SANUWAVE Health, Inc 10-Q for FY2021 Q2
SANUWAVE Health, Inc. (SNWV)
10-Q
2022-01-14
For: 2021-06-30
View Original
Added on
April 10, 2026
About this 10-Q
SANUWAVE Health, Inc filed this 10-Q on January 14, 2022, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.91M
- up 3404.8% from $83K a year earlier
- Net loss
- $8.62M
- compared with a net loss of $3.63M a year earlier
- Diluted EPS
- -$0.02
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2021
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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
(Exact name of registrant as specified in its charter)
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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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(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 Exchange Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which
registered
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☐ Yes ☒ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☐ Yes ☒ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer ☐
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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
As of January 10, 2022 there were issued and outstanding 481,619,621 shares of the registrant’s common stock, $0.001 par value.
SANUWAVE Health, Inc. shares of common stock are traded on the OTC Expert Market under the symbol SNWV.
SANUWAVE Health, Inc.
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Page
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PART I – FINANCIAL INFORMATION
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Item 1.
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4 |
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4
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5
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6
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Item 2.
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23 | |
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Item 3.
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28 | |
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Item 4.
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28 | |
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PART II – OTHER INFORMATION
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Item 1.
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29 | |
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Item 1A.
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29 | |
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Item 2.
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30 | |
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Item 3.
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30 | |
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Item 4.
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30 | |
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Item 5.
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Item 6.
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| 32 | ||
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. and its subsidiaries (“SANUWAVE” or the “Company”) contains forward-looking statements. All statements in this Quarterly
Report on Form 10-Q, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding: the potential impact of the
COVID-19 pandemic on our business, results of operations, liquidity, and operations, including the effect of governmental lockdowns, restrictions and new regulations on our operations and processes, including the execution of clinical trials; the
Company’s future financial results, operating results, and projected costs; market acceptance of and demand for UltraMIST, dermaPACE and our product candidates; management’s plans and objectives for future operations; industry trends; regulatory
actions that could adversely affect the price of or demand for our approved products; our intellectual property portfolio; our business, marketing and manufacturing capacity and strategy; estimates regarding our capital requirements, the
anticipated timing of the need for additional funds, and our expectations regarding future capital-raising transactions, including through investments by strategic partners for market opportunities, which may include strategic partnerships or
licensing agreements, or raising capital through the conversion of outstanding warrants or issuances of securities; product liability claims; economic conditions that could adversely affect the level of demand for or cost of our products; timing of
clinical studies and eventual FDA approval of our products; financial markets; the competitive environment; supplier and customer disputes; and our plans to remediate our material weaknesses in our disclosure controls and procedures and our
internal control over financial reporting. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking
statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Any
expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the
sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed on October 21, 2021 and in the
Company’s Quarterly Reports on Form 10-Q. Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC filings. These and many other factors could affect the Company’s future financial condition and operating
results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. The Company undertakes no obligation to revise or update any
forward-looking statements. The following information should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed on October 21, 2021.
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” are to the consolidated business of the
Company.
PART I -- FINANCIAL INFORMATION
Draft 12/2/2021
| ITEM 1. |
FINANCIAL STATEMENTS
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands except share data)
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June 30, 2021
|
December 31, 2020
|
|||||||
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ASSETS
|
||||||||
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Current Assets:
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||||||||
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Cash
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$
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$
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||||
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Accounts receivable, net of allowance for doubtful accounts of $
|
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||||||
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Inventory
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||||||
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Prepaid expenses and other current assets
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||||||
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Total Current Assets
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Property and Equipment, net
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||||||
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Right of Use Assets, net
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||||||
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Other Intangible Assets, net
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||||||
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Goodwill
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||||||
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Other Assets
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||||||
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Total Assets
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$
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$
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||||
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LIABILITIES
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||||||||
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Current Liabilities:
|
||||||||
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Senior secured promissory note payable, in default
|
$
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|
$
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||||
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Convertible promissory notes payable, in default
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|
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||||||
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Convertible promissory notes, related parties, in default
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||||||
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Accounts payable
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||||||
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Accrued expenses
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||||||
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Accrued employee compensation
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||||||
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Due under factoring agreement
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||||||||
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Warrant liability
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||||||
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Current portion of SBA loans
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||||||
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Accrued interest
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||||||
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Accrued interest, related parties
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||||||
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Current portion of lease liabilities
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||||||
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Current portion of contract liabilities
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Other
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||||||
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Total Current Liabilities
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||||||
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Non-current Liabilities
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||||||||
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SBA loans
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||||||
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Lease liabilities
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Contract liabilities
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Deferred tax liability
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Total Non-current Liabilities
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||||||
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Total Liabilities
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||||||
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Contingencies
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||||||||
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STOCKHOLDERS’ DEFICIT
|
||||||||
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Preferred Stock, par value $
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||||||
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Common Stock, par value $
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|
||||||
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Additional Paid-in Capital
|
|
|
||||||
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Accumulated Deficit
|
(
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)
|
(
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)
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||||
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Accumulated Other Comprehensive Loss
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(
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)
|
(
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)
|
||||
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Total Stockholders’ Deficit
|
(
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)
|
(
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)
|
||||
|
Total Liabilities and Stockholders’ Deficit
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$
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|
$
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|
||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands except share data)
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Three Months Ended June 30,
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Six Months Ended June 30,
|
|||||||||||||||
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2021
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2020
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2021
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2020
|
|||||||||||||
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Revenues:
|
||||||||||||||||
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Accessory and parts revenue
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$
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$
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$
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$
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|
||||||||
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Product
|
|
|
|
|
||||||||||||
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License fees and other
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|
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||||||||||||
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Total Revenue
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||||||||||||
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Cost of Revenues
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||||||||||||
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Gross Margin
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||||||||||||
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Operating Expenses:
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||||||||||||||||
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General and administrative
|
||||||||||||||||
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Selling and marketing
|
||||||||||||||||
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Research and development
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|
||||||||||||
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Total Operating Expenses
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|
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|
||||||||||||
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Operating Loss
|
(
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)
|
(
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)
|
(
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)
|
(
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)
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||||||||
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Other Income (Expense):
|
||||||||||||||||
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Interest expense
|
(
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)
|
(
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(
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(
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|||||||||||
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Change in fair value of derivative liabilities
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(
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)
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|||||||||||
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Interest expense, related party
|
(
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)
|
(
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)
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(
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)
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(
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)
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||||||||
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Loss on issuance of debt
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(
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)
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(
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)
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||||||||||
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Gain / (loss) on foreign currency exchange
|
(
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)
|
(
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)
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(
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)
|
|||||||||
|
Other Income (Expense), net
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Net Loss before Income Taxes
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Provision for Income Taxes
|
|
|
|
|
||||||||||||
|
Net Loss
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Other Comprehensive Loss
|
||||||||||||||||
|
Foreign currency translation adjustments
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Total Comprehensive Loss
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Loss per Share:
|
||||||||||||||||
|
Net loss per share, basic and diluted
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Weighted average shares outstanding, basic and diluted
|
|
|
|
|
||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands except share data)
|
|
Three Months Ended June 30, 2021
|
|||||||||||||||||||||||||||||||
| 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 March 31, 2021
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Foreign currency translation adjustment
|
-
|
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||
|
Balances as of June 30, 2021
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||||||
|
|
Three Months Ended June 30, 2020
|
|||||||||||||||||||||||||||||||
| 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 March 31, 2020
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$ |
(
|
)
|
|||||||||||||||
|
Conversion of short term notes and convertible notes payable
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Conversion of advances from related parties
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Shares issued for services
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Proceeds from PIPE offering, net of offering costs
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Proceeds from stock option exercise
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Beneficial conversion feature on convertible debt
|
-
|
|
-
|
|
|
|
|
|
||||||||||||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Foreign currency translation adjustment
|
-
|
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||
|
Balances as of June 30, 2020
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(In thousands except share data)
|
Six Months Ended June 30, 2021
|
||||||||||||||||||||||||||||||||
| 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, 2020
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||||||
|
Cashless warrant exercise
|
|
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||||||||
|
Reclassification of warrant liability due to cashless warrant exercise
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Foreign currency translation adjustment
|
-
|
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||
|
Balances as of June 30, 2021
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||||||
|
|
Six Months Ended June 30, 2020
|
|||||||||||||||||||||||||||||||
| 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, 2019
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||||||
|
Proceeds from warrant exercise
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Conversion of short term notes and convertible notes payable
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Conversion of advances from related parties
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Shares issued for services
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Proceeds from PIPE offering, net of offering costs
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Stock-based compensation
|
-
|
|
-
|
|
|
|
|
|
||||||||||||||||||||||||
|
Proceeds from stock option exercise
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Beneficial conversion feature on convertible debt
|
-
|
|
-
|
|
|
|
|
|
||||||||||||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Foreign currency translation adjustment
|
-
|
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||
|
Balances as of June 30, 2020
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands)
|
Six Months Ended June 30,
|
||||||||
|
2021
|
2020
|
|||||||
|
Cash Flows - Operating Activities:
|
||||||||
|
Net loss
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Adjustments to reconcile net loss to net cash used by operating activities
|
||||||||
|
Amortization of intangibles
|
|
|
||||||
|
Depreciation
|
|
|
||||||
|
Bad debt expense
|
|
|
||||||
|
Share-based payment
|
|
|
||||||
|
Deferred taxes
|
|
|
||||||
|
Change in fair value of derivative liabilities
|
( |
) |
|
|||||
|
Loss on issuance of debt
|
||||||||
|
Amortization of debt issuance costs
|
|
|
||||||
| Amortization of debt discount |
||||||||
|
Accrued interest
|
|
|
||||||
|
Interest payable, related parties
|
|
|
||||||
|
Changes in operating assets and liabilities
|
||||||||
|
Accounts receivable - trade
|
|
(
|
)
|
|||||
|
Inventory
|
|
(
|
)
|
|||||
|
Prepaid expenses
|
(
|
)
|
(
|
)
|
||||
|
Other assets
|
( |
) |
(
|
)
|
||||
|
Operating leases
|
|
(
|
)
|
|||||
|
Accounts payable
|
|
|
||||||
|
Accrued expenses
|
|
|
||||||
|
Accrued employee compensation
|
|
|
||||||
|
Contract liabilities
|
|
(
|
)
|
|||||
|
Net Cash Used in Operating Activities
|
(
|
)
|
(
|
)
|
||||
|
Cash Flows - Investing Activities
|
||||||||
|
Purchases of property and equipment
|
(
|
)
|
(
|
)
|
||||
|
Net Cash Flows Used in Investing Activities
|
(
|
)
|
(
|
)
|
||||
|
Cash Flows - Financing Activities
|
||||||||
|
Proceeds from sale of convertible preferred stock
|
|
|
||||||
|
Proceeds from convertible promissory notes
|
||||||||
|
Proceeds from SBA loan
|
|
|
||||||
|
Proceeds from PIPE offering, net of offering costs
|
||||||||
|
Proceeds from stock option exercises
|
||||||||
|
Proceeds from factoring
|
||||||||
|
Proceeds from warrant exercises
|
|
|
||||||
|
Proceeds from related party advances
|
|
|
||||||
|
Payments of principal on finance leases
|
(
|
)
|
(
|
)
|
||||
|
Net Cash Flows Provided by Financing Activities
|
|
|
||||||
|
Effect of Exchange Rates on Cash
|
(
|
)
|
(
|
)
|
||||
|
Net Change in Cash During Period
|
(
|
)
|
(
|
)
|
||||
|
Cash at Beginning of Period
|
|
|
||||||
|
Cash at End of Period
|
$
|
|
$
|
|
||||
|
Supplemental Information:
|
||||||||
|
Cash paid for interest
|
$
|
|
$
|
|
||||
|
Non-cash Investing and Financing Activities:
|
||||||||
|
Reclassification of warrant liability due to cashless warrant exercise
|
$
|
|
$
|
|
||||
|
Conversion of short-term notes payable to equity
|
|
|
||||||
|
Conversion of advances from related parties to equity
|
|
|
||||||
|
Additions to right of use assets from new finance lease liabilities
|
|
|
||||||
|
Embedded conversion option with issuances of convertible debt
|
||||||||
|
Warrant issuance in conjunction with convertible notes
|
||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
June 30, 2021
|
1.
|
Nature of the Business and Basis of Presentation
|
SANUWAVE Health, Inc. and Subsidiaries (“SANUWAVE” or the “Company”) is focused on the research, development, and commercialization of its
patented noninvasive and biological response activating medical systems for the repair and regeneration of skin, musculoskeletal tissue, and vascular structures. The Company’s lead regenerative product in the United States is the dermaPACE®
device used for treating diabetic foot ulcers.
Through the Company’s acquisition, on August 6, 2020, of the UltraMIST® assets from Celularity, Inc. (“Celularity”), SANUWAVE now combines two highly complementary and market-cleared energy transfer technologies and two human tissue biologic products, which creates a platform of scale with an end-to-end product offering in the advanced wound care market.
Basis of Presentation – The accompanying
unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the
instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, these Condensed Consolidated Financial Statements do not include all the information and disclosures required by U.S. GAAP for comprehensive financial statements. The
financial information as of June 30, 2021 and for the three and six month ended June 30, 2021 and 2020 is unaudited; however, in the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may
be expected for any other interim period or for the year ending December 31, 2021.
The Condensed Consolidated Balance Sheet at December 31, 2020 has been derived from the audited Consolidated Financial Statements at that date
but does not include all of the information and disclosures required by U.S. GAAP for comprehensive financial statements. These financial statements should be read in conjunction with the Company’s December 31, 2020 Annual Report on Form 10-K
filed with the SEC on October 21, 2021 (the “2020 Annual Report”).
Reclassifications – Certain accounts in the prior period Condensed Consolidated Financial Statements have
been reclassified to conform to the presentation of the current year Condensed Consolidated Financial Statements. Accessory and parts revenue for the three and six months ended June 30, 2020, respectively, contains $76 thousand and $13 thousand of revenue
that was reclassified from other revenue. In addition, $53 thousand and $94 thousand of depreciation expense related to rental devices was reclassified from operating expenses to cost of revenues for the three and six months ended June 30, 2020,
respectively. These reclassifications had no effect on the previously reported operating results.
Covid-19 – The worldwide spread of the COVID-19 virus has resulted and is expected
to result in a global slowdown of economic activity which has, and is likely to continue to, decrease demand for a broad variety of products, including from our customers, while also disrupting supply channels and marketing activities for an
unknown period of time until the disease is contained. Also, the pandemic may cause continued or additional actions by hospitals and clinics such as limiting elective procedures and treatments and limiting clinical trial activities and data
monitoring. We expect all of these factors to continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict.
| 2. |
Going Concern
|
Our recurring losses from operations and dependency upon future issuances of equity or other financing to fund ongoing operations have raised
substantial doubt as to our ability to continue as a going concern. We will be required to raise additional funds to finance our operations and remain a going concern; we may not be able to do so, and/or the terms of any financings may not be
advantageous to us.
The continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources for the
commercialization of the dermaPACE system and intend to continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. The operating losses and the events of default on the
Company’s notes payable indicate substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the filing of this Quarterly Report on Form 10-Q.
The continuation of our business is dependent upon raising additional capital to fund operations. Management’s plans are to obtain additional
capital in 2022 through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, issuance of common or
preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. In addition, there can be
no assurances that our plans to obtain additional capital will be successful on the terms or timeline we expect, or at all. Although no assurances can be given, management believes that potential additional issuances of equity or other potential
financing transactions as discussed above should provide the necessary funding for us. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing
transactions with unfavorable terms.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of
the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the Condensed Consolidated Financial Statements do not
necessarily purport to represent realizable or settlement values. The Condensed Consolidated Financial Statements do not include any adjustment that might result from the outcome of this uncertainty. Our Condensed Consolidated Financial
Statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.
| 3. |
Summary of Significant Accounting Policies
|
Significant accounting policies followed by the Company are summarized below and should be read in conjunction with those described in Note 3 to
the Consolidated Financial Statements in our 2020 Annual Report.
Estimates – These Condensed Consolidated Financial Statements have been prepared in
accordance with U.S. GAAP. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of consolidated financial statements for any period necessarily involves
the use of estimates and assumptions. Actual amounts may differ from these estimates. These Condensed Consolidated Financial Statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the
framework of the accounting policies summarized herein.
Significant estimates include the recording of allowances for doubtful accounts, the net realizable value of inventory, useful lives of
long-lived assets, fair value of goodwill and other intangible assets, the determination of the valuation allowances for deferred taxes and the estimated fair value of embedded derivatives, including warrants and embedded conversion options on
convertible debt issuances.
Goodwill and Other Intangible Assets – Goodwill represents the excess of the purchase price over the fair
value of assets acquired and liabilities assumed. The Company accounts for goodwill under ASC Topic 350, Intangibles-Goodwill and Other. The Company tests goodwill for impairment annually, or more
frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter. Intangible assets arising
from the Company’s acquisition are amortized on a straight‑line basis over the estimated useful life of each asset. Customer relationships have a useful life of seven years . Patents and tradenames have a useful life of nineteen years .
Fair value of financial
instruments - The carrying values of accounts payable, and other short-term obligations approximate their fair values, because of the short-term maturities of these instruments.
The Company
utilizes the guidance of ASC Topic 820-10, Fair Value Measurements (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The framework that is set
forth in this standard is applicable to the fair value measurements where it is permitted or required under other accounting pronouncements.
The ASC 820-10 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires
financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
|
•
|
Level 1 - Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets and liabilities;
|
|
•
|
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
|
|
•
|
Level 3 - Unobservable inputs that are not corroborated by market data, therefore requiring the Company to develop its own assumptions.
|
The Company recognizes all derivatives on the Condensed
Consolidated Balance Sheet at fair value. The fair value of the LGH warrant liability is determined based on a bionomial approach pricing model at issuance and, thereafter, on a Black Scholes model. The fair value of the embedded
conversion option is based on a binomial pricing model at issuance and thereafter. The fair values of the NH and Leviston warrant liabilities are based on a Black Scholes model at issuance and thereafter. The Company’s usage of the Black
Scholes model approximates the bionomial approach pricing model. Each of the pricing models 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.
Recent Accounting Pronouncements – In August 2020, Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2)
convertible instruments with a beneficial conversion feature and simplifies the guidance for determining whether a conversion feature is a derivative. As a result, a convertible debt instrument will be accounted for as a single liability measured
at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. In addition, ASU
2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021,
with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. Effective January 1, 2021, the Company elected to early adopt ASU 2020-06 using the modified retrospective method. The adoption of ASU 2020-06 had no
impact previously reported financial position or operating results.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding
Equity-Classified Written Call Options Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity
(Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or
exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a
modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an
exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding
equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments
prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 is not expected to have a material impact
on the Company’s financial statements or disclosures.
In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income
Taxes. ASU 2019-12 simplifies the accounting for income taxes in several areas including calculating taxes in an interim period, clarifying how to account for taxes that are partially based on income and requiring an entity to reflect
the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This amendment is effective for fiscal years beginning after December 15, 2020, and interim
periods within those fiscal years. The Company adopted ASU 2019-12 effective January 1, 2021 with no impact on previously reported financial position or operating results.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. The amendments in ASU
2017-04 modified the testing that an entity should perform for its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax
effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This amendment is effective for fiscal years beginning after December 15, 2022, and interim
periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2017-04 effective January 1, 2021. The adoption of this guidance did not impact our results of operations or financial position.
| 4. |
Loss per Share
|
The net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares
outstanding for the three and six months ended June 30, 2021 and 2020. In accordance with ASC Topic 260-10-45-13, Earnings Per Share, the weighted average of number of shares outstanding includes
outstanding common stock and shares issuable for nominal consideration. Accordingly, warrants issued with a $0.01 per share exercise
price, are included in weighted average shares outstanding as follows:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2021
|
June 30, 2020
|
June 30, 2021
|
June 30, 2020
|
|||||||||||||
|
Weighted average shares outstanding
|
||||||||||||||||
|
Common shares
|
|
|
|
|
||||||||||||
|
Common shares issuable assuming exercise of nominally priced warrants
|
|
|
|
|
||||||||||||
|
Weighted average shares outstanding
|
|
|
|
|
||||||||||||
Diluted net loss per share would be computed by dividing the net loss attributable to common stockholders by the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net loss per share. As a result of the net loss for the three and
six months ended June 30, 2021 and 2020, all potentially dilutive shares were anti-dilutive and therefore excluded from the computation of diluted net loss per share. Anti-dilutive equity securities consist of the following at June 30, 2021 and 2020, respectively (in
thousands):
|
2021
|
2020
|
|||||||
|
Common stock options
|
|
|
||||||
|
Common stock purchase warrants
|
|
|
||||||
|
Convertible notes payable
|
|
|
||||||
|
Short-term notes payable
|
|
|
||||||
|
Convertible preferred stock
|
|
|
||||||
|
|
|
|||||||
| 5. |
Inventory
|
Inventory consists of the following at June 30, 2021 and December 31, 2020 (in thousands):
|
2021
|
2020
|
|||||||
|
Inventory - finished goods
|
$
|
|
$
|
|
||||
|
Inventory - parts and accessories
|
|
|
||||||
|
Total inventory
|
$
|
|
$
|
|
||||
| 6. |
Accrued Expenses
|
Accrued expenses consist of the following at June 30, 2021 and December 31, 2020 (in thousands):
|
2021
|
2020
|
|||||||
|
Outside services
|
$
|
|
$
|
|
||||
|
License fees
|
|
|
||||||
|
Board of director's fees
|
|
|
||||||
|
Registration penalties
|
|
|
||||||
|
Commissions
|
|
|
||||||
|
Legal and professional fees
|
|
|
||||||
|
Warranty reserve
|
|
|
||||||
|
Inventory purchases
|
|
|
||||||
|
Other
|
|
|
||||||
|
$
|
|
$
|
|
|||||
There was no
| 7. |
Revenue
|
Disaggregation of Revenue - The disaggregation of revenue is based on geographical
region. The following tables present
revenue from contracts with customers for the three and six months ended June 30, 2021 and 2020 (in thousands):
|
Three Months Ended June 30, 2021
|
Three Months Ended June 30, 2020
|
|||||||||||||||||||||||
|
United States
|
International
|
Total
|
United States
|
International
|
Total
|
|||||||||||||||||||
| Accessories and parts |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Product
|
|
|
|
|
|
|
||||||||||||||||||
|
License fees and other
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||
|
Six Months Ended June 30, 2021
|
Six Months Ended June 30, 2020
|
|||||||||||||||||||||||
|
United States
|
International
|
Total
|
United States
|
International
|
Total
|
|||||||||||||||||||
| Accessories and parts |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Product
|
|
|
|
|
|
|
||||||||||||||||||
|
License fees and other
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||
Contract liabilities - As of June 30, 2021 and December 31, 2020, the Company has contract liabilities from contracts
with customers as follows (in thousands):
|
June 30,
2021
|
December 31,
2020
|
|||||||
|
Service agreements
|
$
|
|
$
|
|
||||
|
Deposit on future equipment purchases
|
|
|
||||||
|
Total contract liabilities
|
|
|
||||||
|
Less: current portion
|
(
|
)
|
(
|
)
|
||||
|
Non-current contract liabilities
|
$
|
|
$
|
|
||||
During the three months ended June 30, 2021 and 2020, the Company recognized revenue related to these contract liabilities of $8 thousand and $17 thousand,
respectively, that were included in the beginning contract liability balances for each of those periods. During the six months ended June 30, 2021 and 2020, the Company recognized revenue related to these contract liabilities of $16 thousand and $39 thousand, respectively, that were included in the
beginning contract liability balances for each of those periods.
The following table summarizes the changes in contract liabilities during the six months ended June 30, 2021 (in thousands):
|
Six Months Ended
|
||||
|
June 30, 2021
|
||||
|
Beginning balance
|
$
|
|
||
|
Service agreement additions
|
|
|||
|
Deposit on future equipment purchases
|
|
|||
|
Revenue recognized
|
(
|
)
|
||
|
Total contract liabilities
|
|
|||
|
Less current portion
|
(
|
)
|
||
|
Non-current contract liabilities
|
$
|
|
||
| 8. |
Concentration of Credit Risk and Limited Suppliers
|
Major customers are defined as customers whose
accounts receivable or sales individually consist of more than ten percent of total trade receivables or total sales, respectively. The percentage of accounts receivable and sales from major customers of the Company for
the periods indicated were as follows:
|
June 30, 2021
|
December 31, 2020
|
|||||||
|
Accounts Receivable:
|
||||||||
|
Customer A
|
|
%
|
|
%
|
||||
| Three Months Ended | Six Months Ended | |||||||||||||||
|
June 30, 2021
|
June 30, 2020
|
June 30, 2021
|
June 30, 2020
|
|||||||||||||
|
Revenue:
|
||||||||||||||||
|
Customer B
|
n/a
|
|
%
|
n/a
|
|
%
|
||||||||||
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. The percentage of purchases from major vendors of the Company that exceeded ten
percent of total purchases for the three and six months ended June 30, 2021 and 2020 were as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
|
June 30, 2021
|
June 30, 2020
|
June 30, 2021
|
June 30, 2020
|
|||||||||||||
|
Purchases:
|
||||||||||||||||
|
Vendor A
|
|
%
|
n/a
|
|
%
|
n/a
|
||||||||||
|
Vendor B
|
|
%
|
n/a
|
|
%
|
n/a
|
||||||||||
|
Vendor C
|
n/a
|
|
%
|
n/a
|
|
%
|
||||||||||
|
Vendor D
|
n/a
|
|
%
|
n/a
|
|
%
|
||||||||||
|
Vendor E
|
n/a
|
|
%
|
n/a
|
|
%
|
||||||||||
| 9. |
Accounts Receivable Factoring
|
On June 17, 2021, the Company entered into a factoring agreement with Goodman Capital Finance (“Goodman”), an unrelated third party, pursuant to
which the Company may sell certain of its accounts receivable to Goodman for 86.25 % of the value of the receivable. Advances available
under the facility are capped at the lesser of $3.0 million or a formula amount, as defined in the agreement. Interest on advances is
assessed at a fixed amount upon funding, which is equivalent to an annualized rate of 15.0 % for the first 30 days , and daily thereafter at an annualized rate of 14.4 %.
The agreement’s term is one month and automatically renews for additional one-month periods, unless either party provides 30 days ’ notice of
termination. The accounts receivable are sold with recourse back to the Company, which means that the Company bears the risk of non-payment by the account debtor.
As of June 30, 2021, the Company had transferred to Goodman approximately $1.3 million of accounts receivable balances.
| 10. |
Notes Payable
|
The following two tables summarize outstanding notes payable as of June 30, 2021 and December 31, 2020, respectively (in thousands):
|
|
Maturity
Date
|
Stated
Interest
Rate
|
Incremental
Payment in
Kind Interest
|
Incremental
Default
Interest
|
Conversion
Price
|
Principal
|
Remaining
Debt
Discount
|
Remaining
Embedded
Conversion
Option
|
Carrying
Value
|
||||||||||||||||||||||||
|
Senior secured promissory note payable, in default
|
|
|
%
|
+
|
%
|
+
|
%
|
n/a
|
$
|
|
(
|
)
|
|
$
|
|
||||||||||||||||||
|
Convertible promissory notes payable, in default:
|
|||||||||||||||||||||||||||||||||
|
Seller Note issued 8/6/2020
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
|
|
|
|||||||||||||||||||||
|
Leviston Note issued 4/20/2021
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
(
|
)
|
$ |
|
|
|||||||||||||||||||
|
Leviston Note issued 5/14/2021
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
(
|
)
|
|
|
||||||||||||||||||||
|
Total convertible promisory notes payable, in default
|
|
(
|
)
|
|
|
||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Convertible promissory notes payable, related parties, in default:
|
|||||||||||||||||||||||||||||||||
|
Convertible promissory notes (HealthTronics), related parties
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
|
|
|
|||||||||||||||||||||
|
Convertible promissory notes (Stolarski), related parties
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
|
|
|
|||||||||||||||||||||
|
Total convertible promisory notes payable, related parties, in default
|
|
|
|
|
|||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
SBA loan #1
|
|
|
%
|
n/a
|
n/a
|
n/a
|
|
|
|
|
|||||||||||||||||||||||
|
SBA loan #2
|
|
|
%
|
n/a
|
n/a
|
n/a
|
|
|
|
|
|||||||||||||||||||||||
|
Total SBA loans outstanding
|
|
|
|
|
|||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Total debt outstanding, including amounts in default
|
|
(
|
)
|
|
|
||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Less: current maturities, including notes in default
|
(
|
)
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Total long-term debt as of June 30, 2021
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||||||
|
|
Maturity
Date
|
Stated
Interest
Rate
|
Incremental
Payment in
Kind Interest
|
Incremental
Default
Interest
|
Conversion
Price
|
Principal
|
Remaining
Debt
Discount
|
Carrying
Value
|
|||||||||||||||||||||
|
Senior secured promissory note
payable, in default
|
|
|
%
|
+
|
%
|
+
|
%
|
n/a
|
$
|
|
(
|
)
|
$
|
|
|||||||||||||||
|
Convertible promissory notes payable, in default:
|
|||||||||||||||||||||||||||||
|
Seller Note issued 8/6/2020
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
|
|
||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Convertible promissory notes payable, related parties, in default:
|
|||||||||||||||||||||||||||||
|
Convertible promissory notes (HealthTronics), related parties
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
|
|
||||||||||||||||||
|
Convertible promissory notes (Stolarski), related parties
|
|
|
%
|
n/a
|
+
|
%
|
$
|
|
|
|
|
||||||||||||||||||
|
Total convertible promisory notes payable, related parties, in default
|
|
|
|
||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
SBA loan #1
|
|
|
%
|
n/a
|
n/a
|
n/a
|
|
|
|
||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Total debt outstanding, including amounts in default
|
|
(
|
)
|
|
|||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Less: current maturities, including notes in default
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Total long-term debt as of December 31, 2020
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||||
Senior secured promissory note payable, in default (“Senior Secured Note”) - On August 6, 2020, the
Company entered into a Note and Warrant Purchase and Security Agreement (the “NWPSA”), with NH Expansion Credit Fund Holdings LP, as noteholder and agent. In accordance with the NWPSA, the Company issued a $15 million Senior Secured Promissory Note Payable (the “Senior Secured Note”) and a warrant exercisable into shares of the Company’s common stock (the
“NH Expansion Warrant”) in exchange for cash to support operations, repay outstanding debt and close on the acquisition of the UltraMIST assets from Celularity, among other transactions. As of December 31, 2020, the Company was in default of the
minimum liquidity provisions on the Senior Secured Note. As of June 30, 2021, the Company remains in default of the minimum liquidity provisions on the Senior Secured Note, and, as a result, it is classified in current liabilities in the
accompanying Condensed Consolidated Balance Sheets. As a result of the default, the Company is accruing interest at the default interest note of an incremental 5 %.
The debt issuance costs and debt discount related to the Senior Secured Note were capitalized as a reduction in the principal amount and are being
amortized to interest expense over the life of the Senior Secured Note. The amortization of the debt issuance costs and debt discount for the three and six months ended June 30, 2021 was $227 thousand and $445 , respectively, and is included in interest expense.
Accrued interest related to the Senior Secured Note was $950 thousand and $642 thousand at June 30, 2021 and December 31, 2020, respectively. Interest expense on the Senior Secured Note was $773 thousand and $1.5 million for the three months and six months ended June
30, 2021, respectively.
Convertible promissory notes payable, in default (“Seller Note”) - On August 6, 2020, the Company entered
into an asset purchase agreement with Celularity to acquire Celularity’s UltraMIST assets. A portion of the aggregate consideration of $24
million paid for the assets included the issuance of a promissory note to Celularity in the principal amount of $4 million (the “Seller
Note”). The Seller Note matured on August 6, 2021 and was not repaid. The Company’s failure to pay the outstanding principal balance
when due constituted an event of default under the terms of the Seller Note and, accordingly, it began accruing additional interest of 5.0 %
in addition to the 12.0 % initial rate, as of the date of the default. As of June 30, 2021 and December 31, 2020, the Seller Notes had
outstanding accrued interest of $432 thousand and $192 thousand, respectively.
The Company evaluated embedded conversion features within the convertible promissory note and determined that the conversion feature does not require to be
bifurcated. Upon adoption of ASC 2020-6 effective January 1, 2021, the convertible promissory note is accounted for as a single liability due to the elimination of the beneficial conversion feature accounting model.
April 2021 Securities Purchase Agreement and
Warrants (In default) - On April 20, 2021, the Company entered into a Securities Purchase Agreement (the “Leviston Purchase Agreement”), with Leviston Resources, LLC, an
accredited investor (“Leviston”) for the sale by the Company in a private placement (the “Private Placement”) of (i) the Company’s future advance convertible promissory note in an aggregate principal amount of up to $3.4 million (the “Leviston Note”) and (ii) a warrant to purchase an additional 16,666,667 shares of common stock of the Company (the “Leviston Warrant”). The Leviston Warrant has an exercise price of $0.18 per share and a four-year term. The closing of the Private
Placement occurred on April 20, 2021 (the “Leviston Closing Date”).
As noted above, on April 20, 2021, the Company issued the Leviston Note to the Purchaser in an aggregate principal amount of up to $3.4 million (the “Aggregate Amount”), which shall be advanced in disbursements by the Purchaser (“Leviston Disbursements”), as set forth in the
Leviston Note. On May 14, 2021, the Leviston Note was amended to increase the Aggregate Amount to $4.2 million. On April 21, 2021,
the Purchaser advanced a Leviston Disbursement of $750 thousand, which is net of an original issue discount of 8 %. On May 14, 2021, the Purchaser advanced a second Leviston Disbursement of $750 thousand, also net of an original issue discount of 8 %. A $250 thousand Leviston Disbursement was made on September 3, 2021, which was subject to the same terms and conditions of the April and May Leviston
Disbursements.
Warrant issuances to Leviston in April and May 2021
On each of April
20, 2021 and May 14, 2021, the Company also issued 3,968,254 7,936,508
Embedded Conversion Option
The disbursements made in April and May 2021 under the
Leviston Notes included a Conversion Option that meets the definition of a derivative liability and, accordingly, is required to be bifurcated. The fair value of Conversion Option liability was determined by using a binomial pricing model.
|
Issuance date (1)
|
Issuance date (1)
|
||||||||||||
|
Binomial Assumptions
|
April 20, 2021
|
May 14, 2021
|
June 30, 2021
|
Change
|
|||||||||
|
Principal
|
$ |
$
|
|
$
|
|
||||||||
|
Conversion Price(1)
|
$ |
$
|
|
$
|
|
||||||||
|
Interest Rate (annual) (2)
|
% |
|
%
|
|
%
|
||||||||
|
Volatility (annual) (3)
|
% |
|
%
|
|
%
|
||||||||
|
Time to Maturity (Years)
|
|
|
|||||||||||
|
Fair Value of Conversion Option
|
$ |
$
|
|
$
|
|
|
|||||||
(1) Based on the terms provided in Convertible Promissory notes dated April 20 and May 14, 2021.
(2) Interest rate for U.S. Treasury Bonds, as of each presented period ending date, as published by the U.S. Federal Reserve.
(3) Based on the historical daily volatility of the Company as of each presented period ending date.
Interest rates on Leviston Notes, Conversion Option, and Loss on Issuance
The Leviston Disbursements in April and May 2021 bear interest at the rate of 5 % per annum and the default rate of 15 %.
The Leviston Note contains a conversion option (“Conversion Option”) and because it is in default, the Leviston Note it is convertible into common shares of the Company at a conversion price of 75 % of the lowest VWAP during the ten trading days ending on
the conversion date. The Conversion Option within the Leviston Note is required to be bifurcated at fair value, which was approximately $1.4
million on the April disbursement and $1.4 million on the May disbursement, and which resulted in additional debt discount being
recorded at each disbursement date. Because the combined fair value of the Leviston Warrants and the Conversion Option exceed the face value of the note, the additional amount beyond the face value is recorded as a loss on issuance of $1.4 million on the April disbursement and $1.1
million on the May disbursement.
The remaining disbursements up to the Aggregate Amount are subject to the satisfaction of certain terms and conditions set forth in the
Leviston Note. Leviston Disbursements bear an interest at a rate of five percent (5 %) per annum and have a maturity date of twelve (12 ) months from the date of issuance. The Leviston Note is convertible at the option of the holder into shares of the common stock of the Company at
a conversion price per share equal to the lesser of (i) $0.18 , and (ii) ninety percent (90 %) of the closing price for a share of common stock reported on the OTCQB on the effective date of the Registration Statement (as defined below).
The Leviston Note contains customary events of default and covenants, including limitations on incurrences of indebtedness and liens.
Pursuant to the
Leviston Purchase Agreement, the Company has agreed, within a reasonable period of time following the Leviston Closing Date, and in any event prior to any Leviston Disbursement under the Leviston Note subsequent to the initial Leviston
Disbursement, to enter into a security agreement in favor of the Leviston, securing the Company’s obligations under the Leviston Note.
The rights of Leviston to receive payments under the Leviston Note are subordinate to the rights of North Haven Expansion pursuant to a
subordination agreement, that the Company and Leviston entered into with North Haven Expansion on April 20, 2021, in connection with the Private Placement (the “Subordination Agreement”).
In connection with the Leviston Purchase Agreement, the Company entered into a registration rights agreement with the Leviston on April 20,
2021 (the “Leviston Registration Rights Agreement”) pursuant to which the Company agreed to file a registration statement (the “Registration Statement”) with the SEC no later than thirty days following the Leviston Closing Date for the
registration of 100% of the maximum number of the shares issuable upon conversion of the Leviston Note and exercise of the Leviston Warrants issued pursuant to the Leviston Purchase Agreement (the “Leviston Registrable Securities”). The Company
shall use its best efforts to keep the Registration Statement continuously effective under the Securities Act of 1933, as amended (the “Securities Act”), until all Leviston Registrable Securities have been sold, or may be sold without the
requirement to be in compliance with Rule 144(c)(1) of the Securities Act and otherwise without restriction or limitation pursuant to Rule 144 of the Securities Act, as determined by the counsel to the Company. The Company has yet to file the
Registration Statement and, under the terms of the Leviston Registration Rights Agreement, it is obligated to pay in cash a one-time aggregate amount of $250 thousand to the holders of the Leviston Notes, plus 1% of the outstanding principal for each 30-day period during which the Company continues not to have in-place an effective
Registration Statement.
On
August 31, 2021, Leviston notified the Company that it was in default of the Leviston Purchase Agreement effective June 11, 2021 for failure to timely file a Registration Statement. From the date of the default, interest on the amounts due
to Leviston is calculated at the default interest rate of 15 % in addition to the registration penalties stated above.
Convertible promissory notes payable (HealthTronics), in default – On August 6,
2020, the Company issued to HealthTronics, Inc. a convertible note payable in the amount of $1.4 million (the “HealthTronics
Note”). The HealthTronics Note matured on August 6, 2021 and was not repaid. The Company’s failure to pay the outstanding
principal balance when due constituted an event of default under the terms of the HealthTronics Note and, accordingly, it began accruing additional interest of 2.0 % in addition to the 12.0 % stated interest rate, as of the date of
the default. The convertible promissory note is expressly subordinate to the Senior Secured Notes. The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty. On June 30,
2021 and December 31, 2020 accrued interest of $148 thousand and $66 thousand, respectively, remained outstanding on the HealthTronics Note.
As the Seller Note (as defined in Note 10) was not repaid prior to January 1, 2021, HealthTronics may elect to convert the outstanding
principal amount plus any accrued but unpaid interest thereon into shares of the Company’s common stock, at a conversion price of $0.10
per share. The Company evaluated embedded conversion features within the convertible promissory note and determined that the conversion feature does not require to be bifurcated. Upon adoption of ASC 2020-6 effective January 1, 2021, the
convertible promissory note is accounted for as a single liability due to the elimination of the beneficial conversion feature accounting model.
Convertible promissory notes payable (Stolarski), in default – On August 6,
2020, the Company issued to A. Michael Stolarski, a member of the board of directors and an existing shareholder, a convertible promissory note in the principal amount of $223 thousand (the “Stolarski Note”). The Stolarski Note matured on August 6, 2021
and was not repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the Stolarski Note and, accordingly, it began accruing additional interest of 2.0 % in addition to the 12.0 %
initial rate, as of the date of the default. On June 30, 2021 and December 31, 2020 accrued interest of $24 thousand and $11 thousand, respectively, remained outstanding on the Stolarski Note. The Stolarski Note is expressly subordinate to the Senior Secured Notes.
The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty.
As the Stolarski Note was not repaid prior to January 1, 2021, the holder may elect to convert the outstanding principal amount plus any accrued but unpaid interest
thereon into shares of common stock at a conversion price of $0.10 per share. The Company evaluated embedded conversion features within
the convertible promissory note and determined that the conversion feature does not require to be bifurcated. Upon adoption of ASC 2020-6 effective January 1, 2021, the convertible promissory note is accounted for as a single liability due to the
elimination of the beneficial conversion feature accounting model.
SBA Loan #1 - The Company received a letter from the Small Business Administration
(“SBA”) dated August 27, 2021 forgiving approximately $454 thousand of the SBA Loan #1 principal and $6 thousand of interest. As of June 30, 2021, all of the $464
thousand balance outstanding is classified as current. As of December 31, 2020, $320 thousand is classified as current and $142 thousand is classified as non-current.
SBA Loan #2 – On February 20, 2021, the Company received proceeds from a second SBA
loan (“SBA Loan #2”) in the amount of $1.03 million from Northeast Bank, as lender, pursuant to the Paycheck Protection Program (“PPP”)
under the CARES Act. SBA Loan #2 is evidenced by a promissory note that matures on February 20, 2026 and bears interest of 1 % per annum. Equal monthly payments
of principal and interest commence in June 2022, after both a 24 -week “covered period” and a 10 -month “deferment period,” as defined in the promissory note and current SBA regulations. The SBA Loan #2 contains customary events of default relating to, among other
things, payment defaults and breaches of representations, warranties and covenants. The SBA Loan #2 may be prepaid by the Company at any time prior to maturity with no penalties.
All or a portion of SBA Loan #2 may be fully or partially forgiven by the SBA upon application by the Company not later than June 2022 in
accordance with SBA regulations. The ultimate forgiveness of SBA Loan #2 is also contingent upon regulatory authorities concurring with management’s good faith assessment that the current economic uncertainty made the loan request necessary to
support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company satisfied all eligibility requirements for SBA Loan #2, the Company is later determined to have violated any applicable laws or
regulations or it is otherwise determined that the Company was ineligible to receive SBA Loan #2, the Company may be required to repay SBA Loan #2 in its entirety and/or be subject to additional penalties. In the event SBA Loan #2, or any portion
thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. As of June 30, 2021, $23 thousand
is included in current liabilities and the remainder of the $1.0 million loan balance is included in non-current liabilities in the
accompanying Condensed Consolidated Balance Sheets.
| 11. |
Warrants
|
A summary of the warrant activity during the six months ended June 30, 2021 is as follows:
|
Warrant class
|
Outstanding
December 31,
2020
|
Issuances |
Exercised
|
Outstanding
June 30,
2021
|
Exercise
price/share
|
Expiration
date
|
|||||||||||||||
|
Class E Warrants
|
|
|
|
$
|
|
|
|||||||||||||||
|
Class O Warrants
|
|
|
|
|
|
||||||||||||||||
|
Class P Warrants
|
|
|
|
|
|
||||||||||||||||
|
LGH Warrant
|
|
(
|
)
|
|
|
|
|||||||||||||||
|
NH Expansion Warrant
|
|
|
|
|
|
||||||||||||||||
| Leviston Warrants - April 2021 |
|||||||||||||||||||||
| Leviston Warrants - May 2021 | |||||||||||||||||||||
|
Total
|
|
(
|
)
|
|
|||||||||||||||||
On February 3, 2021, the Company issued 10,925,000
shares of its common stock to LGH upon the cashless exercise of 11,400,000 of the LGH Warrants under the terms of the warrant
agreement. After this cashless exercise, 23,600,000 of LGH Warrants remain outstanding.
| 12. |
Warrant Liabilities
|
A summary of the warrant liability activity for the six months ended June 30, 2021 is as follows:
|
Warrants
Outstanding
|
Fair Value
per Share
|
Fair Value
|
||||||||||
|
Balance December 31, 2020
|
|
$
|
|
$
|
|
|||||||
|
Cashless exercise of LGH Warrants
|
(
|
)
|
|
(
|
)
|
|||||||
|
Warrants classified as liabilities
|
||||||||||||
|
Gain on remeasurement of warrant liability
|
(
|
)
|
||||||||||
|
Balance June 30, 2021
|
|
$
|
|
$
|
|
|||||||
NH Expansion Warrants -- Significant Black Scholes valuation model inputs related to
the NH Expansion Warrants at June 30, 2021 and December 31, 2020 are as follows:
|
Black Scholes option pricing model
|
June 30, 2021
|
December 31, 2020
|
||||||
|
Exercise Price(1)
|
$
|
|
$
|
|
||||
|
Warrant Expiration Date (1)
|
|
|
||||||
|
Interest Rate (annual) (2)
|
|
%
|
|
%
|
||||
|
Volatility (annual) (3)
|
|
%
|
|
%
|
||||
|
Time to Maturity (Years)
|
|
|
||||||
|
Calculated fair value per share
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
|
| (3) |
|
LGH Warrants – On June 5, 2020, the Company entered into a securities purchase
agreement with investor LGH Investments LLC ("LGH") for warrants entitling LGH to acquire 1,075,000 shares of common stock (the “LGH
Warrants”), among other things. The LGH Warrants contain certain ratchet provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants. As a result of certain dilutive issuances
of securities by the Company on August 6, 2020, the exercise price of the LGH Warrants decreased to $0.01 per share and the number of
shares subject to the LGH Warrants increased to 35,000,000 shares. As a result, the Company determined that these warrants meet the
definition of a derivative liability. The fair value of the LGH Warrant liabilities was determined using the Black-Scholes option pricing model which approximates the binomial pricing model. Significant inputs into the model at June 30, 2021 and
December 31, 2020 are as follows:
|
Black Scholes option pricing model
|
June 30, 2021
|
December 31, 2020
|
||||||
|
Exercise Price(1)
|
$
|
|
$
|
|
||||
|
Interest Rate (annual) (2)
|
|
%
|
|
%
|
||||
|
Volatility (annual) (3)
|
|
%
|
|
%
|
||||
|
Time to Maturity (Years)
|
|
|
||||||
|
Calculated fair value per share
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
|
| (3) |
|
Leviston Warrants – As disclosed in Note 11 -Warrants, on each of April 20, 2021 and May 14, 2021, the Company issued 3,968,254 7,936,508
|
Issuance date (1)
|
||||||||
|
Black Scholes option pricing model
|
April 20, 2021
|
June 30, 2021
|
||||||
|
Exercise Price(1)
|
$
|
|
$
|
|
||||
|
Interest Rate (annual) (2)
|
|
%
|
|
%
|
||||
|
Volatility (annual) (3)
|
|
%
|
|
%
|
||||
|
Time to Maturity (Years)
|
|
|
||||||
|
Calculated fair value per share
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
Interest rate for U.S. Treasury Bonds, as of each presented period ending date, as published by the U.S. Federal Reserve.
|
| (3) |
Based on the historical daily volatility of the Company as of each presented period ending date.
|
|
Issuance date (1)
|
||||||||
|
Black Scholes option pricing model
|
May 14, 2021
|
June 30, 2021
|
||||||
|
Exercise Price(1)
|
$
|
|
$
|
|
||||
|
Interest Rate (annual) (2)
|
|
%
|
|
%
|
||||
|
Volatility (annual) (3)
|
|
%
|
|
%
|
||||
|
Time to Maturity (Years)
|
|
|
||||||
|
Calculated fair value per share
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
Interest rate for U.S. Treasury Bonds, as of each presented period ending date, as published by the U.S. Federal Reserve.
|
| (3) |
Based on the historical daily volatility of the Company as of each presented period ending date.
|
| 13. |
Leases
|
The following is a summary of the Company’s right of use assets and lease liabilities at June 30, 2021 and December 31, 2020 (in thousands):
|
June 30, 2021
|
December 31, 2020
|
|||||||||||||||||||||||
| Operating | Financing | Operating | Financing | |||||||||||||||||||||
|
Leases
|
Leases
|
Total
|
Leases
|
Leases
|
Total
|
|||||||||||||||||||
|
Right of use assets
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Less: Accumulated amortization
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||
|
Right of use assets, net
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Lease liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Less: current portion
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||
|
Lease Liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
Total lease costs for the six months ended June 30, 2021 and 2020 are as follows (in thousands):
|
2021
|
2020
|
|||||||
|
Finance lease costs:
|
||||||||
|
Amortization of right-of-use assets
|
$
|
|
$
|
|
||||
|
Interest on lease liabilities
|
|
|
||||||
|
Operating lease costs
|
|
|
||||||
|
Total lease costs
|
$
|
|
$
|
|
||||
The following summarizes cash paid for amounts included in the measurement of lease liabilities as well as the related right-of-use assets
obtained for the six months ended June 30, 2021 and 2020 (in thousands):
|
2021
|
2020
|
|||||||
|
Cash paid for amounts included in measurement of lease liabilities:
|
||||||||
|
Operating cash flows from finance leases
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Operating cash flows from operating leases
|
$
|
(
|
)
|
$
|
(
|
)
|
||
Operating Leases - As of June 30, 2021, the maturities of the Company’s operating lease liability, which have
initial or remaining lease terms in excess of one year, consist of the following (in thousands):
|
Amount
|
||||
|
Year ending December 31,
|
||||
|
2021 (remainder of year)
|
$
|
|
||
|
2022
|
|
|||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
Total lease payments
|
|
|||
|
Less: Present value adjustment
|
(
|
)
|
||
|
Lease liability
|
$
|
|
||
As of June 30, 2021, the Company’s operating leases had a weighted average remaining lease term of 1.8 years and a weighted average discount rate of 10.4 %.
Rent expense for the three months ended June 30, 2021 and 2020 was $86 thousand and $52 thousand, respectively. Rent expense for
the six months ended June 30, 2021 and 2020 was $169 thousand and $118 thousand, respectively.
Financing Lease - As of June 30, 2021, the maturities of the Company’s financing lease liability, which have initial or
remaining lease terms in excess of one year, consist of the following (in thousands):
|
Amount
|
||||
|
Year ending December 31,
|
||||
|
2021 (remainder of year)
|
$
|
|
||
|
2022
|
|
|||
|
2023
|
|
|||
|
Total lease payments
|
|
|||
|
Less: Present value adjustment
|
(
|
)
|
||
|
Lease liability
|
$
|
|
||
As of June 30, 2021, the Company’s financing leases had a weighted average remaining lease term of 1.5 years based on annualized base payments expiring through 2023 and a weighted average discount rate of 13.2 %.
As of June 30, 2021, the Company did not have additional operating or financing leases that have yet commenced.
| 14. |
Contingencies
|
Supplier disputes - In May 2021, the Company
received notification alleging that it is not in compliance with the license agreement with Celularity entered into in connection with the acquisition of the UltraMIST assets. The Company has responded and asserted that the Company is not in
breach and that the supplier has breached various agreements. It is too early to determine the outcome of this matter. Any potential impact to the Company cannot be fully determined at this time and
there is no guarantee that the dispute will be resolved in a manner beneficial to the Company or at all.
As part of the Asset Purchase Agreement on August 6, 2020, the Company assumed obligations for a purchase order for UltraMIST
devices from Celularity’s vendor Minnetronix. This purchase order had a remaining purchase commitment of approximately $1.1 million.
The purchase order also calls for production delay fees of 1.25 % of the committed inventory if the Company delays production. There
is also a cancelation clause of 20 % of the remaining balance in the event that the Company delays production for more than six months . On September 23, 2021, Minnetronix notified the Company that it was cancelling the purchase order for the UltraMIST devices as a result
of the Company delaying production more than six months. This notification includes fees and charges for the cancellation of the purchase order of an additional $320 thousand. The Company expects to be able to resume production upon paying this obligation. While the Company is disputing certain aspects of this termination notice and
is continuing to engage with Minnetronix regarding resolution of this matter, including reinstatement of the purchase order, there is no guarantee that the dispute will be resolved in a manner beneficial to the Company or at all.
| 15. |
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”). 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 along with limited but exclusive distribution rights to provide dermaPACE Systems to
certain governmental healthcare facilities and 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.
During the three months ended June 30, 2021 and 2020, the Company recorded $8 thousand and $13 thousand, respectively, in revenue from an
entity owned by this related party. During the six months ended June 30, 2021 and 2020, respectively, the Company recorded $16 thousand
and $26 thousand in revenue from this entity. In addition, contract liabilities includes a balance of $54 thousand at June 30, 2021 and $69
thousand at December 31, 2020 from this related party.
In March 2021, PSWC paid the Company $125
thousand as a deposit for future purchase of new medical equipment. Please see Note 17 – Subsequent Events in the accompanying Condensed Consolidated Financial Statements for discussion of advances from member of our board of directors in
October 2021.
| 16. |
Income Taxes
|
The provision for income taxes of $6 thousand and $22 thousand, for the three months and six months ended June
30, 2021 and the deferred tax liability are related to the goodwill of $7.3 million recorded as part of the acquisition of the
Celularity assets and is known as a “naked credit”. The goodwill was assigned an indefinite life for book purposes but is deductible for income tax purposes over a fifteen-year life. As a result, the deferred tax liability has an indefinite life and cannot be used as a source of taxable income to support the realization of other deferred tax assets.
| 17. |
Subsequent Events
|
September 2021 Securities Purchase Agreement and Warrants (In default) - On
September 3, 2021, the Company entered into Securities Purchase Agreements (the “September 2021 Purchase Agreements”), with certain accredited investors (collectively, the “September 2021 Purchasers”) for the sale by the Company in a private
placement (the “September 2021 Private Placement”) of (i) the Company’s future advance convertible promissory notes in an aggregate principal amount of up to $543 thousand (the “September 2021 Notes”) and (ii) warrants to purchase an additional 2,777,779
shares of common stock of the Company (the “September 2021 Warrants”). The September 2021 Warrants have an exercise price of $0.18 per
share and a five-year term. The closing of the September 2021 Private Placement occurred on September 7, 2021 (the “September 2021
Purchasers Closing Date”).
Under the terms of the September 2021 Purchase Agreements, the aggregate principal amount of the September 2021 Notes of up to $543 thousand (the “Aggregate Amount”), may be advanced in disbursements by the September 2021 Purchasers (“September 2021 Purchasers Disbursements”),
as set forth in the September 2021 Notes. The September 2021 Purchasers Disbursements bear an interest at a rate of five percent (5 %) per annum and have a maturity date of twelve (12 )
months from the date of issuance. Each September 2021 Note is convertible at the option of the holder into shares of common stock of the Company at a conversion price per share equal to (A) until the date of effectiveness of the Registration
Statement, $0.18 and (B) after the date of effectiveness of the Registration Statement, the lesser of (i) $0.18 , (ii) ninety percent (90 %) of the closing price for a share of common stock reported on the OTCQB on the effective date of the Registration Statement or (iii) 75 % of the lowest volume weighted average price, as defined,, which shall be no lower than $0.01 . The September 2021 Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens.
Pursuant to each September 2021 Purchase Agreement, the Company entered into a security agreement in favor of the applicable September 2021
Purchaser, securing the Company’s obligations under the applicable September 2021 Note. The rights of each September 2021 Purchaser to receive payments under their respective note is subordinate to the rights of North Haven Expansion pursuant to
a Subordination Agreement, that the Company and each September 2021 Purchaser entered into with North Haven Expansion in connection with the September 2021 Private Placement.
In connection with each September 2021 Purchase Agreement, the Company entered into a registration rights agreement with the September 2021
Purchasers on September 3, 2021 (the “September 2021 Purchasers Registration Rights Agreement”) pursuant to which the Company has agreed to file a Registration Statement no later than ninety (90) days following the September 2021 Purchasers
Closing Date for the registration of 100% of the maximum number of the shares issuable upon conversion of the September 2021 Notes and exercise of the September 2021 Warrants issued pursuant to such September 2021 Purchase Agreement (the
“September 2021 Purchasers Registrable Securities”). The Company shall use its best efforts to keep the Registration Statement continuously effective under the Securities Act of 1933, as amended, until all September 2021 Purchasers Registrable
Securities have been sold, or may be sold without the requirement to be in compliance with Rule 144(c)(1) of the Securities Act and otherwise without restriction or limitation pursuant to Rule 144 of the Securities Act, as determined by the
counsel to the Company.
The September 2021 Notes were in default as of October 25, 2021 and, accordingly, on that date, interest began accruing at the default rate of 15 % in addition to registration penalties per the September 2021 Purchasers Registration Rights Agreement.
The Company has yet to file the Registration Statement, and under the terms of the September 2021 Registration Rights Agreement, it is
obligated to pay in cash a one-time aggregate amount of $250 thousand to the holders of the September 2021 Notes, plus 1% of the outstanding principal for each 30-day period during which the Company continues not to have in-place an effective
Registration Statement. As a result of this breach of the September 2021 Registration Rights Agreement, interest on the September 2021 Notes accrues at the default interest rate of 15 %.
September 2021 and December 2021 Advances on Future Receipts Financing – On
September 27, 2021, the Company received $703 thousand in cash proceeds related to its entry into a non-recourse agreement for the sale
of $1.0 million of future receipts to GCF Resources LLC (“GCF”). In conjunction with the 24 -week agreement, the Company is obligated to remit to GCF a minimum of $59
thousand of receipts each week, with the sum of the first four payments occurring at closing, which was September 27, 2021. After
taking into account the payments made at closing, the Company will record an initial liability of $763 thousand and a debt discount of
approximately $60 thousand, which represents the original issue discount and the fees paid in conjunction with the financing. The debt
discount will be amortized to interest expense over the life of the agreement. The Company began making the required minimum weekly payments October 25, 2021. At closing, the Company also issued warrants to purchase 5,555,556 shares of the Company’s common stock to affiliates of GCF. The warrants have an exercise price of $0.18 per share and expire four years after issuance.
On December 22, 2021, the Company paid off the remaining balance of $650
thousand from the September 27, 2021 advance and received $758 thousand in cash proceeds related to its entry into a non-recourse
agreement for the sale of $1.5 million of future receipts to GCF. In conjunction with the 24 -week agreement, the Company is obligated to remit to GCF a minimum of $59
thousand of receipts each week for the first six weeks and receipts of $98 thousand for the remaining 18 weeks. After considering
the payments made at closing, the Company will record an initial liability of $1.5 million and a debt discount of approximately $90 thousand, which represents the original issue discount and the fees paid in conjunction with the financing. The debt discount will be amortized
to interest expense over the life of the agreement. The Company will begin making the required minimum weekly payments January 3, 2022 and is obligated to continue through June 13, 2022. At closing, the Company also issued warrants to
purchase 8,333,334 shares of the Company’s common stock to affiliates of GCF. The warrants have an exercise price of $0.18 per share and expire four years after issuance.
October 2021 Advances from Directors - On October 27, 2021 the Company received $50 thousand in advances from related parties; $25
thousand from NightWatch Capital Advisors, LLC, a company controlled by John Nemelka, a shareholder and member of the Company’s board of directors, (the “Nemelka Advance”) and $25 thousand from A. Michael Stolarski, also a shareholder and member of the Company’s board of directors (the “Stolarski Advance”).
In exchange for the Nemelka Advance, the Company issued to NightWatch Capital Advisors, LLC a promissory note in the principal amount of $25 thousand (the “Nemelka Note”). The Nemelka Note matures on June 30, 2022 and accrues interest at a rate equal to 15.0 % per annum. In
exchange for the Stolarski Advance, as well as the $125 thousand deposit received in March 2021 by the Company (see Note 16), the
Company issued to Mr. Stolarski a promissory note in the principal amount of $150 thousand (“Stolarski Note #2”). Stolarski Note #2
matures on June 30, 2022 and accrues interest at a rate equal to 15.0 % per annum.
| Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated
financial statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” as of and for the year ended December 31, 2020 included in our Annual Report on Form 10-K, filed with the SEC on October 21, 2021 (the “2020 Annual Report”).
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 (“DFU”), which was subject to two double-blinded, randomized Phase III
clinical studies. On December 28, 2017, the U.S. Food and Drug Administration (“FDA”) granted the Company’s request to classify the dermaPACE® System as a Class II device via the de novo process. As a
result of this decision, the Company was able to immediately market the product for the treatment of DFU as described in the de novo request, subject to the general control provisions of the Food, Drug and
Cosmetic Act and the special controls identified in this order.
On August 6, 2020, we entered into an asset purchase agreement (the “Asset Purchase Agreement” or “Acquisition”) with Celularity Inc. (“Celularity”) pursuant to which we acquired
Celularity’s UltraMIST assets (“UltraMIST” or the “Assets”). The UltraMIST® System provides through a fluid mist a low-frequency, non-contact, and pain free ultrasound energy deep inside the wound bed that promotes healing from within. The
ultrasound acoustic waves promote healing by reducing inflammation and bacteria in the wound bed, while also increasing the growth of new blood vessels to the area. The UltraMIST® System treatment must be administered by a healthcare professional.
This proprietary technology has been cleared by the FDA for the promotion of wound healing through wound cleansing and maintenance debridement combined with ultrasound energy deposited inside the wound that stimulated tissue regeneration.
In connection with the Asset Purchase Agreement, on August 6, 2020, we entered into a license and marketing agreement with Celularity pursuant to which Celularity granted to the Company
a license to the Celularity wound care biologic products, Biovance® and Interfyl® (the “License Agreement”). The License Agreement provides the Company with an exclusive license to use, market, distribute and sell Biovance® in the “Field” and
“Territory” (each as defined in the License Agreement), and a non-exclusive license to use, market, distribute and sell Interfyl® in the Field and in the Territory. The License Agreement has an initial five-year term, after which it automatically
renews for additional one-year periods, unless either party gives written notice at least 180 days prior to the expiration of the current term. In May 2021, the Company received notification alleging that it is not in compliance the License
Agreement with Celularity. See further discussion in Note 15 - Contingencies in the accompanying Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S.
GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those related to the recording of the allowances for doubtful accounts, net realizable value of inventory, useful lives of
long-lived assets, fair value of goodwill and other intangible assets, the determination of the valuation allowance for deferred taxes, the estimated fair value of the warrants, 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.
Our significant accounting policies are more fully described in Note 3 to our Consolidated Financial Statements filed with our 2020 Annual Report. For a description
of recent accounting policies and the impact on our financial statements, refer to Note 3 in the accompanying Condensed Consolidated Financial Statements.
Financial Overview
Since inception in 2005, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. We have devoted and expect to continue
to devote substantial resources for the commercialization of the dermaPACE® System and intend to continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. We also expect
to require additional working capital as sales of our UltraMIST product continue to grow.
We incurred net losses of $30.9 million and $10.4 million for the years ended December 31, 2020 and 2019, respectively, and additional losses of approximately $13.6 million in the first
six months of 2021. These factors and the events of default on the promissory notes discussed above 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. See Note 17 – Subsequent Events to the accompanying Condensed Consolidated Financial Statements for a discussion of the various events of default.
Our operating losses create substantial doubt about our ability to continue as a going concern. Although no assurances can be given, we believe that potential additional issuances of
equity, debt or other potential financing may provide the necessary funding for us to continue as a going concern for the 12 months. See “Liquidity and Capital Resources” for further information regarding our financial condition.
The continuation of our business is dependent upon raising additional capital to fund operations. Management’s plans are to obtain additional capital in 2022 through investments by
strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, the issuance of common or preferred stock, securities convertible into
common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. In addition, there can be no assurances that our plans to obtain additional
capital will be successful on the terms or timeline we expect, or at all. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should
provide the necessary funding for us for the next 12 months. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable
terms.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the
realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The Condensed Consolidated Financial Statements do not include any adjustment that might result from the outcome of this uncertainty. Our Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of
assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.
Since our inception, we have incurred losses from operations each year. As of December 31, 2020, we had an accumulated deficit of $156.7 million. 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 continue to incur expenses related to commercialization of our dermaPACE® system for the treatment
of DFU in the United States. If we are able to successfully commercialize, market and distribute the dermaPACE® system, then we believe we may be able to partially or completely offset these losses in the future with revenues from sales of our
UltraMist systems and applicators. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing, as discussed above, may provide the necessary funding for us to continue as a going
concern for the next 12 months. 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;
• supplier and customer disputes;
• 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” in
our 2020 Annual Report.
The worldwide spread of the COVID-19 virus has resulted and is expected to continue to result in a global slowdown of economic activity which is likely to continue to decrease demand for a broad variety of products,
including from our customers, while also disrupting supply channels and marketing activities for an unknown period of time. Also, the pandemic may cause continued or additional actions by hospitals and clinics such as limiting elective procedures
and treatments and limiting clinical trial activities and data monitoring. We expect all of these factors to continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to
predict.
Results of Operations
Revenues and Gross Margin
Revenues for the three months ended June 30, 2021 were $2.9 million compared to $83 thousand for the same period in 2020, an increase of $2.8 million. For the first two quarters of
2021, revenues were $5.0 million compared with $232 thousand for the comparable period of 2020. The increases were primarily driven by 2021 sales of UltraMIST devices and single-use accessories. The Company’s UltraMIST business began with the
August 6, 2020 Acquisition. Please see Note 14 - Contingencies in the accompanying Condensed Consolidated Financial Statements for a description of a supplier dispute relating to UltraMIST.
Gross margin as a percentage of revenue increased to 64% from 5% during the second quarter of 2021 as compared with the second quarter of the prior year. For the first six months of
2021 gross margin increased to 58% compared with 10% for the first six months of 2020. The increase in gross margin percentages for the both the quarter and year-to-date periods were driven by sales of UltraMIST products and accessories, which have
higher gross margin percentages than do DuraPACE products and accessories.
Research and Development Expenses
Research and development expenses increased 3% to $272 thousand from $265 thousand during the second quarter of 2021 compared with the second quarter of 2020. For the first six months
of 2021, research and development expenses increased 14% to $626 thousand from $551 thousand for the same period of 2020. Increases for both the quarter and six-month periods were driven by higher employee compensation and benefits costs incurred
by the larger, post-Acquisition organization, though these costs were partially offset by lower amounts paid to external parties for clinical studies and other research and development.
Selling and Marketing Expenses
Selling and marketing expenses increased $2.1 million or 482% and $3.3 million or 313% for the three and six-month periods ended June 30,
2021, respectively, versus the same periods of 2020. The expense increases were primarily driven by higher employee compensation, commissions, benefits, travel and marketing costs incurred by the larger, post-Acquisition organization as well as
higher levels of revenues.
General and Administrative Expenses
General and administrative expenses increased $536 thousand or 21% and $1.9 million or 43% for the three and six-month periods ended June
30, 2021, respectively, compared with the same periods of 2020. The primary drivers of these increases for the quarter and year-to-date periods, respectively, consist of approximately, $528 thousand and $1.3 million of expenses related to
Registration Statement penalty accruals as well as approximately $176 thousand and $352 thousand of the increases for amortization of intangible assets related to the Acquisition on August 6, 2020. Additionally, both the quarter and year-to-date
periods reflect increases in bad debt, insurance and public company expenses as well as offsetting decreases in legal and other professional fees.
Liquidity and Capital Resources
We expect to devote substantial resources for the commercialization of the dermaPACE® System and intend continue to research and develop the next generation of our technology as well as
the non-medical uses of the PACE technology, both of which will require additional capital resources. We incurred a net loss of $30.9 million and $10.4 million for the years ended December 31, 2020 and 2019, respectively, and incurred additional
net losses in the six months of 2021 of approximately $13.6 million. These factors and the events of default on the notes payable create substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve
months from the financial issuance date. Historically, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. The continuation of our business is dependent upon raising additional
capital to fund operations; we may not be able to do so, and/or the terms of any financings may not be advantageous to us.
During the six months ended June 30, 2021, cash used by operating activities totaled approximately $5.2 million, which was driven largely by the net loss for the same period and was
partially offset by increases in accounts payable and accrued expenses as well as decreases in accounts receivable and inventory. Cash used by investing activities during the first six months of 2021 consisted of purchases of property and equipment
of $277 thousand. Cash provided by financing activities for the period consisted primarily of $1.3 million of proceeds from convertible note issuances, $1.0 million in proceeds from a factoring accounts receivable, $1.0 million of proceeds from SBA
Loan #2 as well as $125 thousand in proceeds from deposits from related parties and were offset by $94 thousand of principal payments on financing leases.
Cash used in operations averaged $1.1 million per month for the first quarter of 2021 and approximately $700 thousand for the second quarter. Management anticipates cash usage for
operations to be approximately $250 thousand to $500 thousand per month for the second half of 2021 as resources are devoted to the commercialization of the dermaPACE and UltraMIST
products including hiring of new employees, expansion of our international business and continued research and development of the next generation of our technology as well as non-medical uses of our technology. Management’s plans are to obtain
additional capital in 2022 through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, issuance of common
or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. Although no assurances can
be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for us for the next 12 months. If these efforts are unsuccessful, we may
be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms.
Segment and Geographic Information
We have determined that we have one operating segment. Our revenues are generated from sales in United States, Europe, Canada, Middle East, Central America, South America, Asia and
Asia/Pacific. All significant expenses are generated in the United States and all significant assets are located in the United States.
Contractual Obligations
Our major outstanding contractual obligations relate to our financing leases for rental equipment, operating leases for our facilities and office equipment, purchase and supplier
obligations for product component materials and equipment, and our outstanding debt. Please see our 2020 Annual Report for additional discussions of these obligations.
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, which has been increasing, affects
expenses such as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market. To the extent inflation
results in rising interest rates and has other adverse effects on the market, it may adversely affect our consolidated financial condition and results of operations.
| Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not required under Regulation S-K for “smaller reporting companies.”
| Item 4. |
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that
are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of our management, including our 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 October 11, 2021. 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 June 30, 2021. 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 October 11, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control — Integrated Framework (2013).
We previously reported three material weaknesses in our internal control over financial reporting process resulting from a lack of internal expertise and resources to analyze and
properly apply U.S. GAAP to complex and non-routine transactions such as complex financial instruments and derivatives and complex sales distribution agreements, a lack of internal resources to analyze and properly apply U.S. GAAP to accounting
for equity components of service agreements with select vendors and cybersecurity breaches from email spoofing in 2019. The Company remedied the cybersecurity breaches and email spoofing in 2020.
As of June 30, 2021 the Company has still identified the following material weaknesses:
| • |
The Company lacks expertise and resources to analyze and properly apply U.S. GAAP to complex and non-routine transactions such as complex financial instruments and derivatives and complex sales distribution agreements.
|
| • |
The Company lacks internal resources to analyze and properly apply U.S. GAAP to accounting for financial instruments included in service agreements with select vendors.
|
| • |
The Company has failed to design and implement controls around all of its accounting and IT processes and procedures and, as such, it believes that all of its accounting and IT processes and procedures need to re-designed and tested
for operating effectiveness.
|
As a result, management concluded that its internal control over reporting was not effective as of June 30, 2021.
Remediation Plan
During 2021, we engaged external consultants with appropriate experience applying GAAP technical accounting guidance, and we have hired additional accounting personnel both internal
and external. We engaged external consultants to review revenue recognition for new products, lease agreements, internal controls and related procedures and review of documentation of internal controls in addition to new equity and debt financing
arrangements. Accounting memos were produced for all technical issues and reviewed with management. The Company will continue to implement and review new controls to address these issues.
We have also implemented cybersecurity training for all employees and redesign of procedures that cyber security breaches may impact and worked with our third-party IT vendor to
develop a training plan for all existing and new employees related to cyber and implemented related controls around information technology infrastructure. In addition, an additional employee was hired to assist with the management of IT controls
and enhance internal IT resources. Going forward, this employee will monitor our third-party IT vendor’s testing and monitoring efforts and where necessary implement new controls as the Company grows. These internal controls have been documented
and procedures implemented.
There is no assurance that the measures described above will be sufficient to remediate the previously identified material weaknesses.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2021 that materially affect, or are reasonably likely to
materially affect, our internal control over financial reporting, except as disclosed in “Remediation Plan” above.
PART II — OTHER INFORMATION
| Item 1. |
LEGAL PROCEEDINGS.
|
From time to time, the Company is subject to various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts and intellectual property matters
resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company believes that all pending claims, if adversely decided, would not have a
material adverse effect on our business, financial position or results of operations.
| Item 1A. |
RISK FACTORS.
|
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required under this item. A discussion of the risks and
uncertainties associated with us and our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business” in our 2020 Annual Report.
| Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
Not applicable.
| Item 3. |
DEFAULTS UPON SENIOR SECURITIES.
|
Not applicable.
| Item 4. |
MINE SAFETY DISCLOSURES.
|
Not applicable.
| Item 5. |
OTHER INFORMATION.
|
Not applicable.
| Item 6. |
EXHIBITS
|
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Exhibit No.
|
Description
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer.
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
|
|
|
Section 1350 Certification of the Principal Executive Officer.
|
|
|
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.
|
*
Filed herewith.
** Furnished herewith.
† XBRL-related documents are not deemed filed for purposes of section 11 of the Securities Act of 1933, as amended, section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject the
liabilities of these sections, and are not part of any registration statement to which they relate.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
SANUWAVE HEALTH, INC.
|
|
|
Dated: January 14, 2022
|
By: /s/ Kevin A. Richardson, II
|
|
Name: Kevin A. Richardson, II
|
|
|
Title: Chief Executive Officer
|
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:
|
Signatures
|
Capacity
|
Date
|
||
|
By: /s/ Kevin A. Richardson, II
Name: Kevin A. Richardson, II
|
Chief Executive Officer and Chairman of the Board of Directors
(principal executive officer)
|
January 14, 2022
|
||
|
By: /s/ Lisa E. Sundstrom
Name: Lisa E. Sundstrom
|
Chief Financial Officer (principal financial and accounting officer)
|
January 14, 2022
|
32
EXHIBIT 31.1
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Under the Securities Exchange Act of 1934
I, Kevin A Richardson II, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of SANUWAVE Health, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
|
| d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
|
| a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
|
| b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: January 14, 2022
/s/ Kevin A. Richardson II
Kevin A. Richardson II
Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Under the Securities Exchange Act of 1934
I, Lisa E. Sundstrom, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of SANUWAVE Health, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
|
| d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
|
| a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
|
| b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: January 14, 2022
/s/Lisa E. Sundstrom
Lisa E. Sundstrom
Chief Financial Officer
(principal financial officer and principal accounting officer)
EXHIBIT 32.1
CERTIFICATION
In connection with the periodic report of SANUWAVE Health, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2021 as filed with the Securities and Exchange Commission (the
“Report”), I, Kevin A. Richardson II, Chief Executive Officer (and principal executive officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:
| 1. |
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
|
| 2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
|
Date: January 14, 2022
/s/ Kevin A. Richardson II
Kevin A. Richardson II
Chief Executive Officer
(principal executive officer)
EXHIBIT 32.2
CERTIFICATION
In connection with the periodic report of SANUWAVE Health, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2021 as filed with the Securities and Exchange Commission (the
“Report”), I, Lisa S. Sundstrom, Controller and Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:
| 1. |
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
|
| 2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
|
Date: January 14, 2022
/s/ Lisa E. Sundstrom
Lisa E. Sundstrom
Chief Financial Officer
(principal financial officer and principal accounting officer)