SANUWAVE Health, Inc. 10-Q/A

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, 2019 included in our Annual Report on Form 10-K, filed with the SEC on March 30, 2020 (the “2019 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, which was subject to two double-blinded, randomized Phase III clinical studies. On December 28, 2017, the U.S. FDA granted the Company’s request to classify the dermaPACE System as a Class II device via the de novo process. As a result of this decision, the Company was able to immediately market the product for the treatment of Diabetic Foot Ulcers (DFU) as described in the De Novo request, subject to the general control provisions of the FD&C Act and the special controls identified in this order. On August 6, 2020 the Company entered into an Asset Purchase Agreement with Celularity pursuant to which the Company acquired Celularity’s UltraMIST assets. The UltraMIST® System provides through a fluid mist a low-frequency, non-contact, and pain free ultrasound energy deep inside the wound bed that promotes healing from within. The ultrasound acoustic waves promote healing by reducing inflammation and bacteria in the wound bed, while also increasing the growth of new blood vessels to the area. The UltraMIST® System treatment must be administered by a healthcare professional. This proprietary technology has been cleared by the U.S. Food and Drug Administration (FDA) for the promotion of wound healing through wound cleansing and maintenance debridement combined with ultrasound energy deposited inside the wound that stimulated tissue regeneration. In connection with the Asset Purchase Agreement, on August 6, 2020, the Company 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 provides the Company with an exclusive license to use, market, distribute and sell Biovance® in the Field and Territory (each as defined in the License Agreement), and a non-exclusive license to use, market, distribute and sell Interfyl® in the Field in the Territory. The License Agreement has an initial five year term, after which it automatically renews for additional one year periods, unless either party gives written notice at least 180 days prior to the expiration of the current term. Our portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE ® ) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. The Company is marketing its dermaPACE System for treatment usage in the United States and will continue to generate revenue from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia, and Asia/Pacific. The Company generates revenue streams from dermaPACE treatments, product sales, licensing transactions and other activities. 31 Table of Contents Our lead product candidate for the global wound care market, dermaPACE, has received FDA clearance for commercial use to treat diabetic foot ulcers in the United States and the CE Mark allowing for commercial use on acute and chronic defects of the skin and subcutaneous soft tissue. We believe we have demonstrated that our patented technology is safe and effective in stimulating healing in chronic conditions of the foot and the elbow through our United States FDA Class III Premarket Approvals (“PMAs”) approved OssaTron® device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our OssaTron, Evotron®, and orthoPACE® devices in Europe and Asia. We are focused on developing our Pulsed Acoustic Cellular Expression (PACE) technology to activate healing in: ● wound conditions, including diabetic foot ulcers, venous and arterial ulcers, pressure sores, burns and other skin eruption conditions; ● orthopedic applications, such as eliminating chronic pain in joints from trauma, arthritis or tendons/ligaments inflammation, speeding the healing of fractures (including nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones in the extremities and spine, and other potential sports injury applications; ● plastic/cosmetic applications such as cellulite smoothing, graft and transplant acceptance, skin tightening, scarring and other potential aesthetic uses; and ● cardiac applications for removing plaque due to atherosclerosis improving heart muscle performance. In addition to healthcare uses, our high-energy, acoustic pressure shock waves, due to their powerful pressure gradients and localized cavitational effects, may have applications in secondary and tertiary oil exploitation, for cleaning industrial waters and food liquids and finally for maintenance of industrial installations by disrupting biofilms formation. Our business approach will be through licensing and/or partnership opportunities. In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. While the COVID-19 pandemic has not had a material adverse financial impact on the Company’s operations to date, the pandemic has resulted in the decreased demand for a broad variety of products, including from our customers, and will also disrupt supply channels and marketing activities for an unknown period of time until the disease is contained. Future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. It is difficult at this time to predict the impact that COVID-19 will have on the Company’s business, financial position and operating results in future periods due to numerous uncertainties. The Company is closely monitoring the impact of the pandemic on all aspects of its business and operations. We have received funds for disaster relief loans through the SBA to help minimize the impact on our business. We were formed as a Nevada corporation in 2004. We maintain a public internet site at www.sanuwave.com. The information on our websites is not part of this Form 10-Q. Recent Clinical Highlights and Updates A dosage study has been developed for launch in Poland to optimize dermaPACE system treatment dosage for producing a more rapid reduction in size of a diabetic foot ulcer (“DFU”). The focus will be on increasing the number of shock waves delivered per treatment, as a function of DFUs area. To determine the dosage necessary, three new distinctive regimens will be assessed during the study. This study started in April 2019 and is expected to be finalized in the fourth quarter of 2020, depending on availability of patients due to the COVID-19 pandemic. A post-market pilot study to evaluate the effects of high energy acoustic shock wave therapy on local skin perfusion and healing of DFUs will be conducted at two sites: one in New Jersey and one in California. The intent of this trial is to quantify the level of increased perfusion and oxygenation during and after treatment with the dermaPACE system. This study started in April 2019 and is expected to be finalized in the fourth quarter of 2020, depending on availability of patients due to the COVID-19 pandemic. 32 Table of Contents Financial Overview (Restated) Since our inception, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. We expect to devote substantial resources for the commercialization of the dermaPACE System and UltraMIST product line and will continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. We incurred a net loss of $12,638,637 and $2,748,018 for the three months ended September 30, 2020 and September 30, 2019, respectively, and $19,272,805 and $7,679,766 for the nine months ended September 30, 2020 and the September 30, 2019, respectively. These factors create substantial doubt about our ability to continue as a going concern for a period of at least twelve months from the financial statement issuance date. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing will provide the necessary funding for us to continue as a going concern for the next year. See “Liquidity and Capital Resources” for further information regarding our financial condition. We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to be generated from, any of our products, due to the numerous risks and uncertainties associated with developing and marketing products, including the uncertainty of: ● the scope, rate of progress and cost of our clinical trials; ● future clinical trial results; ● the cost and timing of regulatory approvals; ● the establishment of successful marketing, sales and distribution channels and partnerships, including our efforts to expand our marketing, sales and distribution reach through joint ventures and other contractual arrangements; ● the cost and timing associated with establishing reimbursement for our products; ● the effects of competing technologies and market developments; and ● the industry demand and patient wellness behavior. Any failure to complete the development of our product candidates in a timely manner, or any failure to successfully market and commercialize our product candidates, would have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with us and our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business” in our 2019 Annual Report. On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the “CARES Act”) to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. On May 29, 2020, the Company received the proceeds from a loan in the amount of approximately $460,000 (the “PPP Loan”) from Truist Bank, as lender, pursuant to the Paycheck Protection Program (“PPP”) of under the CARES Act. The PPP Loan matures on May 28, 2022 and bears interest at a rate of 1% per annum. Commencing December 12, 2020, the Company is required to pay the lender equal monthly payments of principal and interest. The PPP Loan is evidenced by a promissory note dated May 28, 2020, which contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties and covenants. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP Loan, the Company may be eligible for full or partial loan forgiveness in the fourth quarter of 2020, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the PPP Loan. 33 Table of Contents 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 United States generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to the recording of the allowances for doubtful accounts, estimated reserves for inventory, estimated useful life of property and equipment, the determination of the valuation allowance for deferred taxes, the estimated fair value of the warrant liability, and the estimated fair value of stock-based compensation. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The results of our operations for any historical period are not necessarily indicative of the results of our operations for any future period. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements filed with our 2019 Annual Report. For a description of recent accounting policies and the impact on our financial statements, refer to Note 3 in the condensed consolidated financial statements in this 10-Q filing. Restatement of Previously Issued Financial Statements This quarterly report contains the restated condensed consolidated balance sheet as of September 30, 2020 and the effects of the restated condensed consolidated statements of operations for the three and nine months ended September 30, 2020. Notes to the accompanying Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further detail. On February 12, 2021, the Company determined an error in the accounting related to underreporting of the amount of derivative warrant liability. The Company changed its accounting for certain of the Company’s warrants previously issued in connection with convertible note payable as well as reclassification of warrants issued in the Aug 6, 2020 financing due to a lack of authorized shares. Such warrants, should have been reflected as liabilities on the consolidated balance sheets included in the Original 10-Q, rather than as a component of equity. Specifically, the change in treatment of the warrants resulted in a change to the equity, and liability portions of the consolidated balance sheets as of September 30, 2020 and resulted in a loss on the fair value of the derivative liabilities which impacted our results of operations and earnings (loss) per share as reported in our Original 10-Q. Results of Operations for the Three Months ended September 30, 2020 and 2019 (Restated) Revenues and Cost of Revenues Revenues for the three months ended September 30, 2020 were $1,966,896, compared to $197,640 for the same period in 2019, an increase of $1,769,256, or 895%. Revenue resulted primarily from sales of Ultramist, Biovance and Interfyl, recognition of Brazil distribution fee and dermaPACE treatments. The increase in revenue for 2020 is primarily due to acquisition of Celularity assets and licensing fees and international distribution fees, as compared to the prior year. Cost of revenues for the three months ended September 30, 2020 were $548,406 compared to $122,923 for the same period in 2019. Gross profit as a percentage of revenues was 72% for the three months ended September 30, 2020, compared to 38% for the same period in 2019. The increase in gross profit as a percentage of revenues in 2020 was primarily due to sales of Ultramist, Biovance and Interfyl which have a 60% gross profit and increase in high margin dermaPACE treatment fees. 34 Table of Contents Research and Development Expenses Research and development expenses for the three months ended September 30, 2020 were $432,155, compared to $299,903 for the same period in 2019, an increase of $132,252, or 44%. The increase in research and development expenses in 2020, as compared to 2019, was due to higher salary and related costs due to increased headcount as a result of the Celularity asset acquisition and Profile repackaging project in 2020. Selling and Marketing Expenses Selling and marketing expenses for the three months ended September 30, 2020 were $1,373,475, compared to $335,472 for the same period in 2019, an increase of $1,038,003, or 309%. The increase in selling and marketing expenses in 2020, as compared to 2019, was due to higher salary and related costs due to increased headcount as a result of the Celularity asset acquisition, higher commissions and higher costs for tradeshows. General and Administrative Expenses General and administrative expenses for the three months ended September 30, 2020 were $5,054,508, as compared to $1,802,659 for the same period in 2019, an increase of $3,251,849, or 180%. The increase in general and administrative expenses in 2020, as compared to 2019, was due to engagement of specialists for integration of acquisition, implementation of ERP system and accounting for acquisition, increase in legal and consulting fees related to acquisition and increased operating costs such as utilities, rent, and IT services as a result of the acquisition. Depreciation and amortization Depreciation and amortization for the three months ended September 30, 2020 was $327,120, compared to $22,338 for the same period in 2019, an increase of $304,782 or 1,364%. The increase was due to goodwill recorded as a part of the acquisition and higher depreciation related to increase in fixed assets as a result of acquisition and leased dermaPACE devices. Other Income (Expense) Other income (expense) was a net expense of $6,869,869 for the three months ended September 30, 2020 as compared to a net expense of $362,363 for the same period in 2019, an increase of $6,507,506, or 1796%. The increase was primarily due to a loss on warrant valuation, a loss on extinguishment of debt and increase in interest expense due to entering into new debt. Net Loss Net loss for the three months ended September 30, 2020 was $12,638,637, or ($0.03) per basic and diluted share, compared to a net loss of $2,748,018, or ($0.01) per basic and diluted share, for the same period in 2019, an increase in the net loss of $9,890,619, or 358%. 35 Table of Contents Results of Operations for the Nine Months ended September 30, 2020 and 2019 (Restated) Revenues and Cost of Revenues Revenues for the nine months ended September 30, 2020 were $2,198,788, compared to $692,579 for the same period in 2019, an increase of $1,506,209, or 217%. Revenue resulted primarily from sales of Ultramist, Biovance and Interfyl, recognition of Brazil distribution fee and dermaPACE treatments. The increase in revenue for 2020 is primarily due to acquisition of Celularity assets and licensing fees and international distribution fees, as compared to the prior year. Cost of revenues for the nine months ended September 30, 2020 were $663,630, compared to $402,657 for the same period in 2019. Gross profit as a percentage of revenues was 70% for the nine months ended September 30, 2020, compared to 42% for the same period in 2019. The increase in gross profit as a percentage of revenues in 2020 was primarily due to sales of Ultramist, Biovance and Interfyl which have a 60% gross profit and an increase in high margin dermaPACE treatment fees. Research and Development Expenses Research and development expenses for the nine months ended September 30, 2020 were $983,816, compared to $867,825 for the same period in 2019, an increase of $115,991, or 13%. The increase in research and development expenses in 2020, as compared to 2019, was due to higher salary and related costs due to increased headcount as a result of the Celularity asset acquisition and Profile repackaging project in 2020. This is partially offset by decreased study expenses related to our new dosage study in Poland due to COVID-19 pandemic. Selling and Marketing Expenses Selling and marketing expenses for the nine months ended September 30, 2020 were $2,414,477, compared to $901,031 for the same period in 2019, an increase of $1513,446, or 168%. The increase in selling and marketing expenses in 2020, as compared to 2019, was due to higher salary and related costs due to increased headcount as a result of the Celularity asset acquisition and higher commissions. There was a continued slow-down in the commercialization of dermaPACE in the third quarter of 2020 due to the COVID pandemic. General and Administrative Expenses General and administrative expenses for the nine months ended September 30, 2020 were $9,529,218, as compared to $4,746,519 for the same period in 2019, an increase of $4,782,699, or 101%. The increase in general and administrative expenses in 2020, as compared to 2019, was due to engagement of specialists for integration of acquisition, implementation of ERP system and accounting for acquisition, increase in legal and consulting fees related to acquisition and increased operating costs such as utilities, rent, and IT services as a result of the acquisition. Depreciation and amortization Depreciation and amortization for the nine months ended September 30, 2020 was $444,908, compared to $40,150 for the same period in 2019, an increase of $404,758 or 1,008%. The increase was due to goodwill recorded as a part of the acquisition and higher depreciation related to increase in fixed assets as a result of acquisition and leased dermaPACE devices. Other Income (Expense) Other income (expense) was a net expense of $7,435,544 for the nine months ended September 30, 2020 as compared to a net expense of $1,414,163 for the same period in 2019, an increase of $6,011,381, or 426%, in the net expense. The increase was primarily due to loss on warrant valuation, an increase in interest expense and loss on extinguishment of debt. Net Loss Net loss for the nine months ended September 30, 2020 was $19,272,805, or ($0.06) per basic and diluted share, compared to a net loss of $7,679,766, or ($0.04) per basic and diluted share, for the same period in 2019, an increase in the net loss of $11,593,039, or 151%. 36 Table of Contents Liquidity and Capital Resources (Restated) We expect to devote substantial resources for the commercialization of the dermaPACE System and UltraMIST product line and will continue to research and develop the next generation of our technology as well as the non-medical uses of the PACE technology, both of which will require additional capital resources. We incurred a net loss of $19,272,805 and $7,679,766 for the nine months ended September 30, 2020 and September 30, 2019, respectively. Management is currently evaluating the impact on cash flows of the Company’s acquisition of certain assets of Celularity Inc., as more fully described in Note 4 to the Company’s condensed consolidated financial statements in this report. These factors 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. Since inception in 2005, 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 through the next quarter and into the first quarter of 2021. Management expects the cash used in operations for the Company will be approximately $100,000 to $205,000 per month for the second half of 2020 as resources are devoted to the commercialization of the dermaPACE product including hiring of new employees, expansion of our international business and continued research and development of next generation of our technology as well as non-medical uses of our technology. Management’s plans are to obtain additional capital in 2020 through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for us. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The 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. We may also attempt to raise additional capital if there are favorable market conditions or other strategic considerations even if we have sufficient funds for planned operations. To the extent that we raise additional funds by issuance of equity securities, our shareholders will experience dilution and we may be required to use some or all of the net proceeds to repay our indebtedness, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones would harm our future capital position. For the nine months ended September 30, 2020 and 2019, net cash used by operating activities was $9,779,889 and $4,684,611, respectively, primarily consisting of professional and consulting fees, compensation costs, research and development activities and general corporate operations. The increase in the use of cash for operating activities for the nine months ended September 30, 2020, as compared to the same period for 2019, was primarily due to the increase in net loss due to legal, professional and consulting fees related to integration of the acquisition, an increase in accrued expenses of $492,434 an increase in prepaid expenses of $502,346, an increase in accounts payable of $882,779, an increase of accrued employee compensation of $1,091,858 and increase in interest payable, related parties of $785,132. Net cash used by investing activities for the nine months ended September 30, 2020 was $20,039,142 as compared to net cash used by investing activities for the same period in 2019 of $28,990. The increase in cash used by investing activities is due to the acquisition of UltraMIST from Celularity, as described in Note 4. Net cash provided by financing activities for the nine months ended September 30, 2020 was $33,449,131, which primarily consisted of $21,456,468 from private placement offerings, $13,346,547 from senior promissory notes, $2,450,000 proceeds from purchase of preferred stock, $1,100,000 from convertible notes, and $614,335 from SBA Loans. These proceeds were partially offset by debt payments of $5,457,663 and principal payments on financing leases of $114,806. Net cash provided by financing activities for the nine months ended September 30, 2019 was $4,738,556, which primarily consisted of $1,215,000 of proceeds from short term note, $2,055,414 of proceeds from exercise of warrants, $1,378,142 of proceeds from advances from related parties and $90,000 net increase in line of credit, related parties. Cash and cash equivalents increased by $3,631,136 for the nine months ended September 30, 2020. 37 Table of Contents Segment and Geographic Information We have determined that we have one operating segment. Our revenues are generated from sales in United States, Europe, Canada, Asia and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are located in the United States. Contractual Obligations Our major outstanding contractual obligations relate to our operating lease for our facility, purchase and supplier obligations for product component materials and equipment, and our notes payable, related parties. We have disclosed these obligations in our 2019 Annual Report. Off-Balance Sheet Arrangements Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities. Effects of Inflation Due to the fact that our assets are, to an extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our condensed 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”.