PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table lists the costs and expenses payable by the registrant in connection with the sale of the Common Stock covered by this prospectus other than any sales commissions or discounts, which expenses will be paid by the selling stockholders. All amounts shown are estimates except for the SEC registration fee.
| | | | |
|
SEC registration fee | | $ | 2,701 | |
Legal fees and expenses | | | 25,000 | |
Accounting fees and expenses | | | 8,000 | |
Miscellaneous fees and expenses | | | 6,299 | |
| | | |
Total | | $ | 42,000 | |
| | | |
ITEM 14.Commission Position on Indemnification of Directors and OfficersSecurities Act Liabilities
The Nevada General Corporation Law (“NGCL”) provides that a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his capacity as a director or officer unless (i) such act or omission constituted a breach of his/her fiduciary duties as a director or officer, and (ii) his/her breach of those duties involved intentional misconduct, fraud or a knowing violation of law. Under the NGCL, a corporation may indemnify directors and officers, as well as other employees and individuals, against any threatened, pending or completed action, suit or proceeding, except an action by or in the right of the corporation, by reason of the fact that he/she is or was a director, officer, employee or agent of the corporation so long as such person acted in good faith and in a manner which he/she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his/her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he/she reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he/she had reasonable cause to believe that his/her conduct was unlawful.
The NGCL further provides that indemnification may not be made for any claim as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding or in defense of any claim, issue or matter therein, the corporation must indemnify him/her against expenses, including attorneys’ fees, actually and reasonably incurred in connection with the defense. The NGCL provides that this is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders, or disinterested directors or otherwise.
Our articles of incorporation provide that the directors and officers will not be personally liable to us or our stockholders for monetary damages for breach of their fiduciary duty as a director or officer, except for liability of a director or officer for acts or omissions involving intentional misconduct, fraud or a knowing violation of law, or the payment of dividends in violation of the NGCL. Our bylaws and contractual arrangements with certain of our directors and officers provide that we are required to indemnify our directors and officers to the fullest extent permitted by law. Our bylaws and these contractual arrangements also require us to advance expenses incurred by a director or officer in connection with the defense of any proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he/she is not entitled to be indemnified by the registrant. Our bylaws also permit us to purchase and maintain errors and omissions insurance on behalf of any director or officer for any liability arising out of his/her actions in a representative capacity. We do not presently maintain any such errors and omissions insurance for the benefit of our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of May 13, 2013, with respect to the beneficial ownership of our outstanding common stock by (i) any holder of more than five percent, (ii) each of our executive officers and directors, and (iii) our directors and executive officers as a group.
| | Number of Shares | | | Percent of | |
| | Beneficially | | | Shares | |
Name of Beneficial Owner (1) | | Owned (2) | | | Outstanding | |
Joseph Chiarelli (3) | | | 375,000 | | | | 1.7 | % |
Barry J. Jenkins (4) | | | 480,003 | | | | 2.2 | % |
Kevin A. Richardson, II (5) | | | 12,307,914 | | | | 52.4 | % |
John F. Nemelka (6) | | | 2,147,202 | | | | 9.8 | % |
5% Beneficial Owner: | | | | | | | | |
David N. Nemelka (7) | | | 5,048,510 | | | | 19.6 | % |
Christopher M. Cashman (8) | | | 3,936,259 | | | | 15.6 | % |
Prides Capital Fund I, LP (9) | | | 10,520,077 | | | | 45.4 | % |
NightWatch Capital Partners II, LP (10) | | | 2,108,369 | | | | 9.6 | % |
All directors and executive officers as a group (4 persons) | | | 15,310,120 | | | | 62.7 | % |
(1) Unless otherwise noted, each beneficial owner has the same address as us.
(2) Applicable percentage ownership is based on 21,726,536 shares of common stock outstanding as of May 9, 2013, “Beneficial ownership” includes shares for which an individual, directly or indirectly, has or shares voting or investment power, or both, and also includes options that are exercisable within 60 days of May 13, 2013. Unless otherwise indicated, all of the listed persons have sole voting and investment power over the shares listed opposite their names. Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 of the Exchange Act.
(3) Consist of options to purchase up to 375,000 shares of common stock.
(4) Includes options to purchase up to 274,253 shares of common stock and warrants to purchase up to 3,508 shares of common stock.
(5) Includes options to purchase up to 38,333 shares of common stock and promissory notes convertible into 309,000 shares of common stock. In addition, this amount includes 9,081,989 shares of common stock and warrants to purchase 1,438,088 shares of common stock owned directly by Prides Capital Fund I, L.P. Prides Capital Partners LLC is the general partner of Prides Capital Fund I, L.P. and Mr. Richardson is the controlling shareholder of Prides Capital Partners LLC; therefore, under certain provisions of the Exchange Act, he may be deemed to be the beneficial owner of such securities. Mr. Richardson has also been deputized by Prides Capital Partners LLC to serve on the board of directors of the Company. Mr. Richardson disclaims beneficial ownership of all such securities except to the extent of any indirect pecuniary interest (within the meaning of Rule 16a-1 of the Exchange Act) therein.
(6) Includes options to purchase up to 38,333 shares of common stock. In addition, this amount includes 1,904,145 shares of common stock and warrants to purchase 204,224 shares of common stock owned directly by NightWatch Capital Partners II, L.P. NightWatch Capital Management, LLC, is the general partner of NightWatch Capital Partners II, L.P. and Mr. John Nemelka is the controlling shareholder of NightWatch Capital Management LLC; therefore, under certain provisions of the Exchange Act, he may be deemed to be the beneficial owner of such securities. Mr. John Nemelka has also been deputized by NightWatch Capital Management LLC to serve on the board of directors of the Company. Mr. John Nemelka disclaims beneficial ownership of all such securities except to the extent of any indirect pecuniary interest (within the meaning of Rule 16a-1 of the Exchange Act) therein.
(7) Based solely on information contained in filings on Schedule 13D, as amended, and on Form 4s, made with the SEC by the reporting person, and on records of the Company. Includes a subscription agreement to purchase 3,600,000 shares of common stock at $0.25 per share no later than May 27, 2014 and warrants to purchase up to 443,510 shares of common stock. The principal address of David N. Nemelka is 2662 Stonebury Loop Road, Springville, UT 84663.
(8) Includes options to purchase up to 3,460,686 shares of common stock and warrants to purchase up to 8,816 shares of common stock. Mr. Cashman resigned as President, Chief Executive Officer, and as a Director effective November 7, 2012.
(9) Based solely on information contained in filings on Schedule 13D, as amended, made with the SEC by the reporting person and on records of the Company. Includes warrants to purchase 1,438,088 shares of common stock. The principal business address of Prides Capital Fund, I, LP is 100 Cummings Center, Suite 324C, Beverly, MA 01915. Kevin A. Richardson, II, has voting and dispositive power over the securities. See footnote (5).
(10) Based solely on information contained in filings on Schedule 13D, as amended, made with the SEC by the reporting person and of records of the Company. Includes warrants to purchase 204,224 shares of common stock. The principal business address of NightWatch Capital Partners II, LP is 5314 River Run Drive, Suite 350, Provo, UT 84604. John F. Nemelka has voting and dispositive power over the securities. See footnote (6).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Transactions
Other than as described below, since January 1, 2010, there have been no transactions, and there are no currently proposed transactions with related persons required to be disclosed in this prospectus.
In connection with the offering of our Senior Secured Notes which closed on March 8, 2013, Kevin A. Richardson, II, chairman of the board of directors, purchased $60,000 of the notes.
On November 27, 2012, we and David N. Nemelka (Subscriber), the brother of John F. Nemelka, a member of our board of directors, entered into a subscription agreement (Subscription Agreement) whereby the Subscriber agreed to purchase from us, and we agreed to sell, a total of 4,000,000 shares of our common stock at a purchase price equal to $0.25 per share, for an aggregate sales price of $1,000,000 (Purchase Price). The Purchase Price will be payable to us as follows: (i) $50,000 on or before January 31, 2013; (ii) $50,000 on or before February 15, 2013; and (iii) the balance of $900,000 on or before May 27, 2014 (Outside Due Date). The Subscriber may make payments of the Purchase Price at his discretion, in minimum installments of $100,000 each, until the Outside Due Date. In the event that at any time after February 15, 2013, our total available cash should be less than $100,000, the Subscriber shall, upon our demand, pay to us $100,000 of the then outstanding balance of the Purchase Price, which payment shall be due within thirty (30) days of the demand. There is no limit on the number of demands that we may make pursuant to this provision of the Subscription Agreement, provided, however, that in no event shall we provide more than one notice of demand for payment in any thirty (30) day period. As of December 31, 2012, the Subscriber had paid us $25,000 and we issued to the Subscriber 100,000 shares of common stock. We will record the additional $975,000 and issue the corresponding 3,900,000 shares of common stock in the periods in which the Purchase Price is received. Subsequent to December 31, 2012, the Subscriber has paid us an additional $75,000 and was issued an additional 300,000 shares of common stock which will be recorded in the first quarter of 2013.
On November 6, 2012, we entered into a Severance and Advisory Agreement (Severance Agreement) with Christopher M. Cashman, then a director of ours, and our President and Chief Executive Officer. Entry into the Severance Agreement was made in connection with Mr. Cashman’s resignation as President and Chief Executive Officer, and a director of ours, effective November 7, 2012. See further discussion under “Management, Executive Compensation and Corporate Governance”.
On April 8, 2011, we completed a private placement to 28 institutional and individual accredited investors of 2,804,593 shares of our common stock at a purchase price of $3.25 per share, for gross proceeds of $9,114,927. The net proceeds received by us were $8,467,121, net of offering costs of $647,806. As part of the private placement, the investors were issued five-year warrants to purchase up to 2,804,593 shares of our common stock at an initial exercise price of $4.00 per warrant. The net proceeds from the private placement, following the payment of offering-related expenses, are being used by us for working capital and other general corporate purposes. David N. Nemelka, the brother of a member of our board of directors and an existing shareholder, was one of the purchasers in the offering.
On April 4, 2011, the note holders of our amended senior notes (the Notes) cancelled the unpaid principal and interest balance of the Notes which totaled $4,413,908 in consideration for the issuance of 1,358,126 shares of our common stock. In addition, in connection with this transaction, we issued to the note holders an aggregate total of 679,064 warrants to purchase shares of common stock at an exercise price of $4.00 per share. Each warrant represents the right to purchase one share of common stock. The warrants vested upon issuance and expire after five years. The Notes were held by Prides Capital Fund I, LP and NightWatch Capital Partners II, LP (the Noteholders). Kevin A. Richardson, II, who is the chairman of our board of directors, serves as the managing partner of Prides Capital, LLC, an affiliate of Prides Capital Fund I, LP. John F. Nemelka, who is a member of our board of directors, serves as managing principal of NightWatch Capital Advisors, LLC, an affiliate of NightWatch Capital Partners II, LP.
In January 2011, we raised $3,900,334 from a group of accredited investors through the exercise of options they received in 2010 as part of a purchase of a unit which consisted of: (i) one share of common stock, par value $0.001 per share; (ii) a two-year common stock purchase warrant (the Class D Warrant) to purchase one share of common stock, at an exercise price of $2.00; and (iii) an option ,which as amended, expired on January 31, 2011, to purchase the same number of units as granted pursuant to this transaction, at the purchase price of $2.00 per unit. Kevin A. Richardson, II, who is chairman of our board of directors, exercised 545,252 options and David N. Nemelka, who is the brother of John F. Nemelka, a member of our board of directors exercised 686,252 options in connection with this transaction
Between September 30, 2010, and December 7, 2010, we issued 925,000 units to certain accredited investors for an aggregate total purchase price of $1,850,000. Each unit was sold to the new investors at a purchase price of $2.00 per unit. As a result of the offerings, we sold 925,000 units which consisted of 925,000 shares of common stock, 925,000 Class D warrants and 925,000 options, which, as amended, expired on January 31, 2011, to purchase the same number of units as granted pursuant to this transaction, at the purchase price of $2.00 per unit. David N. Nemelka, who is the brother of John F. Nemelka, a member of our board of directors, purchased 175,000 Units in the offerings for a total purchase price of $350,000.
During 2010, we issued promissory notes totaling $1,750,000 to Kevin A. Richardson, II, our chairman of the board of directors, and $500,000 to David N. Nemelka, the brother of John F. Nemelka, a member our board of directors. On October 12, 2010, in conjunction with an offering, we amended the terms of the outstanding promissory notes such that the unpaid principal and interest on each note was exchanged into units. The unpaid principal and interest on the notes to Kevin A. Richardson, II totaled $1,790,504, and this sum was exchanged into a total of 895,252 units which consisted of 895,252 shares of common stock, 895,252 Class D warrants and 895,252 options, which, as amended, expire on January 31, 2011, to purchase another unit at the purchase price of $2.00 per unit. The unpaid principal and interest on the notes to David N. Nemelka totaled $522,504, and this sum was exchanged into a total of 261,252 units which consisted of 261,252 shares of common stock, 261,252 Class D warrants and 261,252 options, which, as amended, expire on January 31, 2011, to purchase another unit at the purchase price of $2.00 per unit.
DESCRIPTION OF SECURITIES TO BE REGISTERED
Our authorized capital stock consists of 155,000,000 shares, of which 150,000,000 shares are designated as common stock and 5,000,000 shares are designated as preferred stock. As of May 13, 2013, there were issued and outstanding:
| · | 21,726,536 shares of common stock, |
| · | warrants to purchase 7,789,991 shares of common stock at a weighted average exercise price of $3.63 per share, and |
| · | options to purchase 8,604,330 shares of common stock at a weighted average exercise price of $1.14 per share. |
| · | Senior Secured Notes with an aggregate principal and accrued interest balance of $2,097,500. Subject to the condition that we raise at least $4,000,000 in gross proceeds through this offering, the Senior Secured Notes, as amended, will automatically convert into (i) common stock at a conversion price of $0.20, and (ii) warrants to purchase the number of shares of common stock equal to the number of shares such holder would have received if it had invested in the offering an amount equal to the principal and interest on the note being converted. |
The following summary of the material provisions of our common stock and preferred stock is qualified by reference to the provisions of our articles of incorporation and bylaws.
Common Stock
All shares of our common stock have equal voting rights and, when validly issued and outstanding, have one vote per share in all matters to be voted upon by the stockholders. Cumulative voting in the election of directors is not allowed, which means that the holders of more than 50% of the outstanding shares can elect all the directors if they choose to do so and, in such event, the holders of the remaining shares will not be able to elect any directors. The affirmative vote of a plurality of the shares of common stock voted at a stockholders meeting where a quorum is present is required to elect directors and to take other corporate actions. Holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared by our board of directors out of legally available funds. However, the current policy of our board of directors is to retain earnings, if any, for our operation and expansion. Upon liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably in all of our assets which are legally available for distribution, after payment of or provision for all liabilities and the liquidation preference of any outstanding preferred stock. The holders of our common stock have no preemptive, subscription, redemption or conversion rights. All issued and outstanding shares of common stock are, and the common stock reserved for issuance upon exercise of our stock options and warrants will be, when issued, fully-paid and non-assessable.
Preferred Stock
Our articles of incorporation authorize the issuance of up to 5,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. No preferred shares are currently issued or outstanding.
Warrants
The following is a brief summary of material provisions of the warrants offered in this offering. Such warrants will have the same material terms as the warrants we will issue we will issue to the holders of the Senior Secured Notes, if such notes are automatically converted to common stock as a result of this offering (which will occur if we raise at least $4,000,000 in this offering).
Exercise Price and Terms. Each warrant entitles the holder thereof to purchase at any time during the period commencing on the date of the closing of the offering and ending on the fifth anniversary of the closing of the offering at an exercise price equal to $1.50 per share, subject to certain adjustments referred to below, shares of our common stock. The holder of any warrant may exercise such warrant by surrendering the warrant to us, with the notice of exercise properly completed and executed, together with payment of the exercise price. The warrants may be exercised at any time in whole or in part at the applicable exercise price until expiration of the warrants. No fractional shares will be issued upon the exercise of the warrants.
Adjustments. The exercise price and the number of shares of common stock purchasable upon the exercise of the warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassifications of the common stock. Additionally, an adjustment would be made in the case of a reclassification or exchange of common stock, consolidation or merger of our Company with or into another corporation (other than a consolidation or merger in which we are the surviving corporation) or sale of all or substantially all of our assets in order to enable holders of the warrants to acquire the kind and number of shares of stock or other securities or property receivable in such event by a holder of the number of shares of common stock that might otherwise have been purchased upon the exercise of the warrant. No adjustment to the number of shares and exercise price of the shares subject to the warrants will be made for dividends (other than stock dividends), if any, paid on our common stock.
Transfer, Exchange and Exercise. The warrants may be presented to us for exchange or exercise at any time during the period commencing on the date of the closing of the offering and ending on the fifth anniversary of the closing of the offering at which time the warrants become wholly void and of no value. Prior to any transfer of the warrants the holder must notify us of the same and, if subsequently requested, provide a legal opinion regarding the transfer to us.
Warrantholder Not a Stockholder. The warrants do not confer upon holders any voting, dividend or other rights as a shareholder of our Company.
18% Senior Secured Convertible Promissory Notes (Senior Secured Notes)
The Senior Secured Notes, as amended, automatically convert to common stock (and warrants, if applicable) upon a qualified financing of $4,000,000 raised in a public and/or private placement transaction, such as this offering. Therefore, upon completion of this offering where gross proceeds to us are at least $4,000,000, the Senior Secured Notes will automatically convert to common stock and warrants.
Anti-Takeover Provisions
Provisions in our Articles of Incorporation and bylaws may discourage certain types of transactions involving an actual or potential change of control of our Company which might be beneficial to us or our security holders.
As noted above, our Articles of Incorporation permits our board of directors to issue shares of any class or series of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any class or series of preferred stock that may be issued in the future.
Our bylaws generally provide that any board vacancy, including a vacancy resulting from an increase in the authorized number of directors, may be filled by a majority of the directors, even if less than a quorum.
Additionally, our bylaws provide that shareholders must provide timely notice in writing to bring business before an annual meeting of shareholders or to nominate candidates for election as directors at an annual meeting of shareholders. Notice for an annual meeting is timely if our Secretary receives the written notice not less man 50 days nor more than 75 days prior to the meeting; provided, however, that in the event less than 60 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Our bylaws also specify the form and content of a shareholder’s notice. These provisions may prevent shareholders from bringing matters before an annual meeting of shareholders or from making nominations for directors at an annual meeting of shareholders.
Trading Information
Our shares of common stock are currently quoted in the over-the-counter market on the OTC Bulletin Board.
Transfer Agent
The transfer agent and registrar for our common stock is Action Stock Transfer Corp., 7069 S. Highland Drive, Suite 300, Salt Lake City, Utah 84121.
SHARES AVAILABLE FOR FUTURE SALE
As of May 13, 2013, we had 21,726,536 shares of common stock outstanding, not including shares issuable upon the exercise of outstanding warrants, stock options and other convertible securities. Future sales of our common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock or impair our ability to raise equity capital in the future. As described below, only a limited number of shares of our common stock will be available for sale in the public market for a period of several months after completion of this offering due to contractual and legal restrictions on resale described below. Nevertheless, sales of a substantial number of shares of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our common stock at such time and our ability to raise equity capital at a time and price we deem appropriate. We cannot assure you that there will be an active market for our common stock.
Upon completion of this offering, and assuming the conversion of our 18% Senior Secured Convertible Promissory Notes, in the principal amount of $2,097,500, including accrued interest, at a conversion price of $0.20 per share (which conversion will occur automatically only if we receive at least $4,000,000 in gross proceeds from this offering), based upon the number of shares outstanding at May 13, 2013, there will be 38,214,036 shares of our common stock outstanding. Of these outstanding shares, the 6,000,000 shares (as part of the Units) sold in this offering will be freely tradable without restriction or future registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales may be made only in compliance with the limitations of Rule 144 described below.
Of the remaining shares outstanding after this offering, 16,332,453 shares are deemed “restricted securities” under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which rules are summarized below, or another exemption.
Public Float
Of our outstanding shares at May 13, 2013, 14,063,637 shares are beneficially owned by executive officers, directors and affiliates of ours. The remaining 7,662,899 shares constitute our public float which, based on the last sale price of our common stock reported on the OTC Bulletin Board on May 14, 2013, equaled approximately $7,662,899.
Rule 144
In general, under Rule 144, as currently in effect, a person who has beneficially owned shares of our common stock for at least six months, including the holding period of prior owners other than affiliates, is entitled to sell his or her shares without any volume limitations; an affiliate, however, can sell such number of shares within any three-month period as does not exceed the greater of:
| · | 1% of the number of shares of our common stock then outstanding, which will equal approximately 382,140 shares of common stock immediately after consummation of this offering, or |
| · | the average weekly trading volume of our common stock, assuming our shares are then traded on a national securities exchange, during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. |
Sales under Rule 144 are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us.
The validity of the issuance of the securities offered by us in this offering will be passed upon for us by Smith, Gambrell & Russell, LLP, Atlanta, Georgia.
The consolidated financial statements of SANUWAVE Health, Inc. as of December 31, 2012 and 2011 and for the years then ended included in this Prospectus and in the Registration Statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm (the report on the consolidated financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern) appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing and accounting.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SANUWAVE Health, Inc. and Subsidiaries
| Page | |
Consolidated Financial Statements | | |
Unaudited Financial Statements | | |
Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2012 | F-1 | |
| | |
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2013 and 2012 | F-2 | |
| | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 | F-3 | |
| | |
Notes to Condensed Consolidated Financial Statements | F-4 | |
Financial Statements
Report of Independent Registered Public Accounting Firm | F-16 | |
| | |
Consolidated Balance Sheets as of December 31, 2012 and 2011 | F-17 | |
| | |
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2012 and 2011 | F-18 | |
| | |
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2012 and 2011 | F-19 | |
| | |
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011 | F-20 | |
| | |
Notes to Consolidated Financial Statements | F-21 | |
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | |
ASSETS | | | | | | |
CURRENT ASSETS | | | | | | |
Cash and cash equivalents | | $ | 671,027 | | | $ | 70,325 | |
Accounts receivable - trade, net of allowance for doubtful accounts of $50,100 in 2013 and $44,124 in 2012 | | | 93,461 | | | | 87,826 | |
Inventory (Note 4) | | | 261,282 | | | | 292,665 | |
Prepaid expenses | | | 116,406 | | | | 128,495 | |
TOTAL CURRENT ASSETS | | | 1,142,176 | | | | 579,311 | |
| | | | | | | | |
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Note 5) | | | 27,851 | | | | 32,842 | |
| | | | | | | | |
OTHER ASSETS | | | 11,233 | | | | 11,358 | |
| | | | | | | | |
INTANGIBLE ASSETS, at cost, less accumulated amortization (Note 6) | | | 1,150,336 | | | | 1,227,025 | |
TOTAL ASSETS | | $ | 2,331,596 | | | $ | 1,850,536 | |
| | | | | | | | |
LIABILITIES | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | |
Accounts payable | | $ | 359,029 | | | $ | 555,898 | |
Accrued expenses (Note 7) | | | 623,311 | | | | 721,916 | |
Accrued employee compensation | | | 376,175 | | | | 534,659 | |
Derivative liability (Note 8) | | | 5,737,000 | | | | - | |
Senior secured convertible promissory notes (Note 8) | | | 436,983 | | | | - | |
Subscription payable for senior secured convertible promissory notes (Note 8) | | | - | | | | 438,516 | |
Interest payable, related parties (Note 9) | | | 80,071 | | | | 81,864 | |
Capital lease payable, current portion (Note 13) | | | 5,026 | | | | 4,933 | |
Liabilities related to discontinued operations | | | 655,061 | | | | 655,061 | |
TOTAL CURRENT LIABILITIES | | | 8,272,656 | | | | 2,992,847 | |
| | | | | | | | |
NON-CURRENT LIABILITIES | | | | | | | | |
Notes payable, related parties (Note 9) | | | 5,372,743 | | | | 5,372,743 | |
Capital lease payable, non-current portion (Note 13) | | | 2,659 | | | | 3,951 | |
TOTAL NON-CURRENT LIABILITIES | | | 5,375,402 | | | | 5,376,694 | |
TOTAL LIABILITIES | | | 13,648,058 | | | | 8,369,541 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS' DEFICIT | | | | | | | | |
PREFERRED STOCK, par value $0.001, 5,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | |
| | | | | | | | |
COMMON STOCK, par value $0.001, 150,000,000 shares authorized; 21,653,536 and 21,007,536 issued and outstanding in 2013 and 2012, respectively | | | 21,654 | | | | 21,008 | |
| | | | | | | | |
ADDITIONAL PAID-IN CAPITAL | | | 64,935,348 | | | | 64,357,193 | |
| | | | | | | | |
ACCUMULATED OTHER COMPREHENSIVE INCOME | | | 6,191 | | | | 13,116 | |
| | | | | | | | |
ACCUMULATED DEFICIT | | | (76,279,655 | ) | | | (70,910,322 | ) |
TOTAL STOCKHOLDERS' DEFICIT | | | (11,316,462 | ) | | | (6,519,005 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 2,331,596 | | | $ | 1,850,536 | |
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(UNAUDITED)
| | Three Months Ended March 31, 2013 | | | Three Months Ended March 31, 2012 | |
| | | | | | |
REVENUE | | $ | 201,234 | | | $ | 238,540 | |
| | | | | | | | |
COST OF REVENUE | | | 55,811 | | | | 71,772 | |
| | | | | | | | |
GROSS PROFIT | | | 145,423 | | | | 166,768 | |
| | | | | | | | |
OPERATING EXPENSES | | | | | | | | |
Research and development | | | 344,685 | | | | 603,797 | |
General and administrative | | | 851,921 | | | | 1,237,540 | |
Depreciation | | | 4,991 | | | | 5,210 | |
Amortization | | | 76,689 | | | | 76,689 | |
TOTAL OPERATING EXPENSES | | | 1,278,286 | | | | 1,923,236 | |
| | | | | | | | |
OPERATING LOSS | | | (1,132,863 | ) | | | (1,756,468 | ) |
| | | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | | |
Loss on embedded conversion feature of Senior Secured Notes (Note 8) | | | (3,737,000 | ) | | | - | |
Interest expense, net | | | (508,890 | ) | | | (78,856 | ) |
Gain on sale of fixed assets | | | 7,500 | | | | - | |
Gain on foreign currency exchange | | | 1,920 | | | | 9 | |
TOTAL OTHER INCOME (EXPENSE) | | | (4,236,470 | ) | | | (78,847 | ) |
| | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (5,369,333 | ) | | | (1,835,315 | ) |
| | | | | | | | |
INCOME TAX EXPENSE | | | - | | | | - | |
| | | | | | | | |
NET LOSS | | | (5,369,333 | ) | | | (1,835,315 | ) |
| | | | | | | | |
OTHER COMPREHENSIVE LOSS | | | | | | | | |
Foreign currency translation adjustments | | | (6,925 | ) | | | 4,928 | |
TOTAL COMPREHENSIVE LOSS | | $ | (5,376,258 | ) | | $ | (1,830,387 | ) |
| | | | | | | | |
LOSS PER SHARE: | | | | | | | | |
Net loss - basic | | $ | (0.25 | ) | | $ | (0.09 | ) |
Net loss - diluted | | $ | (0.25 | ) | | $ | (0.09 | ) |
| | | | | | | | |
Weighted average shares outstanding - basic | | | 21,278,128 | | | | 20,907,536 | |
Weighted average shares outstanding - diluted | | | 21,278,128 | | | | 20,907,536 | |
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
| | Three Months Ended March 31, 2013 | | | Three Months Ended March 31, 2012 | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net loss | | $ | (5,369,333 | ) | | $ | (1,835,315 | ) |
Adjustments to reconcile net loss to net cash used by operating activities | | | | | | | | |
Amortization | | | 76,689 | | | | 76,689 | |
Depreciation | | | 4,991 | | | | 5,210 | |
Change in allowance for doubtful accounts | | | 5,976 | | | | (2,520 | ) |
Stock-based compensation - employees, directors and advisors | | | 317,601 | | | | 262,176 | |
Stock issued for consulting services | | | 186,200 | | | | - | |
Loss on embedded conversion feature of Senior Secured Notes | | | 3,737,000 | | | | - | |
Accrued interest on Senior Secured Notes | | | 428,467 | | | | - | |
Gain on sale of property and equipment | | | (7,500 | ) | | | - | |
Changes in assets - (increase)/decrease | | | | | | | | |
Accounts receivable - trade | | | (11,611 | ) | | | (42,046 | ) |
Inventory | | | 31,383 | | | | 37,943 | |
Prepaid expenses | | | 12,089 | | | | (8,730 | ) |
Due from Pulse Veterinary Technologies, LLC | | | - | | | | 27,837 | |
Other | | | 125 | | | | (129 | ) |
Changes in liabilities - increase/(decrease) | | | | | | | | |
Accounts payable | | | (196,869 | ) | | | (152,553 | ) |
Accrued employee compensation | | | (158,484 | ) | | | 158,559 | |
Accrued expenses | | | (98,605 | ) | | | (15,773 | ) |
Interest payable, related parties | | | (1,793 | ) | | | (1,793 | ) |
NET CASH USED BY OPERATING ACTIVITIES | | | (1,043,674 | ) | | | (1,490,445 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Sale of property and equipment | | | 7,500 | | | | - | |
Purchase of property and equipment | | | - | | | | (945 | ) |
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES | | | 7,500 | | | | (945 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds from subscriptions payable for senior secured convertible promissory notes | | | 1,570,000 | | | | - | |
Proceeds from sale of capital stock - subscription agreement with related party | | | 75,000 | | | | - | |
Payments of principal on capital lease | | | (1,199 | ) | | | (1,112 | ) |
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES | | | 1,643,801 | | | | (1,112 | ) |
| | | | | | | | |
EFFECT OF EXCHANGE RATES ON CASH | | | (6,925 | ) | | | 4,928 | |
| | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 600,702 | | | | (1,487,574 | ) |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 70,325 | | | | 3,909,383 | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 671,027 | | | $ | 2,421,809 | |
| | | | | | | | |
SUPPLEMENTAL INFORMATION | | | | | | | | |
Cash paid for interest, related parties | | $ | 81,864 | | | $ | 81,864 | |
Cash paid for capital lease interest | | $ | 160 | | | $ | 247 | |
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
1. Nature of the Business
SANUWAVE Health, Inc. and subsidiaries (the “Company”) is a shockwave technology company using noninvasive, high-energy, acoustic shockwaves for regenerative medicine and other applications. The Company’s initial focus is regenerative medicine – utilizing noninvasive, acoustic shockwaves to solicit a biological response resulting in the body healing itself through the repair and regeneration of tissue, musculoskeletal and vascular structures. The Company’s lead regenerative product in the United States is the demaPACE® device, which is in a supplemental Phase III clinical study for treating diabetic foot ulcers with possible FDA approval in 2015 subject to submission of satisfactory clinical study results.
The Company’s portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. The Company intends to apply its Pulsed Acoustic Cellular Expression (PACE®) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. The Company is currently not marketing any commercial products in the United States. Revenue is from sales of the European Conformity Marking (“CE Mark”) devices and accessories in Europe, Canada and Asia/Pacific.
In addition, there are license/partnership opportunities for the Company’s shockwave technology for non-medical uses, including energy, water, food and industrial markets.
2. Going concern
The continuation of the Company’s business is dependent upon raising additional capital in the second quarter of 2013. As of March 31, 2013, the Company had cash and cash equivalents of $671,027 and negative working capital of $7,130,480. For the three months ended March 31, 2013 and 2012, the net cash used by operating activities was $1,043,674 and $1,490,445, respectively. The Company incurred a net loss of $5,369,333 for the three months ended March 31, 2013 and a net loss of $6,401,494 for the year ended December 31, 2012. Since inception, the Company has experienced recurring losses from operations and had an accumulated deficit of $76,279,655 at March 31, 2013. As a result, there is substantial doubt as to the Company’s ability to continue as a going concern.
Management’s plans are to obtain additional capital in the second quarter of 2013 through the issuance of common stock and/or other debt or equity securities and the Company has engaged financial advisors to assist with this process. The Company’s cash and cash equivalents, at March 31, 2013, will support the Company’s operations through May 2013. The Company expects to raise up to $600,000 through the issuance of unsecured promissory notes in May and June 2013 and/or amounts received on the Company’s subscription agreement with an affiliated shareholder (see Note 13). In addition, the Company has filed a registration statement with the SEC to raise up to $6,000,000 through the sale of equity securities and has engaged a placement agent to lead this best efforts offering. Even if the Company is successful in each of the short term capital raising efforts described above, the Company may be required to raise additional funds by the end of 2013 to continue operations. Management expects the Company’s monthly use of cash will be approximately $575,000 to $625,000 as the Company devotes substantial resources to the start of the patient enrollment phase of the supplemental Phase III clinical trial for the dermaPACE device to treat diabetic foot ulcers by the end of the second quarter of 2013. The Company estimates the direct cost of the dermaPACE clinical trial will be approximately $3,800,000 through 2014.
On March 8, 2013, the Company completed an offering in which it issued an aggregate of $2,000,000 of 18% senior secured convertible promissory notes (the “Senior Secured Notes”). The Senior Secured Notes are secured by the tangible and intangible assets of the Company. The Senior Secured Notes, as amended, will automatically convert to common stock if the Company raises $4,000,000 or more in gross proceeds through a qualified financing and/or license agreement as defined in the Senior Secured Note agreements, as amended. If the Company does not raise at least $4,000,000, the Senior Secured Notes will not automatically convert to common stock and will become due and payable. The Senior Secured Notes begin to mature in May 2013 and the Company is working with the holders to extend the maturity through the second quarter of 2013.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
2. Going concern (continued)
The Company may raise capital through the issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt, an investment by a strategic partner in a specific clinical indication or market opportunity, or by selling all or a portion of the Company's assets (or some combination of the foregoing). If these efforts are unsuccessful, the Company may be forced to seek relief through a filing under the U.S. Bankruptcy Code. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing shareholders. Although no assurances can be given, management of the Company believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for the Company to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in this Form 10-Q.
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles 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 footnotes required by United States generally accepted accounting principles for complete financial statements. The financial information as of March 31, 2013 and for the three months ended March 31, 2013 and 2012 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 month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2013.
The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.
Significant Accounting Policies
For further information and a summary of significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 26, 2013.
Fair Value Measurements
The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable - trade, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments.
The Company has adopted ASC 820-10, Fair Value Measurements (formerly SFAS No. 157), which defines fair value, establishes a framework for measuring fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair value measurements. 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;
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
3. Summary of Significant Accounting Policies (continued)
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 following table sets forth a summary of changes in the fair value of the derivative liability for the three months ended March 31, 2013:
Description | | | | | New Issuances | | | | | | | |
Derivative liability: | | | | | | | | | | | | |
Embedded conversion feature of Senior Secured Notes | | $ | - | | | $ | 4,908,000 | | | $ | 829,000 | | | $ | 5,737,000 | |
The Company accounts for derivative instruments under ASC 815, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. ASC 815 requires that the Company recognize all derivatives on the balance sheet at fair value. On March 8, 2013, the Company completed an offering and issued Senior Secured Notes that contain an embedded conversion feature which is accounted for as a derivative liability. In recording this derivative liability, $2,000,000 was recorded as a debt discount and the remaining value along with the gains (losses) resulting from the changes in the fair value of the derivative instruments are recorded in the “loss on embedded conversion feature of Senior Secured Notes” in the accompanying condensed consolidated statements of comprehensive loss. The fair value of the embedded conversion feature is determined based on a lattice solution, binomial approach pricing model, and includes the use of unobservable inputs such as the expected term, anticipated volatility and risk-free interest rate.
The Company’s notes payable, related parties consist of $5,372,743 of principal at March 31, 2013 and December 31, 2012. Interest accrues on the notes at a rate of 6% per annum. The fair value was determined using estimated future cash flows discounted at current rates, which is a Level 3 measurement. The estimated fair value of the Company’s notes payable, related parties was $4,621,186 and $4,545,620 at March 31, 2013 and December 31, 2012, respectively.
Recently Issued Accounting Standards
New accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that the Company adopts according to the various timetables the FASB specifies. The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.
In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-02, which amends the guidance in Accounting Standard Codification (“ASC”) 220 on Comprehensive Income. Under the revised guidance, companies are required to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, companies are required to present, either on the face of the statement where net income (loss) is presented or in the notes, the effects on the line items of net income (loss) of significant amounts reclassified out of AOCI but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income (loss) in its entirety in the same reporting period. This amended guidance is to be applied prospectively and is effective for reporting periods (interim and annual) beginning after December 15, 2012 for public companies, with early adoption permitted. The Company adopted the revised guidance January 1, 2013, and reported significant items reclassified out of AOCI in the notes to the condensed consolidated financial statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
4. Inventory
Inventory consists of the following:
| | | | | December 31, 2012 | |
| | | | | | |
Inventory - finished goods | | $ | 272,292 | | | $ | 306,706 | |
Inventory - parts | | | 76,090 | | | | 83,509 | |
Total | | | 348,382 | | | | 390,215 | |
Allowance for losses and obsolescence | | | (87,100 | ) | | | (97,550 | ) |
Net inventory | | $ | 261,282 | | | $ | 292,665 | |
5. Property and equipment
Property and equipment consists of the following:
| | | | | | |
| | | | | | |
Machines and equipment | | $ | 233,793 | | | $ | 233,793 | |
Office and computer equipment | | | 179,349 | | | | 179,349 | |
Software | | | 41,872 | | | | 41,872 | |
Furniture and fixtures | | | 25,679 | | | | 25,679 | |
Vehicles | | | - | | | | 22,531 | |
Other assets | | | 2,446 | | | | 2,446 | |
Total | | | 483,139 | | | | 505,670 | |
Accumulated depreciation | | | (455,288 | ) | | | (472,828 | ) |
Net property and equipment | | $ | 27,851 | | | $ | 32,842 | |
The aggregate depreciation related to property and equipment charged to operations was $4,991 and $5,210 for the three months ended March 31, 2013 and 2012, respectively.
6. Intangible assets
Intangible assets consist of the following:
| | March 31, 2013 | | | | |
| | | | | | |
Patents, at cost | | $ | 3,502,135 | | | $ | 3,502,135 | |
Less accumulated amortization | | | (2,351,799 | ) | | | (2,275,110 | ) |
Net intangible assets | | $ | 1,150,336 | | | $ | 1,227,025 | |
The aggregate amortization charged to operations was $76,689 and $76,689 for the three months ended March 31, 2013 and 2012, respectively.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
7. Accrued expenses
Accrued expenses consist of the following:
| | | | | | |
| | | | | | |
Accrued executive severance | | $ | 441,020 | | | $ | 542,269 | |
Accrued audit and tax preparation | | | 51,900 | | | $ | 102,600 | |
Accrued legal professional fees | | | 47,938 | | | | 23,519 | |
Accrued other | | | 82,453 | | | | 53,528 | |
| | $ | 623,311 | | | $ | 721,916 | |
8. 18% Senior secured convertible promissory notes
During the period from November 2012 through March 8, 2013, the Company entered subscriptions payable for 18% senior secured convertible promissory notes (as previously defined as the “Senior Secured Notes”) from select accredited investors. The Company completed the offering and issued an aggregate $2,000,000 in Senior Secured Notes on March 8, 2013. As of March 31, 2013, the Company had outstanding $2,000,000 in Senior Secured Notes and had $66,520 in accrued interest expense. As of December 31, 2012, the Company had received subscriptions payable for Senior Secured Notes in the aggregate principal amount of $430,000 and had accrued interest expense of $8,516. Kevin A. Richardson, II, chairman of the board of directors of the Company, purchased $60,000 of the Senior Secured Notes.
The Senior Secured Notes have a six month term from the subscription date and the note holders can convert into Company common stock at anytime during the term at a conversion price of $0.20 per share. Upon the consummation of a qualified financing and/or technology license, as defined in the Senior Secured Note agreements, as amended, of $4,000,000 or more by the Company, the principal and interest on the Senior Secured Notes will automatically convert into Company common stock equal to the lower of (i) the Company common stock issued in the qualified financing and/or technology license, reduced by a discount of 20%, and (ii) $0.20 per share. The note holders will also receive, if any are issued, warrants or any other securities issued in a qualified financing and/or technology license on similar terms to the qualified financing and/or technology license. The Senior Secured Notes are secured by the tangible and intangible assets of the Company.
The conversion feature embedded in the Senior Secured Notes is accounted for as a derivative liability, and resulted in the creation at issuance of a discount to the carrying amount of the debt in the amount of $2,000,000, which is being amortized as additional interest expense using the straight-line method over the term of the Senior Secured Notes (the Company determined that using the straight-line method of amortization did not yield a materially different amortization schedule than the effective interest method). The embedded conversion feature is recorded at fair value and is marked to market at each period, with the resulting change in fair value being recorded in the “loss on embedded conversion feature of Senior Secured Notes” in the accompanying condensed consolidated statements of comprehensive loss. The derivative liability for the embedded conversion feature of the Senior Secured Notes, at fair value, was $5,737,000 at March 31, 2013.
Accrued interest expense on the Senior Secured Notes, including amortization of the debt discount, totaled $428,467 for the three months ended March 31, 2013.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
9. Notes payable, related parties
The notes payable, related parties consist of the following:
| | | | | | |
Notes payable, unsecured, payable to | | | | | | |
HealthTronics, Inc., a shareholder of the Company | | $ | 5,372,743 | | | $ | 5,372,743 | |
Less current portion | | | - | | | | - | |
Non-current portion | | $ | 5,372,743 | | | $ | 5,372,743 | |
The notes payable, related parties were issued in conjunction with the Company’s purchase of the orthopedic division of HealthTronics, Inc. on August 1, 2005. The notes payable, related parties bear interest at 6% per annum. Quarterly interest through June 30, 2010, was accrued and added to the principal balance. Interest is paid quarterly in arrears beginning September 30, 2010. All remaining unpaid accrued interest and principal is due August 1, 2015. Accrued interest currently payable totaled $80,071 and $81,864 at March 31, 2013 and December 31, 2012, respectively.
Interest expense on notes payable to related parties totaled $80,071for the three months ended March 31, 2013 and 2012, respectively.
10. Income taxes
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to United States federal and state and non-United States income tax examinations by tax authorities for years before 2006.
At March 31, 2013, the Company had federal net operating loss (“NOL”) carryforwards of $54,017,215 for tax years through the year ended December 31, 2012, that will begin to expire in 2025. The use of deferred tax assets, including federal net operating losses, is limited to future taxable earnings. Based on the required analysis of future taxable income under the provisions of ASC 740, Income Taxes (formerly SFAS No. 109), the Company’s management believes that there is not sufficient evidence at March 31, 2013 indicating that the results of operations will generate sufficient taxable income to realize the net deferred tax asset in years beyond 2013. As a result, a valuation allowance was provided for the entire net deferred tax asset related to future years, including NOL carryforwards.
The Company’s ability to use its NOL carryforwards could be limited and subject to annual limitations. In connection with future offerings, the Company may realize a “more than 50% change in ownership” which could further limit its ability to use its NOL carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which NOL carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take advantage of all or portions of its NOL carryforwards for federal income tax purposes.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
11. Equity transactions
2013 Additional Capital Raise and Consulting Agreements
The continuation of the Company’s business is dependent upon raising additional capital. The Company has engaged financial advisors to identify the opportunities for a capital raise to fund the Company's dermaPACE clinical work and provide working capital. On February 25, 2013, the Company issued to a consultant 2,000,000 warrants to purchase the Company’s common stock at $0.35 per share. The five year warrants vest 300,000 on the date of grant and 1,700,000 upon the completion of a $5,000,000, or greater, capital raise on or prior to June 1, 2013 (see Note 12).
In February 2013, the Company entered into a consulting agreement with a consultant to assist the Company with its strategy for raising additional capital for which a portion of the fee for the services performed is common stock and warrants. The Company issued 100,000 shares of common stock under this agreement in February 2013. The fair value of the common stock of $35,000, based upon the closing market price of the Company’s common stock at the date the common stock was issued, was recorded as consulting expense for the three months ended March 31, 2013. In addition, the Company will issue to the consultant 1,000,000 warrants to purchase common stock at an exercise price of $0.35 per share with a term of five years upon consummation by the Company of an qualified offering (as defined in the consulting agreement) resulting in gross proceeds to the Company of no less than $4,000,000 (see Note 12). In February 2013, the Company entered into two consulting agreements for which a portion of the fee for the services performed is paid with common stock. The Company issued 246,000 shares of common stock under these agreements through March 31, 2013. The fair value of the common stock of $151,200, which was based upon the closing market price of the Company’s common stock at the dates the common stock was issued, was recorded as consulting expense for the three months ended March 31, 2013.
12. Warrants
A summary of the warrant activity as of March 31, 2013 and December 31, 2012, and the changes during the three months ended March 31, 2013, is presented as follows:
| | | | | | | | | | | | | | | |
Outstanding as of December 31, 2012 | | | 1,106,627 | | | | 1,106,627 | | | | 1,950,167 | | | | 3,576,737 | | | | - | |
Issued | | | - | | | | - | | | | - | | | | - | | | | 2,000,000 | |
Exercised | | | - | | | | - | | | | - | | | | - | | | | - | |
Expired | | | - | | | | - | | | | (1,950,167 | ) | | | - | | | | - | |
Outstanding as of March 31, 2013 | | | 1,106,627 | | | | 1,106,627 | | | | - | | | | 3,576,737 | | | | 2,000,000 | |
The Class A, Class B, Class E and Class F Warrants expire five years from date of issuance and the Class D Warrants expired two years from date of issuance. The Class A and Class E Warrants have an exercise price of $4.00 per share, the Class B Warrants have an exercise price of $8.00 per share and the Class F Warrants have an exercise price of $0.35 per share. The Class D Warrants expired unexercised on January 31, 2013.
As discussed in Note 11 above, on February 25, 2013, the Company issued to a consultant 2,000,000 warrants to purchase the Company’s common stock at $0.35 per share. The five year warrants vest 300,000 on the date of grant and 1,700,000 upon the completion of a $5,000,000, or greater, capital raise on or prior to June 1, 2013. The Company will record the underlying cost of the warrants as a cost of capital upon completion of a qualified offering, if it occurs.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
12. Warrants (continued)
As discussed in Note 11 above, in February 2013, the Company entered into a consulting agreement with a consultant to assist the Company with its strategy for raising additional capital for which a portion of the fee for the services performed is common stock and warrants. The Company will issue to the consultant 1,000,000 warrants to purchase common stock at an exercise price of $0.35 per share with a term of five years upon consummation by the Company of an qualified offering (as defined in the consulting agreement) resulting in gross proceeds to the Company of no less than $4,000,000. The Company will record the underlying cost of the warrants as a cost of capital upon completion of a qualified offering, if it occurs.
The exercise price and the number of shares covered by the warrants will be adjusted if the Company has a stock split, if there is a recapitalization of the Company’s Common Stock, or if the Company consolidates with or merges into another company.
13. Commitments and contingencies
Subscription agreement
On November 27, 2012, the Company and David N. Nemelka (the “Subscriber”), the brother of John F. Nemelka, a member of the Company’s board of directors, entered into a subscription agreement (the “Subscription Agreement”) whereby the Subscriber has agreed to purchase from the Company, and the Company has agreed to sell and issue, a total of 4,000,000 shares of the Company’s unregistered common stock at a purchase price equal to $0.25 per share, for an aggregate sales price of $1,000,000 (the “Purchase Price”). The shares are subject to piggy-back registration rights if the Company files a registration statement for an offering of securities.
The Purchase Price shall be payable to the Company as follows: (i) $50,000 on or before January 31, 2013; (ii) $50,000 on or before February 15, 2013; and (iii) the balance of $900,000 on or before May 27, 2014 (the “Outside Due Date”). The Subscriber may make payments of the Purchase Price at his discretion in minimum installments of $100,000 each, until the Outside Due Date.
In the event that at any time after February 15, 2013, the Company’s total available cash should be less than $100,000, the Subscriber shall, upon demand of the Company, pay to the Company $100,000 of the then outstanding balance of the Purchase Price, which payment shall be due within thirty (30) days of the demand. There is no limit on the number of demands that the Company may make pursuant to this provision of the Subscription Agreement, provided, however, that in no event shall the Company provide more than one notice of demand for payment in any thirty (30) day period.
As of March 31, 2013, the Subscriber had paid the Company $100,000 and was issued 400,000 shares of unregistered common stock of the Company. The Company will record the additional $900,000 and issue the corresponding 3,600,000 shares of common stock in the periods in which the Purchase Price is received.
Operating Leases
The Company leases office and warehouse space. Rent expense for the three months ended March 31, 2013 and 2012, was $27,474 and $86,798, respectively.
Capital Leases
The Company leases certain office equipment under an agreement classified as a capital lease. The leased assets serve as security for the lease. The accumulated depreciation of such equipment at March 31, 2013 and December 31, 2012 totaled $7,681 and $6,468, respectively. The net book value of such equipment at March 31, 2013 and December 31, 2012 totaled $6,872 and $8,085, respectively.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
13. Commitments and contingencies (continued)
Litigation
The Company is involved in various legal matters that have arisen in the ordinary course of business. While the ultimate outcome of these matters is not presently determinable, it is the opinion of management that the resolution will not have a material adverse effect on the financial position or results of operations of the Company.
HealthTronics, Inc., along with the Company, are defendants in an alleged breach of contract lawsuit dated April 21, 2006 brought in the Miami-Dade County Circuit Court, Florida by a former limited partner of a former limited partnership of the Company, Bone & Joint Treatment Centers of America. Bone & Joint Treatment Centers of America, the plaintiff, is seeking greater than $3 million. The lawsuit went to trial and the Company received a summary judgment in its favor in December 2011. On January 5, 2012, the plaintiff filed an appeal of the summary judgment and the appeal was heard by a three judge panel on April 29, 2013. HealthTronics, Inc. has been responsible for the defense of the lawsuit on behalf of the Company and believes the case is unfounded and is contesting the claims vigorously.
14. 401(k) plan
The Company sponsors a 401(k) plan that covers all employees who meet the eligibility requirements. The Company amended the 401(k) plan to make the Company matching contribution discretionary and discontinued the Company match effective February 1, 2012. The Company contributed $0 and $9,664 to the plan for the three months ended March 31, 2013 and 2012, respectively.
15. Stock-based compensation
On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Stock Incentive Plan”). The Stock Incentive Plan permits grants of awards to selected employees, directors and advisors of the Company in the form of restricted stock or options to purchase shares of common stock. Options granted may include non-statutory options as well as qualified incentive stock options. The Stock Incentive Plan is currently administered by the board of directors of the Company. The Stock Incentive Plan gives broad powers to the board of directors of the Company to administer and interpret the particular form and conditions of each option. The stock options granted under the Stock Incentive Plan are non-statutory options which generally vest over a period of up to four years and have a ten year term. The options are granted at an exercise price determined by the board of directors of the Company to be the fair market value of the common stock on the date of the grant. At December 31, 2012, the Stock Incentive Plan reserved 5,000,000 shares of common stock for grant. On February 21, 2013, the Stock Incentive Plan was amended to reserve a total of 8,500,000 shares of common stock for grant.
On February 21, 2013, the Company, by mutual agreement with all the active employees and directors of the Company, cancelled options granted to the active employees in the year ended December 31, 2011 and prior which totaled 1,113,644 shares of common stock at an average exercise price of $2.92. In exchange for these options, the active employees and directors received new options to purchase 2,243,644 shares of common stock at an exercise price of $0.35 per share. Using the Black-Scholes option pricing model, management has determined that the options at the grant date, net of the value of the cancelled options as of the date of cancellation, had an average fair value per share of $0.223 resulting in total compensation of $499,621. Compensation cost will be recognized over the requisite service period.
On February 21, 2013, the Company granted two members of the Company’s Medical Advisory Board each options to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.35 per share in place of an annual cash consulting fee. Using the Black-Scholes option pricing model, management has determined that the options at the grant date had a fair value per share of $0.25 resulting in total compensation of $25,000. Compensation cost will be recognized over the calendar year 2013.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
15. Stock-based compensation (continued)
On February 25, 2013, Joseph Chiarelli joined the Company to serve as the Chief Executive Officer and a director of the Company. Mr. Chiarelli was granted options to purchase 2,250,000 shares of the Company’s common stock at an exercise price of $0.35 per share. The options vest and become exercisable in five installments as follows: (i) 375,000 vested at grant; (ii) 375,000 vest upon the Company completing a financing resulting in gross proceeds to the Company of no less than $5,000,000 at a price per share of not less than $0.35; (iii) 375,000 upon the execution by the Company of a license or distribution agreement from which the Company is entitled to receive gross proceeds of no less than $1,000,000 and the Company has received payments of at least $250,000; (iv) 375,000 vest upon receipt by the Company of FDA approval for the use of dermaPACE; and (v) 750,000 vest in the event the Company achieves the milestones (i), (ii), (iii) and (iv) above during the initial two year term and the term is not extended by the Company. Using the Black-Scholes option pricing model, management has determined that the options had an average fair value per share of $0.207 resulting in total compensation of $465,000. Compensation cost will be recognized over the requisite service period.
On March 8, 2012, the Company granted two members of the Company’s Medical Advisory Board each options to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.44 per share in place of an annual cash consulting fee. Using the Black-Scholes option pricing model, management has determined that the options granted in March 2012 had a fair value per share of $0.27 resulting in total compensation of $27,250. Compensation cost was recognized over the calendar year 2012.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions for the three months ended March 31, 2013 and 2012:
| | 2013 | | | 2012 | |
Weighted average expected life in years | | | 4.3 | | | | 5.2 | |
Weighted average risk free interest rate | | | 0.72 | % | | | 0.95 | % |
Weighted average volatility | | | 150.0 | % | | | 75.0 | % |
Forfeiture rate | | | 0.0 | % | �� | | 0.0 | % |
Expected dividend yield | | | 0.0 | % | | | 0.0 | % |
The expected life of options granted represent the period of time that options granted are expected to be outstanding and are derived from the contractual terms of the options granted. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Since there is a limited trading history for the Company’s common stock, the expected volatility is based on a combination of historical data from companies similar in size, value and trading history for the Company’s common stock. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. Management estimates pre-vesting forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards that actually vest. The expected dividend yield is based on historical dividend experience, however, since inception the Company has not declared dividends.
The Company recognized as compensation cost for all outstanding stock options granted to employees, directors and advisors, $317,601 and $262,176 for the three months ended March 31, 2013 and 2012, respectively.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
15. Stock-based compensation (continued)
A summary of option activity as of March 31, 2013 and December 31, 2012, and the changes during the three months ended March 31, 2013, is presented as follows:
| | Options | | | Weighted Average Exercise Price per share | |
Outstanding as of December 31, 2012 | | | 5,229,330 | | | $ | 2.25 | |
Granted | | | 4,593,644 | | | $ | 0.35 | |
Exercised | | | - | | | $ | - | |
Cancelled | | | (1,113,644 | ) | | $ | 2.92 | |
Forfeited or expired | | | (105,000 | ) | | $ | 2.93 | |
Outstanding as of March 31, 2013 | | | 8,604,330 | | | $ | 1.14 | |
| | | | | | | | |
Exercisable | | | 4,733,572 | | | $ | 1.80 | |
The weighted average remaining contractual term for outstanding and exercisable stock options was 7.5 years as of March 31, 2013, and 6.6 years as of December 31, 2012.
A summary of the Company’s nonvested options as of March 31, 2013 and December 31, 2012, and changes during the three months ended March 31, 2013, is presented as follows:
| | Options | | | | |
Outstanding as of December 31, 2012 | | | 508,750 | | | $ | 0.66 | |
Granted | | | 4,593,644 | | | $ | 0.35 | |
Vested | | | (1,180,386 | ) | | $ | 0.41 | |
Cancelled | | | (43,750 | ) | | $ | 2.87 | |
Forfeited or expired | | | (7,500 | ) | | $ | 5.25 | |
Outstanding as of March 31, 2013 | | | 3,870,758 | | | $ | 0.33 | |
16. Changes in other comprehensive loss
The amounts recognized in other comprehensive loss for the three months ended March 31, 2013 were as follows:
| | | | | Total | |
| | | | | | |
Balance, at December 31, 2012 | | $ | 13,116 | | | $ | 13,116 | |
Other comprehensive loss before reclassifications | | | (6,925 | ) | | | (6,925 | ) |
Amounts reclassified from AOCI | | | - | | | | - | |
Net change in other comprehensive loss | | | (6,925 | ) | | | (6,925 | ) |
Balance, at March 31, 2013 | | $ | 6,191 | | | $ | 6,191 | |
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
17. Earnings (loss) per share
The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share (formerly SFAS No. 128,Earnings Per Share). Under the provisions of ASC 260, basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents then outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net income (loss) per share.
As a result of the net loss for the three months ended March 31, 2013 and 2012, respectively, all potentially dilutive shares were anti-dilutive and therefore excluded from the computation of diluted net loss per share. The anti-dilutive equity securities totaled 26,726,924 shares and 14,436,697 shares at March 31, 2013 and 2012, respectively.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
SANUWAVE Health, Inc. and Subsidiaries
Alpharetta, Georgia
We have audited the accompanying consolidated balance sheets of SANUWAVE Health, Inc. and Subsidiaries as of December 31, 2012 and 2011 and the related consolidated statements of comprehensive loss, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SANUWAVE Health, Inc. and Subsidiaries at December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note (1) to the financial statements, the Company has suffered recurring losses from operations, has a net working capital deficit, and is economically dependent upon future issuances of equity or other financing to fund ongoing operations, each of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note (1). The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO USA, LLP
Atlanta, Georgia
March 26, 2013
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011
| | 2012 | | | 2011 | |
ASSETS | | | | | | |
CURRENT ASSETS | | | | | | |
Cash and cash equivalents | | $ | 70,325 | | | $ | 3,909,383 | |
Accounts receivable - trade, net of allowance for doubtful accounts of $44,124 in 2012 and $74,852 in 2011 | | | 87,826 | | | | 81,565 | |
Inventory (Note 3) | | | 292,665 | | | | 396,284 | |
Prepaid expenses | | | 128,495 | | | | 162,975 | |
Due from Pulse Veterinary Technologies, LLC | | | - | | | | 27,837 | |
TOTAL CURRENT ASSETS | | | 579,311 | | | | 4,578,044 | |
| | | | | | | | |
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Note 4) | | | 32,842 | | | | 51,206 | |
| | | | | | | | |
OTHER ASSETS | | | 11,358 | | | | 3,192 | |
| | | | | | | | |
INTANGIBLE ASSETS, at cost, less accumulated amortization (Note 5) | | | 1,227,025 | | | | 1,533,782 | |
TOTAL ASSETS | | $ | 1,850,536 | | | $ | 6,166,224 | |
| | | | | | | | |
LIABILITIES | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | |
Accounts payable | | $ | 555,898 | | | $ | 756,657 | |
Accrued employee compensation | | | 534,659 | | | | 632,333 | |
Accrued expenses (Note 6) | | | 721,916 | | | | 190,583 | |
Subscriptions payable for senior secured convertible promissory notes (Note 7) | | | 438,516 | | | | - | |
Interest payable, related parties (Note 8) | | | 81,864 | | | | 81,864 | |
Capital lease payable, current portion (Note 13) | | | 4,933 | | | | 4,576 | |
Liabilities related to discontinued operations (Note 9) | | | 655,061 | | | | 655,061 | |
TOTAL CURRENT LIABILITIES | | | 2,992,847 | | | | 2,321,074 | |
| | | | | | | | |
NON-CURRENT LIABILITIES | | | | | | | | |
Notes payable, related parties (Note 8) | | | 5,372,743 | | | | 5,372,743 | |
Capital lease payable, non-current portion (Note 13) | | | 3,951 | | | | 8,884 | |
TOTAL NON-CURRENT LIABILITIES | | | 5,376,694 | | | | 5,381,627 | |
TOTAL LIABILITIES | | | 8,369,541 | | | | 7,702,701 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 13) | | | - | | | | - | |
| | | | | | | | |
STOCKHOLDERS' DEFICIT | | | | | | | | |
PREFERRED STOCK, par value $0.001, 5,000,000 shares authorized; no shares issued and outstanding (Note 11) | | | - | | | | - | |
| | | | | | | | |
COMMON STOCK, par value $0.001, 150,000,000 shares and 50,000,000 shares authorized in 2012 and 2011, respectively; 21,007,536 and 20,907,536 issued and outstanding at December 31, 2012 and 2011, respectively (Note 11) | | | 21,008 | | | | 20,908 | |
| | | | | | | | |
ADDITIONAL PAID-IN CAPITAL | | | 64,357,193 | | | | 62,940,977 | |
| | | | | | | | |
ACCUMULATED OTHER COMPREHENSIVE INCOME | | | 13,116 | | | | 10,466 | |
| | | | | | | | |
ACCUMULATED DEFICIT | | | (70,910,322 | ) | | | (64,508,828 | ) |
TOTAL STOCKHOLDERS' DEFICIT | | | (6,519,005 | ) | | | (1,536,477 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 1,850,536 | | | $ | 6,166,224 | |
The accompanying notes to consolidated financial
statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSYears Ended December 31, 2012 and 2011
| | 2012 | | | 2011 | |
| | | | | | |
REVENUES | | $ | 769,217 | | | $ | 802,572 | |
| | | | | | | | |
COST OF REVENUES | | | 220,257 | | | | 261,890 | |
| | | | | | | | |
GROSS PROFIT | | | 548,960 | | | | 540,682 | |
| | | | | | | | |
OPERATING EXPENSES | | | | | | | | |
Research and development | | | 1,762,194 | | | | 2,731,059 | |
General and administrative | | | 4,521,957 | | | | 6,292,950 | |
Depreciation | | | 20,375 | | | | 19,034 | |
Amortization | | | 306,757 | | | | 306,756 | |
TOTAL OPERATING EXPENSES | | | 6,611,283 | | | | 9,349,799 | |
| | | | | | | | |
OPERATING LOSS | | | (6,062,323 | ) | | | (8,809,117 | ) |
| | | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | | |
Interest expense, net | | | (331,743 | ) | | | (472,155 | ) |
Loss on foreign currency exchange | | | (7,428 | ) | | | (13,744 | ) |
Transitional services provided to Pulse Veterinary Technologies, LLC | | | - | | | | 375,000 | |
Loss on extinguishment of debt (Notes 8 and 11) | | | - | | | | (1,318,781 | ) |
TOTAL OTHER INCOME (EXPENSE) | | | (339,171 | ) | | | (1,429,680 | ) |
| | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (6,401,494 | ) | | | (10,238,797 | ) |
| | | | | | | | |
INCOME TAX EXPENSE | | | - | | | | - | |
| | | | | | | | |
NET LOSS | | | (6,401,494 | ) | | | (10,238,797 | ) |
| | | | | | | | |
OTHER COMPREHENSIVE LOSS | | | | | | | | |
Foreign currency translation adjustments | | | 2,650 | | | | (436 | ) |
TOTAL COMPREHENSIVE LOSS | | $ | (6,398,844 | ) | | $ | (10,239,233 | ) |
| | | | | | | | |
LOSS PER SHARE: | | | | | | | | |
Net loss - basic | | $ | (0.30 | ) | | $ | (0.52 | ) |
Net loss - diluted | | $ | (0.30 | ) | | $ | (0.52 | ) |
| | | | | | | | |
Weighted average shares outstanding - basic | | | 20,915,869 | | | | 19,624,061 | |
Weighted average shares outstanding - diluted | | | 20,915,869 | | | | 19,624,061 | |
The accompanying notes to consolidated financial
statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICITYears Ended December 31, 2012 and 2011
| | Preferred Stock | | | Common Stock | | | | | | | | | | | | | |
| | Shares Number of Issued and Outstanding | | | Par Value | | | | | | Par Value | | | Additional Paid- in Capital | | | | | | | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of December 31, 2010 | | | - | | | | - | | | | 14,794,650 | | | | 14,795 | | | | 43,728,133 | | | | (54,270,031 | ) | | | 10,902 | | | | (10,516,201 | ) |
Unit options exercised for cash, related parties | | | - | | | | - | | | | 1,231,504 | | | | 1,231 | | | | 2,461,777 | | | | - | | | | - | | | | 2,463,008 | |
Unit options exercised for cash | | | - | | | | - | | | | 718,663 | | | | 719 | | | | 1,436,607 | | | | - | | | | - | | | | 1,437,326 | |
Private placement shares issued for cash | | | - | | | | - | | | | 2,804,593 | | | | 2,805 | | | | 8,464,316 | | | | - | | | | - | | | | 8,467,121 | |
Notes payable, related parties exchanged for shares | | | - | | | | - | | | | 1,358,126 | | | | 1,358 | | | | 5,731,331 | | | | - | | | | - | | | | 5,732,689 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (10,238,797 | ) | | | - | | | | (10,238,797 | ) |
Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 1,118,813 | | | | - | | | | - | | | | 1,118,813 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (436 | ) | | | (436 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of December 31, 2011 | | | - | | | | - | | | | 20,907,536 | | | | 20,908 | | | | 62,940,977 | | | | (64,508,828 | ) | | | 10,466 | | | | (1,536,477 | ) |
Shares issued for cash | | | - | | | | - | | | | 100,000 | | | | 100 | | | | 24,900 | | | | - | | | | - | | | | 25,000 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (6,401,494 | ) | | | - | | | | (6,401,494 | ) |
Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 1,391,316 | | | | - | | | | - | | | | 1,391,316 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,650 | | | | 2,650 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of December 31, 2012 | | | - | | | $ | - | | | | 21,007,536 | | | $ | 21,008 | | | $ | 64,357,193 | | | $ | (70,910,322 | ) | | $ | 13,116 | | | $ | (6,519,005 | ) |
The accompanying notes to consolidated financial
statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2012 and 2011
| | 2012 | | | 2011 | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net loss | | $ | (6,401,494 | ) | | $ | (10,238,797 | ) |
Adjustments to reconcile net loss to net cash used by operating activities | | | | | | | | |
Amortization | | | 306,757 | | | | 306,756 | |
Depreciation | | | 20,375 | | | | 19,034 | |
Change in allowance for doubtful accounts | | | (30,728 | ) | | | 37,949 | |
Stock-based compensation | | | 1,391,316 | | | | 1,118,813 | |
Accrued interest on convertible notes | | | 8,516 | | | | 166,618 | |
Loss on extinguishment of debt | | | - | | | | 1,318,781 | |
Changes in assets - (increase)/decrease | | | | | | | | |
Accounts receivable - trade | | | 24,467 | | | | (23,965 | ) |
Inventory | | | 103,619 | | | | 67,359 | |
Prepaid expenses | | | 34,480 | | | | (41,891 | ) |
Due from Pulse Veterinary Technologies, LLC | | | 27,837 | | | | 17,552 | |
Other | | | (8,166 | ) | | | 29,061 | |
Changes in liabilities - increase/(decrease) | | | | | | | | |
Accounts payable | | | (200,759 | ) | | | (1,073,158 | ) |
Accrued employee compensation | | | (97,674 | ) | | | (469,077 | ) |
Accrued expenses | | | 531,333 | | | | (65,621 | ) |
Interest payable, related parties | | | - | | | | (1,113 | ) |
NET CASH USED BY OPERATING ACTIVITIES | | | (4,290,121 | ) | | | (8,831,699 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Purchase of property and equipment | | | (2,011 | ) | | | (42,302 | ) |
NET CASH USED BY INVESTING ACTIVITIES | | | (2,011 | ) | | | (42,302 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds from subscriptions payable for senior secured convertible promissory notes | | | 430,000 | | | | - | |
Proceeds from sale of capital stock - subscription agreement with related party | | | 25,000 | | | | - | |
Payments of principal on capital lease | | | (4,576 | ) | | | (1,092 | ) |
Proceeds from unit options exercised, related parties | | | - | | | | 2,463,008 | |
Proceeds from unit options exercised | | | - | | | | 1,437,326 | |
Proceeds from private placement | | | - | | | | 8,467,121 | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 450,424 | | | | 12,366,363 | |
| | | | | | | | |
EFFECT OF EXCHANGE RATES ON CASH | | | 2,650 | | | | (436 | ) |
| | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (3,839,058 | ) | | | 3,491,926 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 3,909,383 | | | | 417,457 | |
CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 70,325 | | | $ | 3,909,383 | |
| | | | | | | | |
SUPPLEMENTAL INFORMATION | | | | | | | | |
Cash paid for interest, related parties | | $ | 324,768 | | | $ | 324,768 | |
Cash paid for capital lease interest | | $ | 858 | | | $ | 266 | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | |
Notes payable, related parties exchanged for capital stock (Note 8 and 11) | | $ | - | | | $ | 4,413,908 | |
Equipment purchased with capital lease | | | - | | | | 14,552 | |
TOTAL NON-CASH INVESTING AND FINANCING ACTIVITIES | | $ | - | | | $ | 4,428,460 | |
The accompanying notes to consolidated financial
statements are an integral part of these statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(1) Going Concern
As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $6,401,494 and $10,238,797 during the years ended December 31, 2012 and 2011, respectively, and the net cash used by operating activities was $4,290,121 and $8,831,699, respectively. As of December 31, 2012, the Company had a net working capital deficit of $2,413,536, an accumulated deficit of $70,910,322 and cash and cash equivalents of $70,325. The operating losses and net working capital deficit create an uncertainty about the Company’s ability to continue as a going concern.
The continuation of the Company’s business is dependent upon raising additional capital. The Company has been working with select accredited investors to raise capital through issuing senior secured convertible promissory notes as discussed in Note (17). The Company received subscriptions for an aggregate $430,000 through December 31, 2012. Subsequent to year-end, the Company received subscriptions for an additional $1,570,000 in senior secured convertible promissory notes. The Company issued the aggregate $2,000,000 of senior secured convertible promissory notes on March 8, 2013. Kevin A. Richardson, II, chairman of the board of directors of the Company, purchased $60,000 of the senior secured convertible promissory notes. Management’s plans are to obtain additional capital in 2013 through the issuance of common stock and/or other equities and has engaged an investment bank to assist with this capital raise.
Additionally, the Company may raise additional capital through the issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt, an investment by a strategic partner in a specific clinical indication or market opportunity, or by selling all or a portion of the Company's assets. If these efforts are unsuccessful, the Company may be forced to seek relief through a filing under the U.S. Bankruptcy Code. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing shareholders. Although no assurances can be given, management of the Company believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
(2) Summary of significant accounting policies
Description of the business – SANUWAVE Health, Inc. and subsidiaries (the "Company") is a shockwave technology company using noninvasive, high energy, acoustic shockwave for regenerative medicine and other applications. The Company’s initial focus is regenerative medicine – utilizing noninvasive, acoustic shockwaves to solicit a biological response resulting in the body healing itself through the repair and regeneration of tissue, musculoskeletal and vascular structures. The Company’s lead product is the demaPACE device for treating diabetic foot ulcers which is in a supplemental Phase III clinical study with the FDA.
The Company’s portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. The Company intends to apply its Pulsed Acoustic Cellular Expression (PACE®) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. The Company currently does not market any commercial products in the United States. Revenues are from sales of the European Conformity Marking (“CE Mark”) devices and accessories in Europe, Canada and Asia.
In addition, there are license/partnership opportunities for the Company's shock wave technology in non-medical uses, including energy, water, food and industrial markets.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(2) Summary of significant accounting policies (continued)
The significant accounting policies followed by the Company are summarized below:
Foreign currency translation - The functional currencies of the Company’s foreign operations are the local currencies. The financial statements of the Company’s foreign subsidiaries have been translated into United States dollars in accordance with ASC 830, Foreign Currency Matters (formerly SFAS No. 52, Foreign Currency Translation.) All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. Translation adjustments are reported in other comprehensive income in the consolidated statements of comprehensive loss and as cumulative translation adjustments as a separate component of accumulated other comprehensive income (loss) in the consolidated statements of stockholders’ deficit.
Principles of consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Estimates – These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein. Significant estimates include the recording of allowances for doubtful accounts, estimated reserves for inventory, estimated useful life of property and equipment, accrued expenses, the determination of the valuation allowances for deferred taxes, estimated fair value of stock-based compensation, estimated fair value of intangible assets, the estimated fair value assigned to the capital stock units exchanged for the promissory notes and the estimated fair value assigned to the common stock and warrants exchanged for the notes payable, related parties.
Cash and cash equivalents - For purposes of the consolidated financial statements, liquid instruments with an original maturity of 90 days or less are considered cash and cash equivalents. The Company maintains its cash in bank accounts which may exceed federally insured limits.
Concentration of credit risk and limited suppliers - Management routinely assesses the financial strength of its customers and, as a consequence, believes accounts receivable are stated at the net realizable value and credit risk exposure is limited. Two distributors accounted for 29% and 20% of revenues for the year ended December 31, 2012, and 35% and 25% of revenues for the year ended December 31, 2011. The two distributors accounted for 35% and 6% of accounts receivable at December 31, 2012, and 23% and 29% of accounts receivable at December 31, 2011.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(2) Summary of significant accounting policies (continued)
We depend on suppliers for product component materials and other components that are subject to stringent regulatory requirements. We currently purchase most of our product component materials from single suppliers and the loss of any of these suppliers could result in a disruption in our production. If this were to occur, it may be difficult to arrange a replacement supplier because certain of these materials may only be available from one or a limited number of sources. In addition, establishing additional or replacement suppliers for these materials may take a substantial period of time, as certain of these suppliers must be approved by regulatory authorities.
Accounts receivable - Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings based on its assessment of the current status of individual accounts. Receivables are generally considered past due if greater than 60 days old. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts.
Inventory - Inventory consists of finished medical equipment and parts and is stated at the lower of cost or market, which is valued using the first in, first out (“FIFO”) method. Market is based upon realizable value less allowance for selling and distribution expenses. The Company analyzes its inventory levels and writes down inventory that has, or is expected to, become obsolete.
Depreciation of property and equipment - The straight-line method of depreciation is used for computing depreciation on property and equipment. Depreciation is based on estimated useful lives as follows: machines and equipment, 3 years; office and computer equipment, 3 years; leasehold improvements, 3 years; furniture and fixtures, 3 years; vehicles, 3 years; and software, 2 years.
Intangible assets - Intangible assets subject to amortization consist of patents which are recorded at cost. Patents are amortized on a straight-line basis over the average life of 11.4 years. The Company regularly reviews intangible assets to determine if facts and circumstances indicate that the useful life is shorter than the Company originally estimated or that the carrying amount of the assets may not be recoverable. Factors the Company considers important and could trigger an impairment review include the following:
● Significant delays or obstacles encountered in the dermaPACE device clinical trial and PMA application;
● Significant changes in the manner in which we use our assets or significant changes in our overall business strategy; and
● Significant underperformance of our assets relative to future operating results.
If such facts and circumstances exist, the Company assesses the recoverability of the intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the intangible asset exceeds its fair value.
Fair value of financial instruments - The book values of accounts receivable, accounts payable, and other financial instruments approximate their fair values, principally because of the short-term maturities of these instruments.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(2) Summary of significant accounting policies (continued)
The Company has adopted ASC 820-10, Fair Value Measurements (formerly SFAS No. 157), which defines fair value, establishes a framework for measuring fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair value measurements. 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’s notes payable, related parties consist of $5,372,743 of principal at December 31, 2012 and 2011. Interest accrues on the notes at a rate of six percent (6%) per annum. The fair value was determined using estimated future cash flows discounted at current rates, which is a Level 3 measurement. The estimated fair value of the Company’s notes payable, related parties was $4,545,620 and $4,253,362 at December 31, 2012 and 2011, respectively.
The Company’s subscriptions payable for the 18% senior secured convertible promissory notes consist of $438,516 in principal and accrued interest at December 31, 2012. Because of the short term nature of the subscription agreements and the underlying notes which have a maturity of six months and are not traded on an active market, the fair value is estimated to approximate the book value at December 31, 2012.
Impairment of long-lived assets – The Company reviews long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the asset’s carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. The Company determines fair value by using a combination of comparable market values and discounted cash flows, as appropriate.
Revenue recognition - Sales of medical devices, including related applicators and applicator kits, are recognized when shipped to the customer. Shipments under agreements with distributors are invoiced at a fixed price, are not subject to return, and payment for these shipments is not contingent on sales by the distributor. The Company recognizes revenue on shipments to distributors in the same manner as with other customers. Fees from services performed are recognized when the service is performed.
Shipping and handling costs - Shipping charges billed to customers are included in revenue. Shipping and handling costs have been recorded in cost of revenues.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(2) Summary of significant accounting policies (continued)
Income taxes- Income taxes are accounted for utilizing the asset and liability method prescribed by the provisions of ASC 740, Income Taxes (formerly SFAS No. 109, Accounting for Income Taxes). Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the deferred tax assets, including loss carryforwards, when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
A provision of ASC 740, Income Taxes (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48)) specifies the way public companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions would “more-likely-than-not” be sustained if challenged by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year.
The Company will recognize in income tax expense interest and penalties related to income tax matters. For the years ended December 31, 2012 and 2011, the Company did not have any amounts recorded for interest and penalties.
Loss per share - The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share (formerly SFAS No. 128, Earnings Per Share). Under the provisions of ASC 260, basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents then outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net income (loss) per share. As a result of the net loss for the years ended December 31, 2012 and 2011, respectively, all potentially dilutive shares were anti-dilutive and therefore excluded from the computation of diluted net loss per share. The anti-dilutive equity securities totaled 15,162,069 shares and 14,390,697 shares at December 31, 2012 and 2011, respectively.
Comprehensive income – ASC 220, Comprehensive Income (formerly SFAS No. 130, Reporting Comprehensive Income) establishes standards for reporting comprehensive income (loss) and its components in a financial statement. Comprehensive income (loss) as defined includes all changes in equity (net assets) during a period from non-owner sources. The only source of other comprehensive income (loss) for the Company, which is excluded from net income (loss), is foreign currency translation adjustments.
Stock-based compensation - The Company uses the fair value method of accounting prescribed by ASC 718, Compensation – Stock Compensation (formerly SFAS No. 123(R), Accounting for Stock-Based Compensation) for its employee stock option program. Under ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally up to four years).
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(2) Summary of significant accounting policies (continued)
Research and development - Research and development costs are expensed as incurred. Research and development costs include payments to third parties that specifically relate to the Company’s products in clinical development, such as payments to contract research organizations, clinical investigators, clinical related consultants and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits and travel) for employees of the regulatory affairs, clinical affairs, quality assurance, quality control, and research and development departments are classified as research and development costs.
Recent pronouncements – There have been no recently issued accounting standards that are expected to have a material impact on our consolidated financial statements.
(3) Inventory
Inventory consists of the following at December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
| | | | | | |
Inventory - finished goods | | $ | 306,706 | | | $ | 412,291 | |
Inventory - parts | | | 83,509 | | | | 113,593 | |
Gross inventory | | | 390,215 | | | | 525,884 | |
Provision for losses and obsolescence | | | (97,550 | ) | | | (129,600 | ) |
Net inventory | | $ | 292,665 | | | $ | 396,284 | |
(4) Property and equipment
Property and equipment consists of the following at December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
| | | | | | |
Machines and equipment | | $ | 233,793 | | | $ | 232,848 | |
Office and computer equipment | | | 179,349 | | | | 224,600 | |
Software | | | 41,872 | | | | 41,872 | |
Furniture and fixtures | | | 25,679 | | | | 24,613 | |
Vehicles | | | 22,531 | | | | 22,531 | |
Leasehold improvements | | | - | | | | 67,421 | |
Other assets | | | 2,446 | | | | 2,378 | |
Total | | | 505,670 | | | | 616,263 | |
Accumulated depreciation | | | (472,828 | ) | | | (565,057 | ) |
Net property and equipment | | $ | 32,842 | | | $ | 51,206 | |
The depreciation charged to operations was $20,375 and $19,034 for the years ended December 31, 2012 and 2011, respectively. The depreciation policies followed by the Company are described in Note (2).
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(5) Intangible assets
Intangible assets consist of the following at December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
| | | | | | |
Patents, at cost | | $ | 3,502,135 | | | $ | 3,502,135 | |
Less accumulated amortization | | | (2,275,110 | ) | | | (1,968,353 | ) |
Net intangible assets | | $ | 1,227,025 | | | $ | 1,533,782 | |
The amortization expense charged to operations was $306,757 and $306,756 for the years ended December 31, 2012 and 2011, respectively. The amortization policies followed by the Company are described in Note (2).
Amortization expense for the future years is summarized as follows:
Years ending December 31, | | Amount | |
| | | |
2013 | | $ | 306,756 | |
2014 | | | 306,756 | |
2015 | | | 306,756 | |
2016 | | | 306,757 | |
Total | | $ | 1,227,025 | |
The weighted average amortization period for intangible assets is as follows:
| | Amount | | | | |
| | | | | | |
Patents | | $ | 3,502,135 | | | | 11.4 | |
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(6) Accrued expenses
Accrued expenses consist of the following at December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
| | | | | | |
Accrued executive severance | | $ | 542,269 | | | $ | - | |
Accrued audit and tax preparation | | | 102,600 | | | | 75,516 | |
Accrued legal professional fees | | | 23,519 | | | | 61,000 | |
Accrued other | | | 53,528 | | | | 54,067 | |
| | $ | 721,916 | | | $ | 190,583 | |
On November 6, 2012, the Company entered into a Severance and Advisory Agreement (the “Severance Agreement”) with Christopher M. Cashman in connection with his resignation as President and Chief Executive Officer, and a director of the Company. Pursuant to the Severance Agreement, Mr. Cashman will receive, as severance along with other non-cash items, six months of his base salary payable over the following six month period and bonus payments of $100,000 upon each of four bonus payment events tied to the Company’s clinical trial plan for the dermaPACE device, or December 31, 2016, whichever occurs first. The accrued executive severance at December 31, 2012 represents the unpaid portion of the base salary and bonus payments.
(7) Subscriptions payable for senior secured convertible promissory notes
During the year ended December 31, 2012, the Company entered subscriptions payable for 18% senior secured convertible promissory notes (the “Senior Secured Notes”) from selected accredited investors. Up to $2,000,000 aggregate principal amount of Senior Secured Notes are being offered (the “Offering”) by the Company. The Company completed the Offering and issued an aggregate $2,000,000 in notes on March 8, 2013.
The Senior Secured Notes have a six month term from the subscription date and the note holders can convert into Company common stock at anytime during the term at $0.20 per share. Upon the consummation of a qualified financing and/or technology license, as defined in the Senior Secured Note agreements, of $4,000,000 or more by the Company, the principal and interest on the Senior Secured Notes will convert into Company common stock equal to the lower of (i) the Company common stock issued in the qualified financing and/or technology license, reduced by a discount of 20%, and (ii) $0.20 per share. The note holders will also receive, if any are issued, warrants or any other security issued in a qualified financing and/or technology license on similar terms to the qualified financing and/or technology license. The Senior Secured Notes are secured by the tangible and intangible assets of the Company. The Company is in the process of evaluating the accounting treatment for these notes issued subsequent to December 31, 2012 and any potential embedded derivatives included therein.
As of December 31, 2012, the Company had received subscriptions payable for Senior Secured Notes in the aggregate principal amount of $430,000 and had accrued interest expense of $8,516.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(8) Notes payable, related parties
The notes payable, related parties consist of the following at December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
| | | | | | |
Notes payable, unsecured, payable to HealthTronics, Inc., a shareholder of the Company | | $ | 5,372,743 | | | $ | 5,372,743 | |
Less current portion | | | - | | | | - | |
Non-current portion | | $ | 5,372,743 | | | $ | 5,372,743 | |
The notes payable, related parties were issued in conjunction with the Company’s purchase of the orthopedic division of HealthTronics, Inc. on August 1, 2005. The notes payable, related parties bear interest at 6% per annum. Quarterly interest through June 30, 2010, was accrued and added to the principal balance. Interest is paid quarterly in arrears beginning September 30, 2010. All remaining unpaid accrued interest and principal is due August 1, 2015. Accrued interest currently payable totaled $81,864 at December 31, 2012 and 2011. Accrued interest not payable until August 1, 2015 totaled $1,372,743 at December 31, 2012 and 2011, and is included in the balance above.
Maturities on notes payable, related parties are as follows:
Years ending December 31, | | Amount | |
| | | |
2013 | | $ | - | |
2014 | | | - | |
2015 | | | 5,372,743 | |
Total | | $ | 5,372,743 | |
On April 4, 2011, the Company amended the terms of outstanding notes with Prides Capital Fund I, LP and NightWatch Capital Partners II, LP such that the unpaid principal and interest balance on the notes, totaling $4,413,908, was cancelled in consideration of the issuance of 1,358,126 shares of common stock of the Company. In addition, the Company, in connection with this transaction, issued to the noteholders warrants to purchase an aggregate of 679,064 shares of common stock at an exercise price of $4.00 per share. In accordance with ASC 470, “Debt”, in April 2011, the Company recorded a loss from extinguishment of debt of $1,318,781, which was the difference between the estimated fair value of the common stock and warrants on the date of exchange of $9,330,326 and the fair value of the notes (assuming the conversion feature was exercised by the noteholders) of $8,011,545.
Interest expense on notes payable, related parties totaled $324,768 and $490,273 for the years ended December 31, 2012 and 2011, respectively.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(9) Discontinued operations
As of December 31, 2012 and 2011, the Company’s liabilities related to discontinued operations were as follows:
| | 2012 | | | 2011 | |
| | | | | | |
Accrued expenses | | $ | (655,061 | ) | | $ | (655,061 | ) |
| | | | | | | | |
Liabilities of discontinued operations | | $ | (655,061 | ) | | $ | (655,061 | ) |
(10) Income taxes
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to United States federal and state and non-United States income tax examinations by tax authorities for years before 2006.
Deferred income taxes are provided for temporary differences between the carrying amounts and tax basis of assets and liabilities. Deferred taxes are classified as current or noncurrent based on the financial statement classification of the related asset or liability giving rise to the temporary difference. For those deferred tax assets or liabilities (such as the tax effect of the net operating loss carryforwards) which do not relate to a financial statement asset or liability, the classification is based on the expected reversal date of the temporary difference.
The income tax provision (benefit) consists of the following at December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
Current: | | | | | | |
Federal | | $ | - | | | $ | - | |
State | | | - | | | | - | |
Foreign | | | - | | | | - | |
| | | - | | | | - | |
Deferred: | | | | | | | | |
Federal | | | (2,126,006 | ) | | | (2,885,054 | ) |
State | | | (227,883 | ) | | | (332,175 | ) |
Foreign | | | 12,556 | | | | 52,136 | |
Change in valuation allowance | | | 2,341,333 | | | | 3,165,093 | |
| | $ | - | | | $ | - | |
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(10) Income taxes (continued)
The income tax provision (benefit) amounts differ from the amounts computed by applying the United States federal statutory income tax rate of 34% to pretax income (loss) as a result of the following for the years ended December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
| | | | | | |
Tax expense (benefit) at statutory rate | | $ | (2,176,508 | ) | | $ | (3,583,579 | ) |
Increase (reduction) in income taxes resulting from: | | | | | | | | |
State income taxes (benefit), net of federal benefit | | | (159,432 | ) | | | (248,639 | ) |
Income from foreign subsidiaries | | | 165,660 | | | | 461,573 | |
Non-deductible loss on extinguishment of debt | | | - | | | | 216,969 | |
Change in valuation allowance - United States | | | 2,301,986 | | | | 3,217,229 | |
Other | | | (131,706 | ) | | | (63,553 | ) |
Income tax expense (benefit) | | $ | - | | | $ | - | |
The tax effects of temporary differences that give rise to the deferred tax assets at December 31, 2012 and 2011 are as follows:
| | 2012 | | | 2011 | |
Deferred tax assets: | | | | | | |
Net operating loss carryforwards | | $ | 20,147,348 | | | $ | 18,458,402 | |
Net operating loss carryforwards - foreign | | | 148,674 | | | | 109,327 | |
Excess of tax basis over book value of property and equipment | | | 42,946 | | | | 63,785 | |
Excess of tax basis over book value of intangible assets | | | 431,513 | | | | 427,484 | |
Stock-based compensation | | | 3,097,308 | | | | 2,572,287 | |
Accrued employee compensation | | | 352,032 | | | | 235,109 | |
Captialized equity costs | | | 75,471 | | | | 75,471 | |
Inventory reserve | | | 36,811 | | | | 48,905 | |
| | | 24,332,103 | | | | 21,990,770 | |
Valuation allowance | | | (24,332,103 | ) | | | (21,990,770 | ) |
Net deferred tax assets | | $ | - | | | $ | - | |
The Company’s ability to use its net operating loss carryforwards could be limited and subject to annual limitations. In connection with future offerings, the Company may realize a “more than 50% change in ownership” which could further limit its ability to use its net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take advantage of all or portions of its net operating loss carryforwards for federal income tax purposes.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(10) Income taxes (continued)
The federal net operating loss carryforwards at December 31, 2012 will expire as follows:
Years ending December 31, | | Amount | |
| | | |
2025 | | $ | 1,376,740 | |
2026 | | | 7,291,084 | |
2027 | | | 12,280,771 | |
2028 | | | 6,922,963 | |
2029 | | | 4,816,700 | |
2030 | | | 7,667,557 | |
2031 | | | 8,816,976 | |
2032 | | | 4,844,424 | |
Total | | $ | 54,017,215 | |
(11) Equity Transactions
Private placement and note exchange
On April 8, 2011, the Company completed a private placement to 28 institutional and individual “accredited investors” (as that term is defined in the Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”)) of 2,804,593 shares of common stock of the Company at a purchase price of $3.25 per share, for gross proceeds of $9,114,927. The net proceeds received by the Company were $8,467,121, net of offering costs of $647,806. As part of the private placement, the investors were issued five-year warrants to purchase up to 2,804,593 shares of common stock at an exercise price of $4.00 per share. In addition, the placement agent for the private placement was issued a five-year warrant to purchase 93,080 shares of common stock at an exercise price of $4.00 per share. The warrants vested upon issuance and expire after five years.
For each of the warrants, the holder will be able to exercise the warrant on a so-called cashless basis at any time following the one-year anniversary of the closing of the private placement if a registration statement covering the shares of common stock underlying such warrants is not effective. The Company filed a registration statement with respect to the resale of the shares of common stock sold to the investors and shares of common stock issuable upon exercise ofthe warrants with the SEC and kept the registration statement effective until all registrable securities were sold or may be sold pursuant to Rule 144 under the Securities Act. The registration statement is no longer effective as the shares have been held for over one year and the Company believes that the shares may be sold pursuant to Rule 144 under the Securities Act.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(11) Equity Transactions (continued)
On April 4, 2011, Prides Capital Fund I, LP and NightWatch Capital Partners II, LP (the “Noteholders”), holders of certain notes payable (the “Notes”) and related parties of the Company, exchanged the unpaid principal and interest balance of the Notes, which totaled $4,413,908, in consideration for the issuance of 1,358,126 shares of common stock. In connection with this transaction, the Company issued to the Noteholders warrants to purchase an aggregate of 679,064 shares of common stock at an exercise price of $4.00 per share. Each warrant represents the right to purchase one share of common stock. The warrants vested upon issuance and expire after five years. In accordance with ASC 470, “Debt”, in April 2011, the Company recorded a loss from extinguishment of debt of $1,318,781, which was the difference between the estimated fair value of the common stock and warrants on the date of exchange of $9,330,326 and the fair value of the Notes (assuming the conversion feature was exercised by the Noteholders) of $8,011,545.
Unit options
During the year ended December 31, 2010, the Company sold “Units” to select accredited investors which consisted of: (i) one share of common stock; (ii) a two-year common stock purchase warrant (the “Class D Warrant”) to purchase one share of common stock, at an exercise price of $2.00; and (iii) an option (the “Option”), which, as amended, expired on January 31, 2011, to purchase the same number of Units as granted pursuant to this transaction, at the purchase price of $2.00 per Unit.
Between January 1 and January 31, 2011, Option holders exercised 1,950,167 Options for total gross proceeds of $3,900,334 to the Company. In connection with the exercise of Options in January 2011, the Company issued 1,950,167 shares of common stock and 1,950,167 Class D Warrants. The Option holders included the chairman of the board of directors of the Company who exercised 545,252 Options and the brother of a member of the board of directors of the Company who exercised 686,252 Options. The 132,500 Options that remained unexercised at January 31, 2011 expired by their terms.
Preferred stock
The Company’s preferred stock may have such rights, preferences and designations and may be issued in such series as determined by the board of directors. No shares were issued and outstanding at December 31, 2012 and 2011.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(12) Warrants
A summary of warrants as of December 31, 2012 and 2011, and the changes during the years ended December 31, 2012 and 2011, is presented as follows:
| | | | | | | | | | | | |
Outstanding as of December 31, 2010 | | | 1,106,627 | | | | 1,106,627 | | | | 2,284,993 | | | | - | |
Issued | | | - | | | | - | | | | 1,950,167 | | | | 3,576,737 | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Expired | | | - | | | | - | | | | - | | | | - | |
Outstanding as of December 31, 2011 | | | 1,106,627 | | | | 1,106,627 | | | | 4,235,160 | | | | 3,576,737 | |
Issued | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Expired | | | - | | | | - | | | | (2,284,993 | ) | | | - | |
Outstanding as of December 31, 2012 | | | 1,106,627 | | | | 1,106,627 | | | | 1,950,167 | | | | 3,576,737 | |
The Class A, Class B and Class E Warrants expire five years from date of issuance and the Class D warrants expire two years from date of issuance. The outstanding Class D Warrants at December 31, 2012 expired unexercised on January 31, 2013.
The Class A and Class E warrants have an exercise price of $4.00 per share, the Class B warrants have an exercise price of $8.00 per share, and the Class D warrants have an exercise price of $2.00 per share. The exercise price and the number of shares covered by the warrants will be adjusted if the Company has a stock split, if there is a recapitalization of the Company’s common stock, or if the Company consolidates with or merges into another corporation.
(13) Commitments and contingencies
Subscription agreement
On November 27, 2012, the Company and David N. Nemelka (the “Subscriber”), the brother of John F. Nemelka, a member of the Company’s board of directors, entered into a subscription agreement (the “Subscription Agreement”) whereby the Subscriber has agreed to purchase from the Company, and the Company has agreed to sell and issue, a total of 4,000,000 shares of the Company’s unregistered common stock at a purchase price equal to $0.25 per share, for an aggregate sales price of $1,000,000 (the “Purchase Price”). The shares are subject to piggy-back registration rights if the Company files a registration statement for an offering of securities.
The Purchase Price shall be payable to the Company as follows: (i) $50,000 on or before January 31, 2013; (ii) $50,000 on or before February 15, 2013; and (iii) the balance of $900,000 on or before May 27, 2014 (the “Outside Due Date”). The Subscriber may make payments of the Purchase Price at his discretion in minimum installments of $100,000 each, until the Outside Due Date.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(13) Commitments and contingencies (continued)
In the event that at any time after February 15, 2013, the Company’s total available cash should be less than $100,000, the Subscriber shall, upon demand of the Company, pay to the Company $100,000 of the then outstanding balance of the Purchase Price, which payment shall be due within thirty (30) days of the demand. There is no limit on the number of demands that the Company may make pursuant to this provision of the Subscription Agreement, provided, however, that in no event shall the Company provide more than one notice of demand for payment in any thirty (30) day period.
As of December 31, 2012, the Subscriber had paid the Company $25,000 and was issued 100,000 shares of unregistered common stock of the Company. The Company will record the additional $975,000 and issue the corresponding 3,900,000 shares of common stock in the periods in which the Purchase Price is received. Subsequent to December 31, 2012, the Subscriber has paid the Company an additional $75,000 and was issued an additional 300,000 shares of unregistered common stock of the Company which was recorded in the first quarter of 2013.
Operating Leases
The Company leases office and warehouse space. Rent expense for the years ended December 31, 2012 and 2011, was $298,452 and $361,189, respectively. Minimum future lease payments under non-cancellable operating leases consist of the following:
Year ending December 31, | | Amount | |
| | | |
2013 | | $ | 102,576 | |
2014 | | | 105,643 | |
2015 | | | 90,225 | |
Total | | $ | 298,444 | |
Capital Leases
The Company leases certain office equipment under an agreement classified as a capital lease. The leased assets serve as security for the lease. The accumulated depreciation of such equipment at December 31, 2012 and 2011 totaled $6,468 and $1,617, respectively. The net book value of such equipment at December 31, 2012 and 2011 totaled $8,085 and $12,935, respectively.
The future commitments as of December 31, 2012 under this capital lease agreement are as follows:
Year ending December 31, | | Principal | | | Interest | | | Total | |
2013 | | $ | 4,933 | | | $ | 501 | | | $ | 5,434 | |
2014 | | | 3,951 | | | | 125 | | | | 4,076 | |
| | $ | 8,884 | | | $ | 626 | | | $ | 9,510 | |
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(13) Commitments and contingencies (continued)
Litigation
The Company is involved in various legal matters that have arisen in the ordinary course of business. While the ultimate outcome of these matters is not presently determinable, it is the opinion of management that the resolution will not have a material adverse effect on the financial position or results of operations of the Company.
HealthTronics, Inc., along with the Company, are defendants in an alleged breach of contract lawsuit dated April 21, 2006 brought in the Miami-Dade County Circuit Court, Florida by a former limited partner of a former limited partnership of the Company, Bone & Joint Treatment Centers of America. Bone & Joint Treatment Centers of America, the plaintiff, is seeking greater than $3 million. The lawsuit went to trial and the Company received a summary judgment in its favor in December 2011. On January 5, 2012, the plaintiff filed an appeal of the summary judgment. HealthTronics has been responsible for the defense of the lawsuit on behalf of the Company and believes the case is unfounded and is contesting the claims vigorously.
(14) 401(k) plan
The Company sponsors a 401(k) plan that covers all employees who meet the eligibility requirements. The Company matched 50% of employee contributions up to 6% of theircompensation effective until January 31, 2012. Effective February 1, 2012, the Company amended the 401(k) plan to make the Company matching contribution discretionary and discontinued the Company match. The Company contributed $9,664 and $73,797 to the plan for the years ended December 31, 2012 and 2011, respectively.
(15) Stock-based compensation
On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Stock Incentive Plan”). The Stock Incentive Plan permits grants of awards to selected employees, directors and advisors of the Company in the form of restricted stock or options to purchase shares of common stock. Options granted may include non-statutory options as well as qualified incentive stock options. The Stock Incentive Plan is currently administered by the board of directors of the Company. The Stock Incentive Plan gives broad powers to the board of directors of the Company to administer and interpret the particular form and conditions of each option. The stock options granted under the Stock Incentive Plan are non-statutory options which generally vest over a period of up to four years and have a ten year term. The options are granted at an exercise price determined by the board of directors of the Company to be the fair market value of the common stock on the date of the grant. At December 31, 2012, the Stock Incentive Plan reserved 5,000,000 shares of common stock for grant. Subsequent to December 31, 2012, the Stock Incentive Plan was amended to reserve a total of 8,500,000 shares of common stock for grant.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(15) Stock-based compensation (continued)
As discussed in Note (6), on November 6, 2012, the Company entered into a Severance Agreement with Christopher M. Cashman in connection with his resignation as President and Chief Executive Officer, and a director of the Company. Pursuant to the Severance Agreement, Mr. Cashman received (a) a grant of 1,000,000 options to acquire shares of common stock at an exercise price of $0.21 per share with 600,000 of the options vested upon the execution of the Severance Agreement and the remaining 400,000 options vesting in increments of 100,000 upon events tied to the Company’s clinical trial plan for the dermaPACE device, or December 31, 2016, whichever occurs first, (b) a grant of 50,000 options to acquire shares of common stock at an exercise price of $0.21 per share as consideration for the provision of twelve months of advisory services and (c) the full vesting of all other outstanding and unvested options. Using the Black-Scholes option pricing model, management has determined that the options granted in November 2012 had a fair value per share of $0.15 resulting in total compensation of $160,500. Compensation cost will be recognized over the requisite vesting period.
On March 8, 2012, the Company granted two members of the Company’s Medical Advisory Board each options to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.44 per share in place of an annual cash consulting fee. Using the Black-Scholes option pricing model, management has determined that the options granted in March 2012 had a fair value per share of $0.27 resulting in total compensation of $27,250. Compensation cost was recognized over the calendar year 2012.
On November 16, 2011, the Company granted an employee options to purchase 25,000 shares of the Company’s common stock at an exercise price of $1.60 per share. Using the Black-Scholes option pricing model, management has determined that the options granted in November 2011 had a fair value per share of $0.96 resulting in total compensation of $24,000. Compensation cost will be recognized over the requisite service period.
On October 24, 2011, the Company granted 1,300,000 options to an employee at an exercise price of $1.98 per share. Using the Black-Scholes option pricing model, management has determined that the options granted in October 2011 had a fair value per share of $1.15 resulting in total compensation of $1,496,563. Compensation cost will be recognized over the requisite service period.
On September 28, 2011, the Company granted 25,000 options to a member of the board of directors at an exercise price of $2.85 per share. On September 20, 2011, the Company granted 25,000 options to a member of the board of directors at an exercise price of $2.95 per share. Using the Black-Scholes option pricing model, management has determined that the options granted in September 2011 had a weighted average fair value per share of $1.58 resulting in total compensation of $78,750. The stock options were fully vested when granted and therefore the full compensation cost was recognized at grant date.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(15) Stock-based compensation (continued)
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions for the years ended December 31, 2012 and 2011:
| | 2012 | | | 2011 | |
Weighted average expected life in years | | | 5.2 | | | | 5.8 | |
Weighted average risk free interest rate | | | 0.81 | % | | | 1.32 | % |
Weighted average volatility | | | 97.83 | % | | | 65.00 | % |
Forfeiture rate | | | 0.0 | % | | | 0.0 | % |
Expected dividend yield | | | 0.0 | % | | | 0.0 | % |
Since there is a limited trading history for our common stock, the expected volatility is based on historical data from companies similar in size and value to us. The expected dividend yield is based on our historical dividend experience, however, since our inception, we have not declared dividends. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. We estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards that actually vest. The expected life of options granted represent the period of time that options granted are expected to be outstanding and are derived from the contractual terms of the options granted.
For the years ended December 31, 2012 and 2011, the Company recognized $1,391,316 and $1,118,813, respectively, as compensation cost related to options granted. The remaining $87,184 of compensation cost will be recognized over the next three years as follows:
Years ending December 31, | | | |
| | | |
2013 | | $ | 78,260 | |
2014 | | | 7,542 | |
2015 | | | 1,382 | |
Total | | $ | 87,184 | |
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(15) Stock-based compensation (continued)
A summary of option activity as of December 31, 2012 and 2011, and the changes during the years ended December 31, 2012 and 2011, is presented as follows:
| | Options | | | | |
Outstanding as of December 31, 2010 | | | 2,992,796 | | | $ | 3.20 | |
Granted | | | 1,375,000 | | | $ | 2.00 | |
Exercised | | | - | | | $ | - | |
Forfeited or expired | | | (2,250 | ) | | $ | 3.14 | |
Outstanding as of December 31, 2011 | | | 4,365,546 | | | $ | 2.82 | |
Granted | | | 1,150,000 | | | $ | 0.23 | |
Exercised | | | - | | | $ | - | |
Forfeited or expired | | | (286,216 | ) | | $ | 2.85 | |
Outstanding as of December 31, 2012 | | | 5,229,330 | | | $ | 2.25 | |
| | | | | | | | |
Exercisable | | | 4,720,580 | | | $ | 2.42 | |
The weighted average remaining contractual term for outstanding exercisable stock options is 6.6 years as of December 31, 2012 and 6.3 years as of December 31, 2011.
A summary of the Company’s nonvested options as of December 31, 2012 and 2011, and changes during the years ended December 31, 2012 and 2011, is presented as follows:
| | Options | | | | |
Outstanding as of December 31, 2010 | | | 883,993 | | | $ | 4.69 | |
Granted | | | 1,375,000 | | | $ | 2.01 | |
Vested | | | (943,084 | ) | | $ | 3.85 | |
Forfeited or expired | | | (1,187 | ) | | $ | 3.62 | |
Outstanding as of December 31, 2011 | | | 1,314,722 | | | $ | 2.48 | |
Granted | | | 1,150,000 | | | $ | 0.23 | |
Vested | | | (1,901,722 | ) | | $ | 1.52 | |
Forfeited or expired | | | (54,250 | ) | | $ | 3.41 | |
Outstanding as of December 31, 2012 | | | 508,750 | | | $ | 0.66 | |
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
(16) Segment and geographic information
The Company has one line of business with revenues being generated from sales in Europe and Asia and all significant expenses being generated in the United States. All significant assets are located in the United States.
(17) Subsequent events
The Company has evaluated subsequent events through the date of issuance of the consolidated financial statements.
Senior Secured Notes
The Company has been working with select accredited investors to raise capital through the issuance of Senior Secured Notes as discussed in Note (7). Through December 31, 2012, the Company had received subscriptions payable for Senior Secured Notes in the aggregate principal amount of $430,000 and had accrued interest expense of $8,516. Up to $2,000,000 aggregate principal amount of Senior Secured Notes are being offered by the Company.
Subsequent to year-end, the Company received an additional $1,570,000 in subscriptions for the Senior Secured Notes. The Company completed the offering on March 8, 2013 and issued such notes. Kevin A. Richardson, II, chairman of the board of directors of the Company, purchased $60,000 of the Senior Secured Notes.
Subscription Agreement
As discussed in Note (13), on November 27, 2012, the Company entered into a Subscription Agreement whereby the Subscriber has agreed to purchase from the Company, and the Company agreed to sell and issue, a total of 4,000,000 shares of the Company’s unregistered common stock at a purchase price equal to $0.25 per share, for an aggregate sales price of $1,000,000. As of December 31, 2012, the Subscriber had paid the Company $25,000 and was issued 100,000 unregistered shares of common stock of the Company. The Company will record the additional $975,000 and issue the corresponding 3,900,000 shares of common stock in the periods in which the Purchase Price is received.
Subsequent to December 31, 2012, the Subscriber has paid the Company an additional $75,000 and was issued an additional 300,000 shares of unregistered common stock of the Company which was recorded in the first quarter of 2013.
2013 Additional Capital Raise and Consulting Agreements
The continuation of the Company’s business is dependent upon raising additional capital. Management’s plans are to obtain additional capital in 2013 through the issuance of common stock or other equities. The Company has engaged financial advisors to identify the opportunities for a capital raise to fund the Company's dermaPACE clinical work and provide working capital. The Company has issued to a consultant, 2,000,000 warrants to purchase the Company’s common stock at $0.35 per share. The four year warrants vest 300,000 on the date of grant and 1,700,000 upon the completion of a $5,000,000, or greater, capital raise.
SANUWAVE HEALTH, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
In February 2013, the Company entered into a consulting agreement with a consultant to assist the Company with its strategy for raising additional capital for which a portion of the fee for the services performed is common stock and warrants. The Company issued 100,000 shares of common stock under this agreement in February 2013. In addition, the Company will issue to the consultant 1,000,000 warrants to purchase common stock at an exercise price of $0.35 per share with a term of five years upon consummation by the Company of an qualified offering (as defined in the consulting agreement) resulting in gross proceeds to the Company of no less than $4,000,000.
In February 2013, the Company entered into two consulting agreements for which a portion of the fee for the services performed is paid with common stock. The Company has issued 173,000 shares of common stock under these agreements through March 22, 2013.
Employment Agreement with new Chief Executive Officer
Subsequent to December 31, 2012, Joseph Chiarelli joined the Company to serve as the Chief Executive Officer and a director of the Company commencing on February 25, 2013 with a two year term thereafter extendable for one year periods. Mr. Chiarelli is entitled to an annual base salary of $200,000 for the first year and $225,000 thereafter, with a performance and compensation review not less often than annually, at which time compensation may be adjusted as determined by the board of directors.
In the event of the satisfaction of the following milestones, the Company shall award and pay to Mr. Chiarelli a cash bonus as follows: (i) $35,000 for the Company completing a financing resulting in gross proceeds to the Company of no less than $5,000,000 at a price per share of not less than $0.35; (ii) $25,000 when the final patient is enrolled in the Company’s dermaPACE Phase III clinical trial; (iii) $25,000 upon receipt by the Company of FDA approval for the use of dermaPACE; and (iv) $25,000 upon the execution by the Company of a license or distribution agreement from which the Company is entitled to receive gross proceeds of no less than $1,000,000 and the Company has received payments of at least $250,000. In addition, with respect to each full fiscal year, Mr. Chiarelli is eligible to earn an annual bonus award as determined by the board of directors based on the achievement of certain performance goals established by the board of directors. Mr. Chiarelli is also entitled to participate in the Company’s employee benefit plans (other than annual bonus and incentive plans). The employment agreement contains an agreement not to compete, which covers the term of employment and two years thereafter, and a confidentiality provision, which is indefinite.
Upon the execution of his employment agreement, Mr. Chiarelli was granted options to purchase 2,250,000 shares of the Company’s common stock at an exercise price of $0.35 per share. The options vest and become exercisable in five installments as follows: (i) 375,000 vested at grant; (ii) 375,000 vest upon the Company completing a financing resulting in gross proceeds to the Company of no less than $5,000,000 at a price per share of not less than $0.35; (iii) 375,000 upon the execution by the Company of a license or distribution agreement from which the Company is entitled to receive gross proceeds of no less than $1,000,000 and the Company has received payments of at least $250,000; (iv) 375,000 vest upon receipt by the Company of FDA approval for the use of dermaPACE; and (v) 750,000 vest in the event the Company achieves the milestones (i), (ii), (iii) and (iv) above during the initial two year term and the term is not extended by the Company.
Stock Incentive Plan
Subsequent to December 31, 2012, the Company amended the Stock Incentive Plan to increase the shares of common stock reserved for grant pursuant to the Stock Incentive Plan to 8,500,000. In addition, on February 21, 2013, the Company, by mutual agreement with the active employees and directors of the Company, cancelled options granted to the active employees in the year ended December 31, 2011 and prior which totaled 1,113,644 shares of common stock at an average exercise price of $2.92. In exchange for these options, the active employees and directors received new options to purchase 2,243,644 shares of common stock at an exercise price of $0.35 per share. The Company will record the effect of this transaction in the first quarter of 2013.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table lists the costs and expenses payable by the registrant in connection with the sale of the common stock covered by this. All amounts shown are estimates except for the SEC registration fee.
| | $ | 818.40 | |
Legal fees and expenses | | | 50,000.00 | |
Accounting fees and expenses | | | 25,000.00 | |
Miscellaneous fees and expenses | | | 2,000.00 | |
Total | | $ | 77,818.40 | |
ITEM 14. Indemnification of Directors and Officers
The Nevada General Corporation Law (“NGCL”) provides that a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his capacity as a director or officer unless (i) such act or omission constituted a breach of his/her fiduciary duties as a director or officer, and (ii) his/her breach of those duties involved intentional misconduct, fraud or a knowing violation of law. Under the NGCL, a corporation may indemnify directors and officers, as well as other employees and individuals, against any threatened, pending or completed action, suit or proceeding, except an action by or in the right of the corporation, by reason of the fact that he/she is or was a director, officer, employee or agent of the corporation so long as such person acted in good faith and in a manner which he/she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his/her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he/she reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he/she had reasonable cause to believe that his/her conduct was unlawful.
The NGCL further provides that indemnification may not be made for any claim as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding or in defense of any claim, issue or matter therein, the corporation must indemnify him/her against expenses, including attorneys’ fees, actually and reasonably incurred in connection with the defense. The NGCL provides that this is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders, or disinterested directors or otherwise.
The registrant’s articles of incorporation provide that the directors and officers will not be personally liable to the registrant or its stockholders for monetary damages for breach of their fiduciary duty as a director or officer, except for liability of a director or officer for acts or omissions involving intentional misconduct, fraud or a knowing violation of law, or the payment of dividends in violation of the NGCL. The registrant’sregistrant's bylaws and contractual arrangements with certain of its directors and officers provide that the registrant is required to indemnify its directors and officers to the fullest extent permitted by law. The registrant’sregistrant's bylaws and these contractual arrangements also require the registrant to advance expenses incurred by a director or officer in connection with the defense of any proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he/she is not entitled to be indemnified by the registrant. The registrant’sregistrant's bylaws also permit the registrant to purchase and maintain errors and omissions insurance on behalf of any director or officer for any liability arising out of his/her actions in a representative capacity. The registrant does not presently maintain any such errors and omissions insurance for the benefit of its directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
ITEM 15. Recent Sales of Unregistered Securities
On November 27, 2012, we entered into a subscription agreement (Subscription Agreement) with David N. Nemelka (Subscriber), the brother of John F. Nemelka, a member of our board of directors, whereby the Subscriber agreed to purchase from us, and us agreed to sell and issue, a total of 4,000,000 shares of our common stock, at a purchase price equal to $0.25 per share, for an aggregate sales price of $1,000,000. These shares were sold pursuant to the exemption provided by the SEC’s Rule 506 of Regulation D under the Securities Act. As of December 31, 2012, the Subscriber had paid us $25,000 and we issued to the Subscriber 100,000 shares of common stock. For the three months ended March 31, 2013, the Subscriber has paid us an additional $75,000 and was issued an additional 300,000 shares of common stock. We will record the additional $900,000 and issue the corresponding 3,600,000 shares of common stock in the periods in which the purchase price is received.
In February 2013, we entered into two consulting agreements for which a portion of the fee for the services performed is paid with common stock. We have issued 319,000 shares of common stock under these agreements through May 13, 2013.
In February 2013, we entered into a consulting agreement with a consultant to assist us with our strategy for raising additional capital for which a portion of the fee for the services performed is common stock and warrants. We issued 100,000 shares of common stock under this agreement in February 2013. In addition, we will issue to the consultant 1,000,000 warrants to purchase common stock at an exercise price of $0.35 per share with a term of five years upon consummation by us of an qualified offering (as defined in the consulting agreement) resulting in gross proceeds to us of no less than $4,000,000.
In February 2013, we entered into a consulting agreement with a consultant to assist us with our strategy for raising additional capital for which the fee for the services performed was paid with warrants. We have issued to the consultant 2,000,000 warrants to purchase common stock at an exercise price of $0.35 per share with a term of five years. The warrants vest 300,000 upon grant and 1,700,000 upon consummation of an offering of securities managed by an investment bank resulting in gross proceeds to us of no less than $5,000,000 on or prior to June 1, 2013.
In connection with the foregoing, we relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.
On April 8, 2011, pursuant to the exemptive provision of Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, we completed a private placement to 28 institutional and individual accredited investors of 2,804,593 shares of our Common Stockcommon stock at a purchase price of $3.25 per share, for gross proceeds to us of $9,114,927. The net proceeds received by the Companyus were $8,467,121, net of offering costs of $647,806. As part of the private placement, the investors were issued five-year warrants to purchase up to 2,804,593 shares of our Common Stockcommon stock at an initial exercise price of $4.00 per share. The net proceeds from the private placement, following the payment of