Item 1. Financial Statements
ITEM 1.
FINANCIAL STATEMENTS
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except share data)
March 31, 2021
December 31, 2020
ASSETS
Current Assets:
Cash
$
96
$
2,437
Accounts receivable, net of allowance for doubtful accounts of $475 in 2021 and $343 in 2020
1,727
2,356
Inventory
2,935
2,956
Prepaid expenses and other current assets
405
179
Total Current Assets
5,163
7,928
Property and Equipment, net
531
471
Right of Use Assets, net
685
795
Other Intangible Assets, net
6,369
6,545
Goodwill
7,260
7,260
Other Assets
271
28
Total Assets
$
20,279
$
23,027
LIABILITIES
Current Liabilities:
Senior secured promissory note payable, in default
$
10,903
$
10,676
Convertible promissory notes payable, in default
4,000
4,000
Convertible promissory notes, related parties, in default
1,596
1,596
Accounts payable
5,728
4,454
Accrued expenses
2,492
2,127
Accrued employee compensation
2,463
2,541
Warrant liability
6,191
8,855
Current portion of SBA loans
464
321
Accrued interest
981
1,021
Accrued interest, related parties
124
77
Current portion of lease liabilities
414
451
Current portion of contract liabilities
32
32
Other
-
23
Total Current Liabilities
35,388
36,174
Non-current Liabilities
SBA loans
1,033
143
Lease liabilities
319
391
Contract liabilities
156
37
Deferred tax liability
16
-
Total Non-currrent Liabilities
1,524
571
Total Liabilities
36,912
36,745
Contingencies
STOCKHOLDERS’ DEFICIT
Preferred Stock, par value $0.001, 5,000,000 shares authorized; 6,175, 293, 90 and 8 shares designated Series A, Series B, Series C and Series D, respectively; no shares issued and
outstanding at March 31, 2021 and December 31, 2020
-
-
Common Stock, par value $0.001, 800,000,000 shares authorized; 481,619,621 and 470,694,621 issued and outstanding at March 31, 2021 and December 31, 2020, respectively
482
471
Additional Paid-in Capital
144,582
142,563
Accumulated Deficit
(161,627
)
(156,690
)
Accumulated Other Comprehensive Loss
(70
)
(62
)
Total Stockholders’ Deficit
(16,633
)
(13,718
)
Total Liabilities and Stockholders’ Deficit
$
20,279
$
23,027
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands except share data)
Three Months Ended March 31,
2021
2020
Revenues:
Product
$
253
$
75
Accessory and parts revenue
1,825
63
License fees and other
38
11
Total Revenues
2,116
149
Cost of Revenues
1,055
130
Gross Margin
1,061
19
Operating Expenses:
Research and development
354
287
Selling and marketing
1,780
608
General and administrative
3,321
1,920
Total Operating Expenses
5,455
2,815
Operating Loss
(4,394
)
(2,796
)
Other Income (Expense), net
Change in fair value of warrant liability
635
-
Interest expense
(1,122
)
(19
)
Interest expense, related party
(47
)
(183
)
Loss on foreign currency exchange
7
(4
)
Other Income (Expense), net
(527
)
(206
)
Net Loss before Income Taxes
(4,921
)
(3,002
)
Provision for Income Taxes
16
-
Net Loss
(4,937
)
(3,002
)
Other Comprehensive Loss
Foreign currency translation adjustments
(8
)
5
Total Comprehensive Loss
$
(4,945
)
$
(2,997
)
Loss per Share:
Net loss per share, basic and diluted
$
(0.01
)
$
(0.01
)
Weighted average shares outstanding, basic and diluted
518,490,225
296,061,866
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(In thousands except share data)
Preferred Stock
Common Stock
Number of
Shares
Issued and
Outstanding
Par Value
Number of
Shares
Issued and
Outstanding
Par Value
Additional Paid-
in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Balances as of December 31, 2020
-
$
-
470,694,621
$
471
$
142,563
$
(156,690
)
$
(62
)
$
(13,718
)
Cashless warrant exercise
-
-
10,925,000
11
(11
)
-
-
-
Reclassification of warrant liability due to cashless warrant exercise
-
-
-
-
2,030
-
-
2,030
Net loss
-
-
-
-
-
(4,937
)
-
(4,937
)
Foreign currency translation adjustment
-
-
-
-
-
-
(8
)
(8
)
Balances as of March 31, 2021
-
$
-
481,619,621
$
482
$
144,582
$
(161,627
)
$
(70
)
$
(16,633
)
-
Balances as of December 31, 2019
-
$
-
293,780,400
$
294
$
115,458
$
(125,752
)
$
(62
)
$
(10,062
)
Proceeds from warrant exercise
-
-
1,000,000
1
9
-
-
10
Shares issued for services
-
-
1,000,000
1
199
-
-
200
Stock-based compensation
-
-
-
-
21
-
-
21
Conversion of short term notes
-
-
1,820,461
2
262
-
-
264
Conversion of advances from related parties
-
-
62,811
-
3
-
-
3
Net loss
-
-
-
-
-
(3,002
)
-
(3,002
)
Foreign currency translation adjustment
-
-
-
-
-
-
4
4
Balances as of March 31, 2020
-
$
-
297,663,672
$
298
$
115,952
$
(128,754
)
$
(58
)
$
(12,562
)
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended March 31,
2021
2020
Cash Flows - Operating Acivities:
Net loss
$
(4,937
)
$
(3,002
)
Adjustments to reconcile net loss to net cash used by operating activities
Amortization of intangibles
176
-
Depreciation
94
53
Bad debt expense
132
83
Share-based payment
-
222
Deferred taxes
16
-
Change in warrant valuation
(635
)
-
Amortization of debt issuance costs and original issue discount
228
-
Accrued interest
(40
)
2
Interest payable, related parties
47
183
Changes in operating assets and liabilities
Accounts receivable - trade
489
(111
)
Inventory
21
24
Prepaid expenses
(444
)
(104
)
Other assets
(24
)
(1
)
Operating leases
(6
)
(3
)
Accounts payable
1,274
(323
)
Accrued expenses
365
65
Accrued employee compensation
(78
)
289
Contract liabilties
(22
)
(23
)
Net Cash Used by Operating Activities
(3,344
)
(2,646
)
Cash Flows - Investing Activities
Purchases of property and equipment
(101
)
(5
)
Net Cash Flows Used by Investing Activities
(101
)
(5
)
Cash Flows - Financing Activities
Proceeds from sale of convertible preferred stock
-
2,250
Proceeds from SBA loan
1,033
-
Proceeds from warrant exercises
-
10
Proceeds from related party deposits
125
-
Payments of principal on finance leases
(46
)
(28
)
Net Cash Flows Provided by Financing Activities
1,112
2,232
Effect of Exchange Rates on Cash
(8
)
5
Net Change in Cash During Period
(2,341
)
(414
)
Cash at Beginning of Period
2,437
1,761
Cash at End of Period
$
96
$
1,347
Supplemental Information:
Cash paid for interest
$
934
$
-
Non-cash Investing and Financing Activities:
Cashless warrant exercise
$
2,030
$
-
Conversion of short-term notes payable to equity
-
264
Conversion of advamces from related parties to equity
-
2
Additions to right of use assets from new finance lease liabilities
-
128
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 2021 and for the three months ended March 31, 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 months ended March 31, 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 quarter ended March 31, 2020 contains $63 thousand of revenue that was reclassified from other revenue. In addition, $41 thousand of depreciation
expense related to rental devices was reclassified from operating expenses to cost of revenues for the quarter ended March 31, 2020. 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.
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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 will 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 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 warrants.
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:
March 31, 2021
December 31, 2020
Accounts Receivable:
Customer A
15
%
46
%
Three Months Ended
March 31, 2021
March 31, 2020
Revenue:
Customer B
n/a
66
%
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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 months ended March 31, 2021 and 2020 were as follows:
Three Months Ended
March 31, 2021
March 31, 2020
Purchases:
Vendor A
55
%
n/a
Vendor B
13
%
n/a
Vendor C
n/a
35
%
Vendor D
n/a
22
%
Vendor E
n/a
11
%
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. At December 31, 2020, the
Company determined that intangible assets related to certain customer relationships was impaired. No additional impairment was indicated at March 31, 2021.
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 months ended March 31, 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:
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2021
2020
Weighted average shares outstanding
Common shares
481,619,621
296,061,866
Common shares issuable assuming excercise of nominally priced warrants
36,870,604
-
Weighted average shares outstanding
518,490,225
296,061,866
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 months ended March 31, 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 March 31, 2021 and 2020, respectively:
2021
2020
Common stock options
31,864,385
34,403,385
Common stock purchase warrants
142,265,576
8,374,091
Convertible notes payable
60,328,907
-
Short-term notes payable
-
2,250,000
Convertible preferred stock
-
16,071,429
234,458,868
61,098,905
5.
Inventory
Inventory consists of the following at March 31, 2021 and December 31, 2020 (in thousands):
2021
2020
Inventory - finished goods
$
2,270
$
2,276
Inventory - parts and accessories
665
680
Total inventory
$
2,935
$
2,956
6.
Accrued Expenses
Accrued expenses consist of the following at March 31, 2021 and December 31, 2020 (in thousands):
2021
2020
Outside services
$
191
$
347
License fees
298
336
Board of director’s fees
380
320
Registration penalties
1,055
264
Commissions
-
239
Legal and professional fees
139
197
Warranty reserve
180
180
Inventory purchases
72
91
Other
177
153
$
2,492
$
2,127
There was no activity in the warranty reserve during the three months ended March 31, 2021.
7.
Revenue
Disaggregation of Revenue - The disaggregation of revenue is based on geographical region. The following table presents revenue from
contracts with customers for the three months ended March 31, 2021 and 2020 (in thousands):
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Three Months Ended March 31, 2021
Three Months Ended March 31, 2020
United States
International
Total
United States
International
Total
Product
$
41
$
212
$
253
$
34
$
41
$
75
Accessories and parts
1,689
136
1,825
63
-
63
License fees and other
33
5
38
1
10
11
$
1,763
$
353
$
2,116
$
98
$
51
$
149
Contract liabilities - As of March 31, 2021 and December 31, 2020, the Company has contract liabilities from contracts with customers
as follows (in thousands):
March 31,
2021
December 31,
2020
Service agreements
$
63
$
69
Deposit on future equipment purchases
125
-
Total contract liabilities
188
69
Less: current portion
(32
)
(32
)
Non-current contract liabilities
$
156
$
37
During the three months ended March 31, 2021 and 2020, the Company recognized revenue related to these contract liabilities of $8 thousand and $22 thousand, respectively, that were in the
beginning contract liability balances for each of those periods.
8.
Debt with Related Parties
Debt with related parties at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
2021
2020
Maturity Date
Stated Interest
Rate
Incremental
Default
Interest
Convertible promissory notes (HealthTronics), related parties, in default
$
1,372
$
1,372
In default
12.0
%
+2.0
%
Convertible promissory notes (Stolarski), related parties, in default
224
224
In default
12.0
%
+2.0
%
Total debt with related parties
$
1,596
$
1,596
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 (as defined in Note 9).
As the Seller Note (as defined in Note 9) 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, 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 March 31, 2021
and December 31, 2020 accrued interest of $17 thousand and $11 thousand, respectively, remained outstanding on the Stolarski Note.
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 by 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.
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9.
Debt with Unaffiliated Parties
Debt with unaffiliated parties at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
2021
2020
Maturity Date
Stated Interest
Rate
Incremental
Payment in
Kind Interest
Incremental
Default Interest
Senior secured promissory note payable, in default::
Principal
$
15,000
$
15,000
Debt issuance costs
(1,440
)
(1,520
)
Debt discount
(2,657
)
(2,804
)
10,903
10,676
In default
12.25
%
+3.00
%
+5.00
%
Convertible promissory note payable, in default
4,000
4,000
In default
12.00
%
n/a
+5.00
%
SBA loan #1
464
464
May 28, 2022
1.00
%
n/a
n/a
SBA loan #2
1,033
-
February 20, 2026
1.00
%
n/a
n/a
16,400
15,140
Less: current maturities including notes in default
(15,367
)
(14,997
)
Debt with unafffiliated parties, long-term
$
1,033
$
143
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 March 31, 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 months ended March 31, 2021 was $228 thousand and is included in interest expense. Accrued interest related to the Senior Secured Note was $666
thousand and $642 thousand at March 31, 2021 and December 31, 2020, respectively. Interest expense on the Senior Secured Note was $760 thousand for the three months ended March 31, 2021.
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 March 31, 2021 and December 31, 2020, the Seller Notes had outstanding accrued interest of $312 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.
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 March 31, 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.
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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 March 31, 2021, the entire $1,033 thousand loan balance outstanding is included in non-current liabilities in the accompanying Condensed Consolidated Balance Sheets.
10.
Warrants
A summary of the warrant activity during the three months ended March 31, 2021 is as follows:
Warrant class
Outstanding
December 31,
2020
Exercised
Outstanding
March 31,
2021
Exercise
price/share
Expiration
date
Class E Warrants
141,091,485
-
141,091,485
$
0.25
August 2023
Class O Warrants
909,091
-
909,091
0.11
January 2022
Class P Warrants
265,000
-
265,000
0.20
June 2024
LGH Warrant
35,000,000
(11,400,000
)
23,600,000
0.01
June 2025
NH Expansion Warrant
13,091,160
-
13,091,160
0.01
August 2030
Total
190,356,736
(11,400,000
)
178,956,736
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.
11.
Warrant Liabilities
A summary of the warrant liability activity for the three months ended March 31, 2021 is as follows:
Warrants
Outstanding
Fair Value
per Share
Fair Value
Balance December 31, 2020
48,091,160
$
0.18
$
8,855,379
Cashless exercise of LGH Warrants
(11,400,000
)
0.18
(2,030,025
)
Gain on remeasurement of warrant liability
(634,672
)
Balance March 31, 2021
36,691,160
$
0.17
$
6,190,682
NH Expansion Warrants -- Significant Black Scholes valuation model inputs related to the NH Expansion Warrants at March 31, 2021 and
December 31, 2020 are as follows:
Black Scholes option pricing model
March 31,2021
December 31, 2020
Exercise Price (1)
$
0.01
$
0.01
Warrant Expiration Date (1)
August 6, 2030
August 6, 2030
Interest Rate (annual) (2)
0.70
%
0.65
%
Volatility (annual) (3)
145.04
%
143.94
%
Time to Maturity (Years)
9.4
9.6
Calculated fair value per share
$
0.1700
$
0.1891
( 1) Based on the terms provided in the warrant agreement to
purchase common stock of the Company dated August 6, 2020.
(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.
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 March 31, 2021 and December 31, 2020 are as follows:
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Black Scholes option pricing model
March 31, 2021
December 31, 2020
Exercise Price (1)
$
0.01
$
0.01
Warrant Expiration Date (1)
June 5, 2025
June 5, 2025
Interest Rate (annual) (2)
0.37
%
0.36
%
Volatility (annual) (3)
100.16
%
99
%
Time to Maturity (Years)
4.2
4.4
Calculated fair value per share
$
0.1680
$
0.1823
(1)
Based on the terms provided in the warrant agreement to purchase common stock of the Company dated August 6, 2020.
(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.
12.
Leases
The following is a summary of the Company’s right of use assets and lease liabilities at March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021
December 31, 2020
Operating
Leases
Financing
Leases
Total
Operating
Leases
Financing
Leases
Total
Right of use assets
$
725
$
644
$
1,369
$
725
$
644
$
1,369
Less: Accumulated amortization
(396
)
(288
)
(684
)
(339
)
(235
)
(574
)
Right of use assets, net
$
329
$
356
$
685
$
386
$
409
$
795
Lease liabilities
$
352
$
381
$
733
$
415
$
427
$
842
Less: current portion
(214
)
(200
)
(414
)
(257
)
(194
)
(451
)
Lease Liabilities
$
138
$
181
$
319
$
158
$
233
$
391
Total lease costs for the three months ended March 31, 2021 and 2020 are as follows (in thousands):
2021
2020
Finance lease costs:
Amortization of right-of-use assets
$
53
$
41
Interest on lease liabilities
13
12
Operating lease costs
83
52
Total lease costs
$
149
$
105
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 three months ended March 31, 2021 and
2020 (in thousands):
2021
2020
Cash paid for amouonts included in measurement of lease liabilities:
Operating cash flows from finance leases
$
(59
)
$
(40
)
Operating cash flows from operating leases
$
(83
)
$
(55
)
Operating Leases - As of March 31, 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)
$
210
2022
94
2023
65
2024
8
2025
3
Total lease payments
380
Less: Present value adjustment
(28
)
Lease liability
$
352
As of March 31, 2021, the Company’s operating leases had a weighted average remaining lease term of 1.9 years and a weighted average discount rate of 10.0%.
Rent expense for the three months ended March 31, 2021 and 2020 was $83 thousand and $52 thousand, respectively.
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Financing Lease - As of March 31, 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)
$
176
2022
200
2023
18
Total lease payments
394
Less: Present value adjustment
(13
)
Lease liability
$
381
As of March31, 2021, the Company’s financing leases had a weighted average remaining lease term of 2.0 years based on annualized base payments expiring through 2023 and a weighted average
discount rate of 13.2%.
As of March 31, 2021, the Company did not have additional operating or financing leases that have yet commenced.
13.
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.
14.
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 March 31, 2021 and 2020, the Company recorded $8 thousand and $13 thousand, respectively, in revenue from an entity owned by this related party. In addition,
contract liabilities includes a balance of $63 thousand at March 31, 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 16 – Subsequent Events in the accompanying Condensed Consolidated
Financial Statements for discussion of advances from directors in October 2021.
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15.
Income Taxes
The provision for income taxes of $16 thousand and 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.
16.
Subsequent Events
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%. Subsequent to April 21, 2021 the Purchaser made two additional disbursements, net of 8% original issue discounts, totaling $1.0 million, $750 thousand on May 14,
2021 and $250 thousand on September 3, 2021. 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.
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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.
June 2021 Accounts Receivable Factoring Agreement – 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. 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.
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.
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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 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 October 25, 2021 and is obligated to continue through March 7, 2022.
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 14), 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.
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