|
Form of
Convertible Promissory Note between the Company and accredited
investors party thereto (Incorporated by reference to the Form 8-K
filed with the SEC on March 18, 2014).
|
|
|
|
Amendment
No. 1 to the Convertible Note Agreement between the Company and
accredited investors party thereto (Incorporated by reference to
the Form 8-K filed with the SEC on March 18, 2014).
|
|
|
|
Class K
Warrant Agreement by and between the Company and HealthTronics,
Inc., dated June 15, 2015 (Incorporated by reference to the Form
8-K filed with the SEC on June 18, 2015).
|
|
|
|
Amendment
No. 1 to Class K Warrant Agreement by and between the Company and
HealthTronics, Inc., dated June 28, 2016 (Incorporated by reference
to the Form 10-Q filed with the SEC on August 15,
2016).
|
|
|
|
Form of
Class L Warrant Common Stock Purchase Warrant (Incorporated by
reference to the Form 8-K filed with the SEC on March 17,
2016).
|
|
|
|
Second
Form of Class L Warrant Common Stock Purchase Warrant (Incorporated
by reference to the Form 8-K filed with the SEC on August 24,
2016).
|
|
|
|
Registration
Rights Agreement dated January 13, 2016 among the Company and the
investors listed therein (Incorporated by reference to the Form 8-K
filed with the SEC on January 19, 2016).
|
|
|
|
Class K
Warrant Agreement dated as of August 3, 2017, between the Company
and HealthTronics, Inc. (Incorporated by reference to Form 8-K
filed with the SEC on August 4, 2017).
|
|
|
|
Form of
Class N Warrant. (Incorporated by reference to Form 8-K filed with
the SEC on November 9, 2017).
|
|
|
|
Letter
to Series A Warrantholders, Class N Warrantholders and Class L
Warrantholders, dated January 29, 2019. (Incorporated by reference
to Form 8-K filed with the SEC on January 25, 2019).
|
|
|
|
Form of
Class O Warrant. (Incorporated by reference to Form 8-K filed with
the SEC on March 15, 2019).
|
|
|
|
Letter
to Class N Warrantholders and Class O Warrantholders, dated March
14, 2019. (Incorporated by Reference to Form 8-K filed with the SEC
on March 15, 2019).
|
|
|
10.1
∞
|
|
Amended
and Restated 2006 Stock Option Incentive Plan of SANUWAVE Health,
Inc. (Incorporated by reference to Form 8-K filed with the SEC on
November 3, 2010).
|
|
|
Form of
Securities Purchase Agreement, by and among the Company and the
accredited investors party thereto, dated March 17, 2014
(Incorporated by reference to the Form 8-K filed with the SEC on
March 18, 2014).
|
|
|
|
Form of
Registration Rights Agreement, by and among the Company and the
holders party thereto, dated March 17, 2014 (Incorporated by
reference to the Form 8-K filed with the SEC on March 18,
2014).
|
66
|
|
Form of Subscription
Agreement for the 18% Convertible Promissory Notes between
the
Company and the accredited
investors a party thereto (Incorporated by reference to the Form
8-K filed with the SEC on March 18,
2014).
|
|
|
|
Amendment
to certain Promissory Notes that were dated August 1, 2005, by and
among the Company, SANUWAVE, Inc. and HealthTronics, Inc., dated
June 15, 2015 (Incorporated by reference to the Form 8-K filed with
the SEC on June 18, 2015.)
|
|
|
|
Security
Agreement, by and between the Company and HealthTronics, Inc.,
dated June 15, 2015 (Incorporated by reference to the Form 8-K
filed with the SEC on June 18, 2015).
|
|
|
|
Exchange
Agreement dated January 13, 2016 among the Company and the
investors listed therein (Incorporated by reference to the Form 8-K
filed with the SEC on January 19, 2016).
|
|
|
|
Escrow
Deposit Agreement dated January 25, 2016 among the Company, Newport
Coast Securities, Inc. and Signature Bank (Incorporated by
reference to the Form S-1/A filed with the SEC on February 3,
2016).
|
|
|
|
Second
Amendment to Certain Promissory Notes entered into as of June 28,
2016 by and among the Company, SANUWAVE, Inc. and HealthTronics,
Inc. (Incorporated by reference to the Form 10-Q filed with the SEC
on August 15, 2016).
|
|
|
|
Form of
Securities Purchase Agreement, by and among the Company and the
accredited investors a party thereto, dated March 11, 2016
(Incorporated by reference to the Form 8-K filed with the SEC on
March 17, 2016).
|
|
|
|
Form of
Securities Purchase Agreement, by and between the Company and the
accredited investors a party thereto, dated August 24, 2016
(Incorporated by reference to the Form 8-K filed with the SEC on J
August 25, 2016).
|
|
|
|
Form of
Registration Rights Agreement, by and between the Company and the
holders a party thereto, dated August 24, 2016 (Incorporated by
reference to the Form 8-K filed with the SEC on August 25,
2016).
|
|
|
|
Third
Amendment to promissory notes entered into as of August 3, 2017 by
and among the Company, SANUWAVE, Inc. and HealthTronics, Inc.
(Incorporated by reference to Form 8-K filed with the SEC on August
4, 2017).
|
|
|
10.14
#
|
|
Binding
Term Sheet for Joint Venture Agreement between the Company and
MundiMed Distribuidora Hospitalar LTDA effective as of September
25, 2017 (Incorporated by reference to Form 10-Q filed with the SEC
on November 15, 2017).
|
|
|
Form of
10% Convertible Promissory Note, by and among the Company and the
accredited investors a party thereto. (Incorporated by reference to
Form 8-K filed with the SEC on November 9, 2017).
|
|
|
|
Form of
Registration Rights Agreement, by and among the Company and the
accredited investors a party thereto (Incorporated by reference to
Form 8-K filed with the SEC on November 9, 2017).
|
|
|
10.17
#
|
|
Agreement
for Purchase and Sale, Limited Exclusive Distribution and
Royalties, and Servicing and Repairs of dermaPACE Systems and
Equipment among the Company, and Premier Shockwave Wound Care, Inc.
and Premier Shockwave, Inc. dated as of February 13, 2018.
(Incorporated by reference to Form 10-K filed with the SEC on March
29, 2018).
|
|
|
Agreement,
dated June 14, 2018, by and among the Company and Johnfk Medical
Inc. (Incorporated by reference to Form 8-K filed with the SEC on
June 29, 2018).
|
|
|
|
Joint
Venture Agreement, dated September 21, 2018, by and among the
Company, Johnfk Medical Inc. and Holistic Health Institute Pte.
Ltd. (Incorporated by reference to Form 8-K filed with the SEC on
September 27, 2018).
|
|
|
|
Master
Equipment Lease, dated January 26, 2018, by and among the Company
and NFS Leasing, Inc. (Incorporated by reference to Form 8-K filed
with the SEC on February 15, 2018).
|
|
|
10.21
∞
|
|
Offer
Letter, dated as of November 30, 2018, by and between SANUWAVE
Health, Inc. and Kevin Richardson. (Incorporated by reference to
Form 8-K filed with the SEC on December 4, 2018).
|
|
10.22
∞
|
|
Offer
Letter, dated as of April 15, 2018, by and between SANUWAVE Health,
Inc., and Shri Parikh. (Incorporated by reference to Form 8-K filed
with the SEC on June 7, 2018).
|
|
|
Code of
Business Conduct and Ethics of SANUWAVE Health, Inc. (Incorporated
by reference to the Form 10-K filed with the SEC on March 30,
2016).
|
|
|
21.1
*
|
|
List of
subsidiaries
|
|
|
Consent
of Cherry Bekaert LLP, independent registered public
accountants.
|
|
|
|
Consent
of Marcum LLP, independent registered public
accountants.
|
|
|
24.1*
|
|
Power
of Attorney (included on signature page).
|
|
31.1
*
|
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer.
|
|
31.2
*
|
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
|
|
32.1
*
|
|
Section
1350 Certification of the Chief Executive Officer.
|
|
32.2
*
|
|
Section
1350 Certification of the Chief Financial Officer.
|
|
101.INS**
|
|
XBRL
Instance
|
|
101.SCH**
|
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL**
|
|
XBRL
Taxonomy Extension Calculation
|
|
101.DEF**
|
|
XBRL
Taxonomy Extension Definition
|
|
101.LAB**
|
|
XBRL
Taxonomy Extension Labels
|
|
101.PRE**
|
|
XBRL
Taxonomy Extension Presentation
|
______________________________________________________________
∞
Indicates management contract or compensatory plan or
arrangement.
*
Filed herewith
#
Confidential treatment has been requested as to certain portions of
this exhibit, which portions have been omitted and
submitted
separately to the Securities and Exchange Commission.
** XBRL information is furnished and not filed or a part of a
registration statement or prospectus for purposes of sections 11 or
12 of the Securities Act of 1933, as amended, is deemed not filed
for purposes of section 18 of the Exchange Act and otherwise is not
subject to liability under these sections.
I
tem
16.
Form 10-K Summary
The
Company has elected not to include summary
information.
67
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned hereunto duly
authorized.
|
|
SANUWAVE
HEALTH, INC.
|
|
|
|
|
|
|
|
|
Dated:
April
1
, 2019
|
By:
|
/s/
Kevin A.
Richardson, II
|
|
|
|
|
Name:
Kevin A.
Richardson, II
|
|
|
|
|
Title:
Acting
Chief Executive Officer
|
|
POWER OF ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Kevin A.
Richardson, II and Lisa E. Sundstrom, and each of them, as such
person’s true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for such person and
in such person’s name, place and stead, in any and all
capacities, to sign any and all amendments to this annual report on
Form 10-K, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be
done in connection therewith, as fully to all intents and purposes
as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of
them or their or such person’s substitute or substitutes, may
lawfully do or cause to be done by virtue
thereof.
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:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Kevin A. Richardson,
II
|
|
Acting
Chief Executive Officer and Chairman of the Board of
Directors
|
|
April 1
, 2019
|
|
Name:
Kevin A.
Richardson, II
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
/s/
Lisa E.
Sundstrom
|
|
Chief
Financial Officer
|
|
April 1 , 2019 |
|
Name:
Lisa E. Sundstrom
|
|
(principal
financial and accounting officer)
|
|
|
|
|
|
|
|
|
|
/s/
John F.
Nemelka
|
|
Director
|
|
April 1
, 2019
|
|
Name:
John F. Nemelka
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Alan L.
Rubino
|
|
Director
|
|
April 1
, 2019
|
|
Name:
Alan
L. Rubino
|
|
|
|
|
|
|
|
|
|
|
|
/s/
A. Michael
Stolarski
|
|
Director
|
|
April 1
, 2019
|
|
Name:
A.
Michael Stolarski
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Maj-Britt
Kaltoft
|
|
Director
|
|
April 1
, 2019
|
|
Name:
Maj-Britt
Kaltoft
|
|
|
|
|
|
|
|
|
|
|
68
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosurePart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 16. Form 10-k Summary