SANUWAVE Health, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands except share data) June 30, 2021 December 31, 2020 ASSETS Current Assets: Cash $ 264 $ 2,437 Accounts receivable, net of allowance for doubtful accounts of $ 583 in 2021 and $ 343 in 2020 1,888 2,356 Inventory 2,436 2,956 Prepaid expenses and other current assets 399 179 Total Current Assets 4,987 7,928 Property and Equipment, net 657 471 Right of Use Assets, net 574 795 Other Intangible Assets, net 6,193 6,545 Goodwill 7,260 7,260 Other Assets 70 28 Total Assets $ 19,741 $ 23,027 LIABILITIES Current Liabilities: Senior secured promissory note payable, in default $ 11,131 $ 10,676 Convertible promissory notes payable, in default 7,108 4,000 Convertible promissory notes, related parties, in default 1,596 1,596 Accounts payable 5,929 4,454 Accrued expenses 3,726 2,127 Accrued employee compensation 3,093 2,541 Due under factoring agreement 1,038 - Warrant liability 7,434 8,855 Current portion of SBA loans 487 321 Accrued interest 1,411 1,021 Accrued interest, related parties 172 77 Current portion of lease liabilities 376 451 Current portion of contract liabilities 33 32 Other - 23 Total Current Liabilities 43,534 36,174 Non-current Liabilities SBA loans 1,011 143 Lease liabilities 245 391 Contract liabilities 181 37 Deferred tax liability 22 - Total Non-current Liabilities 1,459 571 Total Liabilities 44,993 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 June 30 , 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 June 30 , 2021 and December 31 , 2020 , respectively 482 471 Additional Paid-in Capital 144,582 142,563 Accumulated Deficit ( 170,242 ) ( 156,690 ) Accumulated Other Comprehensive Loss ( 74 ) ( 62 ) Total Stockholders’ Deficit ( 25,252 ) ( 13,718 ) Total Liabilities and Stockholders’ Deficit $ 19,741 $ 23,027 The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 4 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (In thousands except share data) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues: Accessory and parts revenue $ 2,284 $ 13 $ 4,109 $ 76 Product 514 69 767 144 License fees and other 111 1 149 12 Total Revenue 2,909 83 5,025 232 Cost of Revenues 1,048 79 2,103 209 Gross Margin 1,861 4 2,922 23 Operating Expenses: General and administrative 3,115 2,579 6,436 4,499 Selling and marketing 2,520 433 4,300 1,041 Research and development 272 265 626 551 Total Operating Expenses 5,907 3,277 11,362 6,091 Operating Loss ( 4,046 ) ( 3,273 ) ( 8,440 ) ( 6,068 ) Other Income (Expense): Interest expense ( 1,437 ) ( 169 ) ( 2,559 ) ( 188 ) Change in fair value of derivative liabilities ( 591 ) - 44 - Interest expense, related party ( 48 ) ( 187 ) ( 95 ) ( 370 ) Loss on issuance of debt ( 2,484 ) - ( 2,484 ) - Gain / (loss) on foreign currency exchange ( 3 ) ( 3 ) 4 ( 8 ) Other Income (Expense), net ( 4,563 ) ( 359 ) ( 5,090 ) ( 566 ) Net Loss before Income Taxes ( 8,609 ) ( 3,632 ) ( 13,530 ) ( 6,634 ) Provision for Income Taxes 6 - 22 - Net Loss ( 8,615 ) ( 3,632 ) ( 13,552 ) ( 6,634 ) Other Comprehensive Loss Foreign currency translation adjustments ( 3 ) ( 7 ) ( 11 ) ( 2 ) Total Comprehensive Loss $ ( 8,618 ) $ ( 3,639 ) $ ( 13,563 ) $ ( 6,636 ) Loss per Share: Net loss per share, basic and diluted $ ( 0.02 ) $ ( 0.01 ) $ ( 0.03 ) $ ( 0.02 ) Weighted average shares outstanding, basic and diluted 518,310,781 299,497,960 518,400,008 297,856,870 The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 5 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (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 - $ - 481,619,621 $ 482 $ 144,582 $ ( 161,627 ) $ ( 70 ) $ ( 16,633 ) Net loss - - - - - ( 8,615 ) - ( 8,615 ) Foreign currency translation adjustment - - - - - - ( 4 ) ( 4 ) Balances as of June 30, 2021 - $ - 481,619,621 $ 482 $ 144,582 $ ( 170,242 ) $ ( 74 ) $ ( 25,252 ) 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 - $ - 297,663,672 $ 298 $ 115,952 $ ( 128,754 ) $ ( 58 ) $ ( 12,562 ) Conversion of short term notes and convertible notes payable - - 759,328 1 90 - - 91 Conversion of advances from related parties - - 200,000 - 16 - - 16 Shares issued for services - - 2,200,000 2 515 - - 517 Proceeds from PIPE offering, net of offering costs - - 1,071,428 1 149 - - 150 Proceeds from stock option exercise - - 225,000 - 44 - - 44 Beneficial conversion feature on convertible debt - - - - 561 - - 561 Net loss - - - - - ( 3,632 ) - ( 3,632 ) Foreign currency translation adjustment - - - - - - ( 7 ) ( 7 ) Balances as of June 30, 2020 - $ - 302,119,428 $ 302 $ 117,327 $ ( 132,386 ) $ ( 65 ) $ ( 14,822 ) The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 6 Table of Contents 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 - $ - 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 - - - - - ( 13,552 ) - ( 13,552 ) Foreign currency translation adjustment - - - - - - ( 12 ) ( 12 ) Balances as of June 30, 2021 - $ - 481,619,621 $ 482 $ 144,582 $ ( 170,242 ) $ ( 74 ) $ ( 25,252 ) 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 - $ - 293,780,400 $ 294 $ 115,458 $ ( 125,752 ) $ ( 62 ) $ ( 10,062 ) Proceeds from warrant exercise - - 1,000,000 1 9 - - 10 Conversion of short term notes and convertible notes payable - - 2,579,789 3 352 - - 355 Conversion of advances from related parties - - 262,811 - 19 - - 19 Shares issued for services - - 3,200,000 3 714 - - 717 Proceeds from PIPE offering, net of offering costs - - 1,071,428 1 149 - - 150 Stock-based compensation - - - - 21 - - 21 Proceeds from stock option exercise - - 225,000 - 44 - - 44 Beneficial conversion feature on convertible debt - - - - 561 - - 561 Net loss - - - - - ( 6,634 ) - ( 6,634 ) Foreign currency translation adjustment - - - - - - ( 3 ) ( 3 ) Balances as of June 30, 2020 - $ - 302,119,428 $ 302 $ 117,327 $ ( 132,386 ) $ ( 65 ) $ ( 14,822 ) The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 7 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Six Months Ended June 30, 2021 2020 Cash Flows - Operating Activities: Net loss $ ( 13,552 ) $ ( 6,634 ) Adjustments to reconcile net loss to net cash used by operating activities Amortization of intangibles 352 - Depreciation 198 118 Bad debt expense 240 183 Share-based payment - 739 Deferred taxes 22 - Change in fair value of derivative liabilities ( 44 ) - Loss on issuance of debt 2,484 - Amortization of debt issuance costs 455 70 Amortization of debt discount 264 - Accrued interest 390 84 Interest payable, related parties 95 370 Changes in operating assets and liabilities Accounts receivable - trade 218 ( 218 ) Inventory 521 ( 108 ) Prepaid expenses ( 191 ) ( 102 ) Other assets ( 83 ) ( 1 ) Operating leases - ( 6 ) Accounts payable 1,475 360 Accrued expenses 1,350 110 Accrued employee compensation 553 557 Contract liabilities 4 ( 34 ) Net Cash Used in Operating Activities ( 5,249 ) ( 4,512 ) Cash Flows - Investing Activities Purchases of property and equipment ( 277 ) ( 1,115 ) Net Cash Flows Used in Investing Activities ( 277 ) ( 1,115 ) Cash Flows - Financing Activities Proceeds from sale of convertible preferred stock - 2,450 Proceeds from convertible promissory notes 1,263 1,100 Proceeds from SBA loan 1,033 614 Proceeds from PIPE offering, net of offering costs - 150 Proceeds from stock option exercises - 44 Proceeds from factoring 1,038 - Proceeds from warrant exercises - 10 Proceeds from related party advances 125 - Payments of principal on finance leases ( 94 ) ( 69 ) Net Cash Flows Provided by Financing Activities 3,365 4,299 Effect of Exchange Rates on Cash ( 12 ) ( 2 ) Net Change in Cash During Period ( 2,173 ) ( 1,330 ) Cash at Beginning of Period 2,437 1,761 Cash at End of Period $ 264 $ 431 Supplemental Information: Cash paid for interest $ 1,434 $ - Non-cash Investing and Financing Activities: Reclassification of warrant liability due to cashless warrant exercise $ 2,030 $ - Conversion of short-term notes payable to equity - 355 Conversion of advances from related parties to equity - 18 Additions to right of use assets from new finance lease liabilities - 128 Embedded conversion option with issuances of convertible debt 2,740 561 Warrant issuance in conjunction with convertible notes 758 - The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 8 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 9 Table of Contents 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. 10 Table of Contents 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. 11 Table of Contents 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 481,619,621 299,497,960 481,619,621 297,856,870 Common shares issuable assuming exercise of nominally priced warrants 36,691,160 - 36,780,387 - Weighted average shares outstanding 518,310,781 299,497,960 518,400,008 297,856,870 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 31,760 34,169 Common stock purchase warrants 150,202 9,374 Convertible notes payable 74,155 5,227 Short-term notes payable - 2,250 Convertible preferred stock - 17,500 256,117 68,520 5. Inventory Inventory consists of the following at June 30, 2021 and December 31, 2020 (in thousands): 2021 2020 Inventory - finished goods $ 1,991 $ 2,276 Inventory - parts and accessories 445 680 Total inventory $ 2,436 $ 2,956 12 Table of Contents 6. Accrued Expenses Accrued expenses consist of the following at June 30, 2021 and December 31, 2020 (in thousands): 2021 2020 Outside services $ 135 $ 347 License fees 715 336 Board of director's fees 437 320 Registration penalties 1,849 264 Commissions - 239 Legal and professional fees 107 197 Warranty reserve 180 180 Inventory purchases 87 91 Other 216 153 $ 3,726 $ 2,127 There was no activity in the warranty reserve during the three and six months ended June 30, 2021. 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 $ 2,214 $ 70 $ 2,284 $ 13 $ - $ 13 Product 470 44 514 63 6 69 License fees and other 91 20 111 ( 12 ) 13 1 $ 2,775 $ 134 $ 2,909 $ 64 $ 19 $ 83 Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 United States International Total United States International Total Accessories and parts $ 3,903 $ 206 $ 4,109 $ 76 $ - $ 76 Product 511 256 767 97 47 144 License fees and other 124 25 149 ( 65 ) 77 12 $ 4,538 $ 487 $ 5,025 $ 108 $ 124 $ 232 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 $ 89 $ 69 Deposit on future equipment purchases 125 - Total contract liabilities 214 69 Less: current portion ( 33 ) ( 32 ) Non-current contract liabilities $ 181 $ 37 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 $ 69 Service agreement additions 36 Deposit on future equipment purchases 125 Revenue recognized ( 16 ) Total contract liabilities 214 Less current portion ( 33 ) Non-current contract liabilities $ 181 13 Table of Contents 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 17 % 46 % Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Revenue: Customer B n/a 45 % n/a 49 % 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 44 % n/a 43 % n/a Vendor B 38 % n/a 21 % n/a Vendor C n/a 36 % n/a 29 % Vendor D n/a 11 % n/a 22 % Vendor E n/a 36 % n/a 19 % 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 In default 12.25 % + 3.00 % + 5.00 % n/a $ 15,000 ( 3,869 ) - $ 11,131 Convertible promissory notes payable, in default: Seller Note issued 8/6/2020 In default 12.00 % n/a + 5.00 % $ 0.10 4,000 - - 4,000 Leviston Note issued 4/20/2021 In default 5.00 % n/a + 10.00 % $ 0.1361 815 ( 656 ) $ 1,437 1,596 Leviston Note issued 5/14/2021 In default 5.00 % n/a + 10.00 % $ 0.1361 815 ( 710 ) 1,407 1,512 Total convertible promisory notes payable, in default 5,630 ( 1,366 ) 2,844 7,108 Convertible promissory notes payable, related parties, in default: Convertible promissory notes (HealthTronics), related parties In default 12.0 % n/a + 2.0 % $ 0.10 1,372 - - 1,372 Convertible promissory notes (Stolarski), related parties In default 12.0 % n/a + 2.0 % $ 0.10 224 - - 224 Total convertible promisory notes payable, related parties, in default 1,596 - - 1,596 SBA loan #1 May 28, 2022 1.00 % n/a n/a n/a 464 - - 464 SBA loan #2 February 20, 2026 1.00 % n/a n/a n/a 1,034 - - 1,034 Total SBA loans outstanding 1,498 - - 1,498 Total debt outstanding, including amounts in default 23,724 ( 5,235 ) 2,844 21,333 Less: current maturities, including notes in default ( 22,713 ) 5,235 ( 2,844 ) ( 20,322 ) Total long-term debt as of June 30, 2021 $ 1,011 $ - $ - $ 1,011 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 In default 12.25 % + 3.00 % + 5.00 % n/a $ 15,000 ( 4,324 ) $ 10,676 Convertible promissory notes payable, in default: Seller Note issued 8/6/2020 In default 12.00 % n/a + 5.00 % $ 0.10 4,000 - 4,000 Convertible promissory notes payable, related parties, in default: Convertible promissory notes (HealthTronics), related parties In default 12.0 % n/a + 2.0 % $ 0.10 1,372 - 1,372 Convertible promissory notes (Stolarski), related parties In default 12.0 % n/a + 2.0 % $ 0.10 224 - 224 Total convertible promisory notes payable, related parties, in default 1,596 - 1,596 SBA loan #1 May 28, 2022 1.00 % n/a n/a n/a 464 - 464 Total debt outstanding, including amounts in default 21,060 ( 4,324 ) 16,736 Less: current maturities, including notes in default ( 20,917 ) 4,324 ( 16,593 ) Total long-term debt as of December 31, 2020 $ 143 $ - $ 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 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. 14 Table of Contents 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. 15 Table of Contents 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 warrants to Leviston for a total of 7,936,508 shares of common stock. The Leviston 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, the Company determined that these warrants meet the definition of a derivative liability. See details of the associated warrant issuances at Note 11 – Warrants. 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 $ 815,217 $ 815,217 $ 1,630,434 Conversion Price (1) $ 0.18 $ 0.18 $ 0.1361 Interest Rate (annual) (2) 0.07 % 0.06 % 0.07 % Volatility (annual) (3) 69.60 % 69.60 % 77.20 % Time to Maturity (Years) 1.0 1.0 0.9 Fair Value of Conversion Option $ 1,354,858 $ 1,385,167 $ 2,844,636 104,611 (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. 16 Table of Contents 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 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 Leviston Warrants - April 2021 - 3,968,254 - 3,968,254 0.18 April 2025 Leviston Warrants - May 2021 - 3,968,354 - 3,968,354 0.18 May 2025 Total 190,356,736 7,936,608 ( 11,400,000 ) 186,893,344 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 48,091,160 $ 0.18 $ 8,855,379 Cashless exercise of LGH Warrants ( 11,400,000 ) 0.18 ( 2,030,025 ) Warrants classified as liabilities 7,936,508 0.10 757,141 Gain on remeasurement of warrant liability - ( 148,046 ) Balance June 30, 2021 44,627,668 $ 0.16 $ 7,434,449 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) $ 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) 130.20 % 143.94 % Time to Maturity (Years) 9.1 9.6 Calculated fair value per share $ 0.1800 $ 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. 17 Table of Contents 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) $ 0.01 $ 0.01 Interest Rate (annual) (2) 0.37 % 0.36 % Volatility (annual) (3) 96.40 % 99 % Time to Maturity (Years) 3.9 4.4 Calculated fair value per share $ 0.1778 $ 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. Leviston Warrants – As disclosed in Note 11 -Warrants, on each of April 20, 2021 and May 14, 2021, the Company issued 3,968,254 warrants to Leviston entitling them to acquire a total of 7,936,508 shares of common stock. The Leviston 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, the Company determined that these warrants meet the definition of a derivative liability. The fair value of the Leviston 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 2021 issuance dates are as follows: Issuance date (1) Black Scholes option pricing model April 20, 2021 June 30, 2021 Exercise Price (1) $ 0.18 $ 0.18 Interest Rate (annual) (2) 0.56 % 0.63 % Volatility (annual) (3) 91.90 % 89.60 % Time to Maturity (Years) 4.0 3.8 Calculated fair value per share $ 0.0970 $ 0.111 (1) Based on the terms provided in the warrant agreement to purchase common stock of the Company dated April 20, 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. Issuance date (1) Black Scholes option pricing model May 14, 2021 June 30, 2021 Exercise Price (1) $ 0.18 $ 0.18 Interest Rate (annual) (2) 0.56 % 0.63 % Volatility (annual) (3) 90.3 % 89.60 % Time to Maturity (Years) 3.9 3.8 Calculated fair value per share $ 0.094 $ 0.111 (1) Based on the terms provided in the warrant agreement to purchase common stock of the Company dated 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. 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 $ 725 $ 644 $ 1,369 $ 725 $ 644 $ 1,369 Less: Accumulated amortization ( 454 ) ( 341 ) ( 795 ) ( 339 ) ( 235 ) ( 574 ) Right of use assets, net $ 271 $ 303 $ 574 $ 386 $ 409 $ 795 Lease liabilities $ 288 $ 333 $ 621 $ 415 $ 427 $ 842 Less: current portion ( 170 ) ( 206 ) ( 376 ) ( 257 ) ( 194 ) ( 451 ) Lease Liabilities $ 118 $ 127 $ 245 $ 158 $ 233 $ 391 18 Table of Contents 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 $ 106 $ 94 Interest on lease liabilities 24 33 Operating lease costs 169 118 Total lease costs $ 299 $ 245 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 $ ( 117 ) $ ( 103 ) Operating cash flows from operating leases $ ( 169 ) $ ( 118 ) 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) $ 140 2022 94 2023 65 2024 8 2025 3 Total lease payments 310 Less: Present value adjustment ( 22 ) Lease liability $ 288 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) $ 118 2022 200 2023 18 Total lease payments 336 Less: Present value adjustment ( 3 ) Lease liability $ 333 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. 19 Table of Contents 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”). 20 Table of Contents 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. 21 Table of Contents 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. 22 Table of Contents