10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-52985
SANUWAVE Health, Inc.
(Exact name of registrant as specified in its charter)
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| Nevada
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20-1176000 |
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
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| 11680 Great Oaks Way, Suite 350 |
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| Alpharetta, GA
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30022 |
| (Address of principal executive offices)
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(770) 419-7525
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class |
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Name of each exchange on which registered |
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N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o Yes þ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
The aggregate market value of the registrant’s common stock held by non-affiliates of the
registrant (assuming, for purposes of this calculation only, that the registrant’s directors,
executive officers and greater than 10% shareholders are affiliates of the registrant), based upon
the closing sale price of the registrant’s common stock on June 30, 2010, the last business day of
the registrant’s most recently completed second fiscal quarter, was $9.8 million.
As of March 15, 2011, there were issued and outstanding 16,744,817 shares of the registrant’s
common stock.
SANUWAVE Health, Inc.
Table of Contents
2
PART I
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K of SANUWAVE Health, Inc. and its subsidiaries (“SANUWAVE” or
the “Company”) contains forward-looking statements. All statements in this Annual Report on Form
10-K, including those made by the management of the Company, other than statements of historical
fact, are forward-looking statements. Examples of forward-looking statements include statements
regarding the Company’s future financial results, operating results, business strategies, projected
costs, products, competitive positions, management’s plans and objectives for future operations,
and industry trends. These forward-looking statements are based on management’s estimates,
projections and assumptions as of the date hereof and include the assumptions that underlie such
statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and
“continue,” the negative of these terms, or other comparable terminology. Any expectations based
on these forward-looking statements are subject to risks and uncertainties and other important
factors, including those discussed in this report, including the sections titled “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Other
risks and uncertainties are and will be disclosed in the Company’s prior and future Securities and
Exchange Commission filings. These and many other factors could affect the Company’s future
financial condition and operating results and could cause actual results to differ materially from
expectations based on forward-looking statements made in this document or elsewhere by the Company
or on its behalf. The Company undertakes no obligation to revise or update any forward-looking
statements.
Except as otherwise indicated by the context, references in this Annual Report on Form 10-K to
“we,” “us” and “our” are to the consolidated business of the Company.
Restatement of Previously Issued Consolidated Financial Statements
In this Annual Report on Form 10-K, we have restated our previously reported consolidated
balance sheet at December 31, 2009 and the consolidated statement of stockholders’ equity (deficit)
at January 1, 2009 and related disclosures, to record the effect of the non-cash stock compensation
expense which was incorrectly understated by $687,309 in the consolidated financial statements for
the year ended December 31, 2008 due to an error in determining the vesting period for the stock
options issued in 2008.
In April 2008, the Company granted, as adjusted for the Merger, 1,043,990 options to employees
at an exercise price of $2.92 per share. Using the Black-Scholes option pricing model, the options
granted in April 2008 had a weighted average fair value per share of $1.42, resulting in total
compensation cost over the vesting period of the options of $1,481,207.
The Company determined during the audit for the year ended December 31, 2010 that the non-cash
stock compensation expense was incorrectly recorded in the financial statements for the year ended
December 31, 2008. The 2008 non-cash stock compensation expense had been calculated based on a
four-year straight-line vesting schedule instead of taking into account that many of the stock
options issued in 2008, in accordance with their terms, were 50% vested at the date of grant. As
such, the non-cash stock compensation expense recorded in general and administrative expenses in
the consolidated statement of operations and comprehensive loss for the year ended December 31,
2008 was understated by $687,309.
This is a non-cash item which resulted in an understatement at December 31, 2008 of additional
paid-in capital of $687,309 and an understatement of retained deficit of $687,309. There was no
impact on the net cash used by operating activities of $7,009,402 as reported in the consolidated
statement of cash flows for the year ended December 31, 2008.
There was no impact on the consolidated financial statements for the year ended December 31,
2009 other than to increase the beginning of the year balance of additional paid-in capital by
$687,309 and the beginning of the year balance of retained deficit by $687,309.
3
Overview
We are an emerging global regenerative medicine company focused on the development and
commercialization of non-invasive, biological response activating devices for the repair and
regeneration of tissue, musculoskeletal and vascular structures. Our portfolio of products and
product candidates activate biologic signaling and angiogenic responses, including new
vascularization and microcirculatory improvement, helping to restore the body’s normal healing
processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE™)
technology in wound healing, orthopedic/spine, plastic/cosmetic and cardiac conditions.
Our lead device product for the global wound care market, dermaPACE®, has recently
completed its pivotal Phase III, Investigational Device Exemption (“IDE”) trial in the United
States for the treatment of diabetic foot ulcers. We received permission by the United States Food
and Drug Administration (the “FDA”) through the acceptance of our shell application in August 2010
to file the pre-market approval (“PMA”) for dermaPACE in a series of three sections or “modules”.
This first module included preclinical data and results of prior clinical testing and was filed in
December 2010. The second module containing a quality manufacturing system review was submitted in
January 2011. We expect to file the third module containing data from the recently completed
pivotal Phase III clinical trial of dermaPACE to treat diabetic foot ulcers, proposed product
labeling and a summary of safety and effectiveness in the second quarter of 2011. The dermaPACE has
received the European Conformity Marking (“CE Mark”) allowing for commercial use on acute and
chronic defects of the skin and subcutaneous soft tissue.
We research, design, manufacture, market and service our products worldwide and believe we
have already demonstrated that our PACE technology is safe and effective in stimulating healing in
chronic conditions of the foot and the elbow through our United States FDA Class III PMA approved
Ossatron® device, and in the stimulation of bone and chronic tendonitis regeneration in
the musculoskeletal environment through the utilization of our Ossatron, Evotron™, and
newly introduced orthoPACE™ devices in Europe.
We are focused on developing our PACE technology to activate healing in:
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wound conditions, including diabetic foot ulcers, venous ulcers, pressure sores, burns
and other skin eruption conditions; |
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orthopedic/spine applications, such as speeding the healing of fractures (including
nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones
in the extremities and spine, eliminating chronic pain in joints from trauma or arthritis,
and other potential sports injury applications; |
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plastic/cosmetic applications such as cellulite smoothing, graft and transplant
acceptance, skin tightening, scarring and other potential aesthetic uses; and |
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cardiac applications for removing plaque due to atherosclerosis and improving heart
muscle performance. |
We believe our experience from our preclinical research and the clinical use of our
predecessor legacy devices in Europe and Asia, as well as our Ossatron device in the United States,
demonstrates the safety, clinical utility and efficacy of our product candidates. In addition, we
have preclinical programs focused on the development and better understanding of treatments
specific to our target applications, as well as the development of next generation devices
utilizing our PACE technology to maximize healing response and intervention.
We believe that our studies suggest that our PACE technology will be effective in our target
applications. If successful, we anticipate that these clinical studies should lead to regulatory
approval of our regenerative product candidates in the United States, Europe and Asia. If approved
by the appropriate regulatory authorities, we believe that our product candidates will offer new,
effective and non-invasive treatment options in wound healing, orthopedic/spine injuries,
plastic/cosmetic uses and cardiac procedures, improving the quality of life for millions of
patients suffering from injuries or deterioration of tissue, bones and vascular structures.
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Organization; Reverse Merger Transaction
The Company is a corporation organized and existing under the laws of the state of Nevada.
The Company was
incorporated on May 6, 2004. On September 25, 2009, the Company (formerly named Rub Music
Enterprises, Inc.) and RME Delaware Merger Sub, Inc., a Nevada corporation and wholly-owned
subsidiary of the Company (the “Merger Sub”) entered into a reverse merger agreement (the “Merger
Agreement”) with SANUWAVE, Inc., a Delaware corporation. Pursuant to the Merger Agreement, the
Merger Sub merged with and into SANUWAVE, Inc., with SANUWAVE, Inc. as the surviving entity (the
“Merger”). In connection with the Merger, the Company acquired 100% of the outstanding capital
stock of SANUWAVE, Inc. and the stockholders of SANUWAVE, Inc. received 11,009,657 shares of the
Company’s common stock, Class A warrants to purchase 1,106,627 shares of the Company’s common stock
at $4.00 per share, and Class B warrants to purchase an additional 1,106,627 shares of the
Company’s common stock at $8.00 per share. In addition, in connection with the Merger, certain
stockholders of the Company agreed to cancel all of their shares of common stock of the Company,
except for 1,500,000 shares of common stock, for an aggregate price of $180,000 (the “Share
Repurchase”). At the time of the Merger, the Company had 1,500,000 Class C warrants outstanding
to purchase the Company’s common stock at $4.00 per share.
As a result of the Merger and the Share Repurchase, the stockholders of SANUWAVE, Inc.
controlled approximately 88% of the Company’s outstanding common stock, holding 11,009,657 of the
12,509,657 outstanding shares, and SANUWAVE, Inc. was considered the accounting acquirer in this
Merger. The Company was a “shell company” as such term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) immediately prior to the Merger.
As a result of the Merger, the Company’s operations are now focused in global medical technology
and the Company is no longer a shell company.
Pulsed Acoustic Cellular Expression (“PACE”) Technology
Our PACE product candidates, including our lead product candidate, dermaPACE, utilize high
energy, acoustic pressure waves in the shockwave spectrum to enhance new blood vessel formation,
and soft tissue and bone regeneration. PACE pressure waves combine compressive and tensile
stresses on cells and structures to promote an inflammatory response in musculoskeletal and soft
tissue, resulting in microcirculatory improvement, including the production of angiogenic growth
factors, enhanced new blood vessel formation (angiogenesis) and subsequent regeneration of tissue.
PACE waves are different from other forms of acoustic energy, such as ultrasound, in that the wave
front, in which the compressive forces exist, is a region of sudden and forceful change in stress,
density and temperature, which positively regulates the inflammatory response and reinitiates the
cellular proliferation phases, allowing the body’s own healing response to reinitiate or be
enhanced. We believe that our PACE technology is well suited for various applications due to its
activation of a broad spectrum of cellular events critical for the initiation and progression of
healing.
High energy, acoustic pressure waves in the shockwave spectrum are the primary component of
our previously developed product, Ossatron, which was approved and marketed in the United States
for use in chronic tendonitis of the foot in 2000 and the elbow in 2003. Additionally, acoustic
shockwaves have been used safely at much higher energy and pulse levels in the lithotripsy
procedure (breaking up kidney stones) by urologists for over 20 years and has reached standard of
care status.
dermaPACE — Our lead product candidate
We have completed our multi-site, randomized, double-blind, sham controlled FDA IDE wound care
clinical study focused on the healing of diabetic foot ulcers utilizing our lead product candidate,
dermaPACE, and released top-line data. The primary study goal is to establish superiority in
diabetic foot ulcer healing rates using the dermaPACE treatment compared to sham control, when both
are combined with the current standard of care. The standard of care includes wet-to-dry
dressings, the most widely used primary dressing material in the United States, and offloading with
a walking boot for ulcers located on the plantar surface of the foot. A total of 206 patients were
enrolled and randomized in the dermaPACE study at 24 sites. The patients in the study were
followed for a total of 24 weeks. The study’s primary endpoint of wound closure was defined as
100% skin re-epithelialization without drainage or dressing requirements confirmed at two
consecutive visits, 2-4 weeks apart. Secondary clinical trial endpoints included time to closure,
reduction in total wound surface area and volume, rate of improvement, long-term safety, and skin
appearance and pain assessments.
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Unlike many other chronic wound trials conducted in the diabetic patient population, there
were two important, rigorous elements incorporated in the dermaPACE study design: double-blind
(patient and principal investigator) randomization, and elimination of the option to close the
target ulcer surgically or by other primary means. Maintaining the double-blind in this device
trial restricted the knowledge of the treatment assignment so not to influence how a patient
was treated or maintained on study and evaluated. This eliminated unintended human bias and
qualifies this research as level 1 evidence, allowing the results to be accepted at face value. By
not allowing the clinical investigators to surgically close the target ulcer in this clinical
trial, the results provide a clear and unbiased view of the granulation and epithelialization
process attributable to dermaPACE alone.
Patients treated with dermaPACE showed a strong positive trend in the primary endpoint of 100%
wound closure. Treatment with dermaPACE increased the proportion of diabetic foot ulcers that
closed within 12 weeks by 36%, although this result was not statistically significant. Based on
the pure, controlled design of the study, which blinded both investigators and patients and
restricted investigators from closing wounds surgically, we analyzed a clinically relevant ≥ 90%
wound closure endpoint that demonstrated statistical significance (p=0.0161) in favor of dermaPACE
(51/107, 48%) compared to patients randomized to receive Sham control (31/99, 31%). The median
wound closure exceeded 99% for the dermaPACE treated patients who achieved at least 90% wound
closure, and these patients had only a 4.5% recurrence rate at 24 weeks.
Importantly, there were no device-related adverse events associated with the dermaPACE
procedures reported during the course of the clinical trial, and no issues regarding the
tolerability of the treatment. This suggests that a second course of treatment, if needed, is a
clinically viable option.
Based on the results of the clinical trial, the dermaPACE was shown to:
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significantly accelerate the rate of diabetic foot ulcer closure; |
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cause highly significant reductions in ulcer size; |
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have an extremely low rate of ulcer recurrence; and |
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not be associated with any device-related adverse events. |
We have filed the first two modules of the three of our PMA. We expect to file our final
module with the FDA in the second quarter of 2011 and, pending a favorable response from the FDA,
to launch dermaPACE in the United States in early 2012.
Prior to receiving FDA approval, we intend to begin the process of initiating private industry
payor meetings in the United States to introduce the economics and positive efficacy results of
dermaPACE. These discussions will focus on building knowledge of dermaPACE and educating to the
positive value proposition compared to existing alternatives. We will also begin the process of
obtaining a new Category III Current Procedural Terminology (“CPT”) code for dermaPACE for Medicare
tracking purposes, which is a requisite first step in obtaining medical reimbursement for
dermaPACE. We believe that, in addition to improving the quality of life of the patients treated,
dermaPACE will provide cost benefits to payors, employers and society as a whole through improved
healing, shortened healing times, and fewer and less burdensome required procedures.
In addition, our dermaPACE device has received the European CE Mark approval to treat acute
and chronic defects of the skin and subcutaneous soft tissue, such as in the treatment of pressure
ulcers, diabetic foot ulcers, burns, and traumatic and surgical wounds. We are actively marketing
dermaPACE to the European Community utilizing distributors in select countries.
Growth Opportunity in Wound Care Treatment
We are focused on the development of products that treat unmet medical needs in large market
opportunities. Currently, there are limited biological or mechanical therapies to activate the
healing and regeneration of tissue, bone and vascular structures. As baby boomers age, the
incidence of their targeted diseases and musculoskeletal injuries and ailments will be far more
prevalent. We believe that our PACE technology is well positioned to address many of these issues.
We believe that our PACE technology, in promoting tissue regeneration, can be effective in a broad
array of applications and address unmet medical needs in wound healing, orthopedic/spine,
plastic/cosmetic and cardiac conditions.
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Our primary interest is developing our lead product candidate, dermaPACE, for the global wound
care market, with the first focus in the United States on diabetic foot ulcers. Diabetes is
common, disabling and deadly. In the United States, diabetes has reached epidemic proportions.
According to the American Diabetes Association, about 25.8 million
people (8.3% of the total United States population) have diabetes, and nearly two million new
cases are diagnosed in people aged 20 years or older each year. If current trends continue, 1 in 3
Americans will develop diabetes at some point in their lifetime, and those with diabetes will lose,
on average, 10-15 years of life expectancy. Importantly, up to 25% of people with diabetes will
develop a diabetic foot ulcer, resulting in 3 million diabetic foot ulcers annually in the United
States alone. More than half of all foot ulcers will become infected, thus requiring
hospitalization, and 1 in 5 will require an amputation that carries a high risk of mortality.
Diabetes puts tremendous economic pressure on the United States healthcare system. In January
2011, the Centers for Disease Control and Prevention (the “CDC”) reported the total costs (direct
and indirect) of diabetes in the United States is $174 billion annually, and people with diagnosed
diabetes have medical expenditures that are over two times higher than medical expenditures for
people without diabetes. Hospitalization costs alone are $16,000 to $20,000 for a patient with a
diabetic foot ulcer, and direct and indirect costs of an amputation range from $20,000 to $60,000
per patient. Advanced, cost-effective treatment modalities for diabetes and its comorbidities,
including diabetic foot ulcers, are in great need, yet in short supply, globally. According to the
American Diabetes Association, by the year 2025 the prevalence of diabetes is expected to rise by
72% to 324 million people worldwide.
A majority of challenging wounds are non-healing chronic wounds. These wounds often involve
physiologic, complex and multiple complications such as reduced blood supply, compromised lymphatic
systems or immune deficiencies that interfere with the body’s normal wound healing processes. In
addition, diabetic ulcers and pressure ulcers are often slow-to-heal wounds. These wounds often
develop due to a patient’s impaired vascular and tissue repair capabilities. These conditions can
also inhibit a patient’s healing process, and often fail to heal for many months, and sometimes,
for several years. Wounds that are difficult to treat do not always respond to traditional
therapies, which include hydrocolloids, hydrogels and alginates. We believe that physicians and
hospitals need a therapy that addresses the special needs of these wounds with high levels of both
clinical and cost effectiveness.
We believe we are developing a safe and advanced technology in the wound healing and tissue
regeneration market with PACE. dermaPACE is non-invasive and does not require anesthesia, making
it a cost-effective, time-efficient and painless approach to wound care. Physicians and nurses
look for therapies that can accelerate the healing process and overcome the obstacles of patients’
compromised conditions, and prefer therapies that are easy to administer. In addition, since many
of these patients are not confined to bed, healthcare providers want therapies that are minimally
disruptive to the patient’s or the caregiver’s daily routines. dermaPACE’s non-invasive treatment
is designed to elicit the body’s own healing response. dermaPACE’s simple protocol of four
treatments over a two week period, followed by simple standard of care dressing changes, are
designed to allow for limited disruption to the patients’ normal lives and have no effect on
mobility while their wounds heal.
Our clinical experiences have demonstrated the ability of dermaPACE to promote wound healing,
improve healing time and help prevent chronic conditions, such as diabetic foot ulcers, from
leading to amputation. Our dermaPACE device has been used safely in Europe and Asia for various
types of acute and chronic wounds.
Developing Product Opportunities — Orthopedic and Spine
We launched the orthoPACE device in Europe which is intended for use in orthopedic, trauma and
sports medicine indications following CE Mark approval in June 2010. The device features a new,
unique applicator that is less painful for some indications and may reduce or completely eliminate
anesthesia for some patients. In the orthopedic setting, the orthoPACE will initially be used to
treat tendinopathies and acute and nonunion fractures, including the soft tissue surrounding the
fracture to accelerate healing and prevent secondary complications and their associated treatment
costs. The first shipments to Europe of the new orthoPACE device were made in the third quarter of
2010.
We have established clinical, manufacturing and development relationships and multiple
regulatory pathways to product development. We believe that these relationships and pathways,
coupled with the well-characterized biologic response, history of safe use and clinically-proven
efficacy of our PACE technology, all position us to become a leader in the development and
commercialization of non-invasive, biological response devices for the repair and regeneration of
tissue, musculoskeletal and vascular structures that will capitalize on the growing market for
these products in wound healing, orthopedic/spine, plastic/cosmetic and cardiac applications.
Although the results of our studies have been positive to date, we cannot provide any assurance
that we will be successful in developing, obtaining regulatory approval for, or commercializing our
current product candidates, or that we will do so in a timely fashion.
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We believe there are significant opportunities in the worldwide orthopedic and spine markets,
driven by aging baby boomers, the desire for active lifestyles well into retirement and the growth
in the incidence of osteoporosis, osteoarthritis, obesity, diabetes and other diseases that cause
injury to orthopedic tissues and/or impair the ability of the body to heal injuries.
Trauma injuries are acute and result from any physical damage to the body caused by violence
or accident or fracture. Surgical treatment of traumatic fractures often involves
fixation with metallic plates, screws and rods (internal fixation) and include off-loading to
prevent motion, permitting the body to initiate a healing response. In the United States, six
million traumatic fractures are treated each year, and over one million internal fixation
procedures are performed annually. The prevalence of non-union among these fractures is between
2.5% and 10.0% depending on the fracture type and risk factors such as diabetes and
smoking history or other systemic diseases. At the time of surgery, adjunctive agents (such as
autograft, cadaver bone and synthetic filling materials) are often implanted along with internal
fixation to fill bony gaps or facilitate the healing process to avoid delayed union or non-union
(incomplete fracture healing) results. Both pre-clinical and clinical investigations have shown
positive results, suggesting our technology could potentially be developed as an adjunct to these
surgeries or primary treatment protocol for delayed or non-union events.
We have had a long history in the sports medicine field that generally refers to the
non-surgical and surgical management of cartilage, ligament and tendon injuries through our legacy
device, Ossatron. Common examples of these injuries include extremity joint pain, torn rotator
cuffs (shoulder), tennis elbow, Achilles’ tendon tears and torn meniscus cartilage in the knee.
Injuries to these structures are very difficult to treat because the body has a limited natural
ability to regenerate these tissues. Cartilage, ligament and tendons seldom return to a pre-injury
state of function. Due to a lack of therapies that can activate healing and regenerate these
tissues, many of these injuries will result in a degree of permanent impairment and chronic pain.
Prior investigations and new pre-clinical work indicate that PACE can activate various cell types
and be an important adjunct to the management of sports medicine injuries.
Spinal fusion is a surgical technique performed to correct an unstable part of the spine by
joining two or more vertebrae, such as degenerative disc disease (DDD), which can no longer be
managed with conservative methods. There are over 500,000 spinal fusions performed in the United
States annually on vertebrae of the lower back (lumbar) or neck region (cervical). Orthopedic
surgeons often will take bone from another part of the body (i.e. hip), known as autograft, and use
it to fill the space between adjacent vertebrae. However, some disadvantages include the need to
perform a second surgery, additional operative time, the potential for post-operative complications
and long-term pain at the graft site. Bone morphogenetic proteins (BMPs) have also been used as a
replacement for autograft in spinal fusion surgery; however, they have been associated with some
severe and potentially life-threatening side effects, particularly when used in the neck region.
PACE has been shown to be safe and effective in a pilot, rabbit model.
Market Trends
We are focused on the development of products that have the potential to address substantial
unmet clinical needs across broad market indications. We believe there are limited therapeutic
treatments that directly and reproducibly activate healing processes in the areas in which we are
focusing, particularly for wound care and repair of certain types of musculoskeletal conditions.
According to AdvaMed, Centers for Medicare & Medicaid Services and our internal projections
for dermaPACE, the United States advanced wound healing market for the dermaPACE is estimated at $5
billion, which includes diabetic foot ulcers, pressure sores, burns and traumatic wounds, and
chronic mixed leg ulcers. We also believe there are significant opportunities in the worldwide
orthopedic and spine markets, driven by aging baby boomers, the desire for active lifestyles well
into retirement and the growth in the incidence of osteoporosis, osteoarthritis, obesity, diabetes
and other diseases that cause injury to orthopedic tissues and/or impair the ability of the body to
heal injuries.
With the success of negative pressure wound therapy devices in the wound care market over the
last ten years and the recognition of the global epidemic associated with wounds, as well as
deteriorating musculoskeletal conditions attributed to various disease states such as obesity,
diabetes and ischemia due to vascular and heart disease, as well as sports injuries, we believe
that Medicare and private insurers have become aware of the costs and expenditures associated with
the adjunctive therapies being utilized for wound healing and orthopedic/spine conditions with
limited efficacies in full skin closure, or bone and tissue regeneration. We believe the wound
healing and orthopedic markets are undergoing a transition, and are interested in biological
response activating devices that are applied non-invasively and seek to activate the body’s own
capabilities for regeneration of tissue at injury sites in a cost-effective manner.
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Strategy
Our objective is to be a leader in the development and commercialization of novel, biological
response activating devices to treat tissue, musculoskeletal and vascular structure conditions.
Our main vehicle for growth is the development and commercialization of our PACE technology. Our
immediate goal involves leveraging the knowledge we gained from our existing human heel and elbow
indications to enter the advanced wound care market with innovative treatments.
The key elements of our strategy include the following:
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Develop and commercialize non-invasive biological response activating devices in the
regenerative medicine area that are superior to current medical devices for the treatment
of tissue, musculoskeletal and vascular structures. |
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We intend to use our proprietary technologies and know-how in the use of high energy,
acoustic pressure waves in the shockwave spectrum to address unmet medical needs in wound
care, orthopedic/spine, plastic/cosmetic and cardiac indications. |
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Focus on products with a cost-effective time to market that utilize our experiences and
track record in product approvals. |
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We have a track record of developing products by relying on our products that have been
previously authorized for marketing by the FDA and by leveraging the lessons learned from
those previous experiences as the cornerstone for further development and regulatory
approvals. We will seek to repeat this process of utilizing FDA-cleared or approved
components in our subsequent product candidates. However, we cannot be certain that this
strategy will accelerate the regulatory approval process for our product candidates, or that
we will obtain such approval. |
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Leverage our historical data and experience to accelerate the development of our lead
wound care product candidate, as well as additional product candidates, for our target
markets. |
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We believe the ability of our legacy products, such as Ossatron, to safely stimulate and
reestablish normal healing in chronic conditions indicates the potential successful use of
dermaPACE and our other product candidates to stimulate and reinstitute the normal healing
process through angiogenesis. We believe that much of the data and experience generated as
part of the clinical development will be useful in gaining the required approval of our
product candidates, including product manufacturing procedures and records, stability test
results, analytical test methodology, pre-clinical and human safety test results, and,
potentially, efficacy information. |
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Maximize the value of our PACE product candidates through control of distribution
channels. |
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In the United States, we plan to build a sales force utilizing direct representatives managed
by an in-house sales management team and supported by employee product specialists. As a
result of our prior product approvals, we have spent significant resources on training and
educating specialists in the use of our technology. We believe that this approach will allow
us to have an immediate impact in the market by leveraging existing physician relationships.
Outside the United States, we intend to utilize our distributor relationships for product
introduction and adoption in local markets. |
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Support the clinical affairs activities for payment and reimbursement for our globally
approved products and product candidates. |
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The efficacy, safety, performance and cost-effectiveness of our product and product
candidates, and of any competing products, will determine the availability and level of
reimbursement. Reimbursement and healthcare payment systems in international markets vary
significantly by country, and include both government sponsored healthcare and private
insurance. To obtain reimbursement or pricing approval in many countries, we may be required
to produce clinical data, which may involve more clinical trials, that compares the
cost-effectiveness of our approved products to other available therapies. |
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Scientific Advisors
We have established a network of advisors that brings expertise in wound healing, orthopedics,
cosmetics, clinical and scientific research, and FDA experience. We consult our scientific
advisors on an as-needed basis on clinical and pre-clinical study design, product and product
candidate development, clinical indications, and all applications of tissue engineering, focusing
on indications and market needs.
We pay consulting fees to members of our scientific advisory board for the services they
provide to us, in addition to reimbursing them for incurred expenses. The amounts vary depending
on the nature of the services. We paid our advisors aggregate consulting fees and reimbursements
of $90,126 and $74,100 for the years ended December 31, 2010 and 2009, respectively.
Sales, Marketing and Distribution
We intend to establish a direct sales force in the wound care market that will market our
products in the United States. The direct sales forces will be managed by our in-house sales
management team and supported by product specialists employed by us who will train the sales force
and provide product education for our physician and care giver customers. We expect to have a
50-person sales force in the United States by the end of 2013 that will represent our initial
dermaPACE commercial efforts after receiving FDA approval to market the device in the United
States.
Outside the United States, we intend to employ distributors to represent our products in our
respective international markets. These distributors will be selected based on their existing
business relationships and the ability of their sales force and distribution capabilities to
effectively penetrate the market with our PACE product line. In addition, we will rely on these
distributors to manage physical distribution, customer service and billing services for our
international customers.
Manufacturing
We have developed a network of suppliers, manufacturers and contract service providers to
provide sufficient quantities of our products and product candidates through the development and
clinical testing phases.
We have a manufacturing supply agreement with Swisstronics Contract Manufacturing AG in
Switzerland, a division of Cicor Technologies Ltd., covering the generator box component of our
products and product candidates. Our generator boxes are manufactured in accordance with
applicable quality standards (EN ISO 13485) and applicable industry and regulatory standards. We
produce the applicators and applicator kits for our products. In addition, we program and load
software and perform the final product testing and certifications internally for all of our
devices.
Our two facilities in Alpharetta, Georgia consist of approximately 20,000 square feet in
total, and provide office, research and development, quality control, production and warehouse
space. They are FDA registered facilities and are ISO 13485 certified.
Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for
our products, product candidates, technology and know-how, to operate without infringing on the
proprietary rights of others and to prevent others from infringing upon our proprietary rights. We
seek to protect our proprietary position by, among other methods, filing United States and selected
foreign patent applications and United States and selected foreign trademark applications related
to our proprietary technology, inventions, products and improvements that are important to the
development of our business. Effective trademark, service mark, copyright, patent and trade secret
protection may not be available in every country in which our products are made available. The
protection of our intellectual property may require the expenditure of significant financial and
managerial resources.
10
Patents
We consider the protection afforded by patents important to our business. We intend to seek
and maintain patent protection in the United States and select foreign countries where deemed
appropriate for products that we develop. There
are no assurances that any patents will result from our patent applications, or that any patents
that may be issued will protect our intellectual property, or that any issued patents or pending
applications will not be successfully challenged, including as to ownership and/or validity, by
third parties. In addition, if we do not avoid infringement of the intellectual property rights of
others, we may have to seek a license to sell our products, defend an infringement action or
challenge the validity of intellectual property in court. Any current or future challenges to our
patent rights, or challenges by us to the patent rights of others, could be expensive and time
consuming.
We derive our patent rights, including as to both issued patents and “patent pending”
applications, from three sources: (1) assignee of patent rights in technology we developed; (2)
assignee of patent rights purchased from HealthTronics, Inc. (“HealthTronics”); and (3) as licensee
of certain patent rights assigned to HealthTronics. In August 2005, we purchased a majority of our
current patents and patent applications from HealthTronics, to whom we granted back perpetual and
royalty-free field-of-use license rights in the purchased patent portfolio. We believe that our
owned and licensed patent rights provide a competitive advantage with respect to others that might
seek to utilize certain of our apparatuses and methods incorporating extracorporeal shockwave
technologies that we have patented; however, we do not hold patent rights that cover all of our
products, product components, or methods that utilize our products. We also have not conducted a
competitive analysis or valuation with respect to our issued and pending patent portfolio in
relation to our current products and/or competitor products.
We are the assignee of fourteen issued United States patents and ten issued foreign patents.
Our current issued United States and foreign patents include patent claims directed to particular
electrode configurations, piezoelectric fiber shockwave devices, chemical components for shockwave
generation and detachable therapy heads with data storage. Our United States patents also include
patent claims directed to methods of using acoustic shockwaves, including shockwave devices such as
our products, to treat ischemic conditions, spinal cord scar tissue and spinal injuries, body
tissues under positive pressure, bone surface gaps, and, within particular treatment parameters,
diabetic foot ulcers and pressure sores. While such patented method claims may provide patent
protection against certain indirect infringing promotion and sales activities of competing
manufacturers and distributors, certain medical methods performed by medical practitioners or
related health care entities may be subject to exemption from potential infringement claims under
35 U.S.C. § 287(c) and, therefore, may limit enforcement of claims of our method patents as
compared to device and non-medical method patents.
We also currently maintain twelve United States non-provisional applications and twelve
foreign patent applications. Our patent-pending rights include inventions directed to certain
shockwave devices and systems, ancillary products and components for shockwave treatment devices,
and various methods of using acoustic pressure waves. Such patent-pending methods include, for
example, using acoustic pressure waves to treat soft tissue disorders, bones, joints, wounds, skin,
blood vessels and circulatory disorders, lymphatic disorders, cardiac tissue, fat and cellulite,
cancer, blood and fluids for sterilization, and to destroy pathogens. All of our United States and
foreign pending applications either have yet to be examined or require response to an examiner’s
office action rejections and, therefore, remain subject to further prosecution, the possibility of
further rejections and appeals, and/or the possibility we may elect to abandon prosecution, without
assurance that a patent may issue from any pending application.
Under our license to HealthTronics, we reserve exclusive rights in our purchased portfolio as
to orthopedic, tendonopathy, skin wounds, cardiac, dental and neural medical conditions and to all
conditions in animals (the “Ortho Field”). HealthTronics receives field-exclusive and
sublicensable rights under the purchased portfolio as to (1) certain HealthTronics lithotripsy
devices in all fields other than the Ortho Field, and (2) all products in the treatment of renal,
ureteral, gall stones and other urological conditions (the “Litho Field”). HealthTronics also
receives non-exclusive and non-sublicensable rights in the purchased portfolio as to any products
in all fields other than the Ortho Field and Litho Field.
Pursuant to mutual amendment and other assignment-back rights under the patent license
agreement with HealthTronics, we are also a licensee of certain patents and patent applications
that have been assigned to HealthTronics. Under issued United States Pat. No. 6,972,116, directed
to particular compositions of shockwave device electrodes, we receive a perpetual, exclusive and
royalty-free license in the Ortho Field and a non-exclusive license in all other fields other than
the Litho Field (reserved exclusively to HealthTronics). We also receive a perpetual,
non-exclusive and royalty-free license to six issued foreign patents and one pending United States
patent application. Our non-exclusive license is subject to HealthTronics’ sole discretion to
further maintain any of the patents and pending applications assigned back to HealthTronics.
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As part of the sale of the veterinary business in June 2009, we have also granted certain
exclusive and non-exclusive patent license rights to Pulse Veterinary Technologies, LLC under most
of our patent portfolio to utilize shockwave technologies in the field of non-human mammals.
Given our international patent portfolio, there are growing risks of challenges to our
existing and future patent rights. Such challenges may result in invalidation or modification of
some or all of our patent rights in a particular patent territory, and reduce our competitive
advantage with respect to third party products and services. Such challenges may also require the
expenditure of significant financial and managerial resources.
A Switzerland based company, SwiTech Medical AG (“SwiTech”), filed an ex parte reexamination
request on July 15, 2010, against our United States Pat. No. 6,080,119. The United States Patent &
Trademark Office (the “USPTO”) granted the request with a non-final examiner’s office action
rejecting the issued patent claims as anticipated and obvious over newly cited art. The Company
filed a response to the examiner’s office action on January 12, 2011, arguing the office action is
unsupported and requesting confirmation of the patent claims. On February 4, 2011, a subsequent
non-final examiner’s office action deemed the prior rejections overcome, but raising new obvious
rejections over the cited art. On March 15, 2011, the Company reached agreement during a
reexamination interview with the USPTO for confirmation of amended patent claims to be submitted by
April 4, 2011. At this time, it is not possible to estimate the risk or range of possible loss.
If we become involved in future litigation or any other adverse intellectual property
proceeding, for example, as a result of an alleged infringement, or a third party alleging an
earlier date of invention, we may have to spend significant amounts of money and time and, in the
event of an adverse ruling, we could be subject to liability for damages, including treble damages,
invalidation of our intellectual property and injunctive relief that could prevent us from using
technologies or developing products, any of which could have a significant adverse effect on our
business, financial condition and results of operation. In addition, any claims relating to the
infringement of third party proprietary rights, or earlier date of invention, even if not
meritorious, could result in costly litigation, lengthy governmental proceedings, divert
management’s attention and resources and require us to enter into royalty or license agreements
which are not advantageous, if available at all.
Trademarks
Since other products on the market compete with our products, we believe that our product
brand names are an important factor in establishing product recognition. We have trademark
registrations for SANUWAVE® in the United States, European Community, Canada, Japan,
Switzerland, Taiwan and under the Madrid Protocol and dermaPACE® in the United States.
We have filed pending trademark applications for dermaPACE® in Canada and received
registrations in the European Community, Japan, South Korea, Switzerland, Taiwan and under the
Madrid Protocol (including the United States). We have filed pending trademark applications for
angioPACE™ in the United States and received registrations in Australia, Canada, the
European Community and Switzerland. We have received trademark registrations for PACE™
and Pulsed Acoustic Cellular Expression™ in the European Community, China, Hong Kong,
Singapore, Switzerland, Taiwan and have pending applications in Canada and the United States. We
have filed pending applications for orthoPACE™, DAP Diffused Acoustic
Pressure™, and Profile™ in the United States. We also maintain trademark
registrations for the marks Ossatron® (United States and Germany), evoPACE®
(Australia, the European Community and Switzerland), Evotron® (United States, Germany
and Switzerland), Evotrode® (Germany and Switzerland), Healing Today. Curing
Tomorrow. ® (United States), HMT® (Switzerland), orthoPACE® (the
European Community), Orthotripsy® (United States), Reflectron® (Germany and
Switzerland), Reflectrode® (Germany and Switzerland), CSWT® (Switzerland),
OSWT® (Switzerland) and TSWT® (Switzerland).
Potential Intellectual Property Issues
Although we believe that the patents and patent applications, including those that we license,
provide a competitive advantage, the patent positions of biotechnology and medical device companies
are highly complex and uncertain. The medical device industry is characterized by the existence of
a large number of patents and frequent litigation based on allegations of patent infringement. Our
success will depend in part on us not infringing on patents issued to others, including our
competitors and potential competitors, as well as our ability to enforce our patent rights. We
also rely on trade secrets, know-how, continuing technological innovation and in-licensing
opportunities to develop and maintain our proprietary position.
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Despite any measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products and product candidates, or to obtain and use information
that we regard as proprietary. In enforcement proceedings in Switzerland, we are currently
assisting HealthTronics as an informer of misappropriation by SwiTech and related third parties of
intellectual property rights in legacy software and devices relating to assets we purchased from
HealthTronics in August 2005. Such present or future actions against violations of our
intellectual property rights may incur material expense and divert the attention of management.
Third parties that license our proprietary rights, such as trademarks, patented technology or
copyrighted material, may also take actions that diminish the value of our proprietary rights or
reputation. In addition, the steps we take to protect our proprietary rights may not be adequate
and third parties may infringe or misappropriate our copyrights, trademarks, trade dress, patents
and similar proprietary rights.
We collaborate with other persons and entities on research, development and commercialization
activities and expect to do so in the future. Disputes may arise about inventorship and
corresponding rights in know-how and inventions resulting from the joint creation or use of
intellectual property by us and our collaborators, researchers, licensors, licensees and
consultants. In addition, other parties may circumvent any proprietary protection that we do have.
As a result, we may not be able to maintain our proprietary position.
For additional risks related to our intellectual property, see “Risk Factors — Risks Related
to Intellectual Property.”
Competition
We believe the advanced wound care market is dramatically underserved. Current technologies
developed by Kinetic Concepts, Inc. (“KCI”), Advanced BioHealing, Inc., Organogenesis, Inc., Smith
& Nephew plc, Integra LifeSciences Holdings Corporation and Systagenix Wound Management (US), Inc.
manage wounds, but, in our opinion, do not impact the biologic factors to promote healing like our
PACE technology. The leading medical device serving this market is the Vacuum Assisted Closure
(“V.A.C.”) System marketed by KCI. The V.A.C. is a negative pressure wound therapy (“NPWT”) device
that applies suction to debride and better manage wounds. KCI successfully launched the V.A.C. in
the United States to address the void in advanced wound care, received a Medicare Part B
reimbursement code in 2000, gained inclusion in the diabetic foot ulcer guidelines from the Tucson
Expert Consensus Conference in 2004 and recorded worldwide revenue of $1.4 billion from the V.A.C.
in 2010.
There are also several companies that market extracorporeal shockwave device products
targeting lithotripsy and orthopedic markets, including Dornier MedTech, Storz Medical AG and
Tissue Regeneration Technologies, LLC, and could ultimately pursue the wound care market.
Nevertheless, we believe that dermaPACE has a competitive advantage over all of these existing
technologies by achieving wound closure by means of a minimally invasive process through innate
biological response to PACE.
Developing and commercializing new products is highly competitive. The market is
characterized by extensive research and clinical efforts and rapid technological change. We face
intense competition worldwide from medical device, biomedical technology and medical products and
combination products companies, including major pharmaceutical companies. We may be unable to
respond to technological advances through the development and introduction of new products. Most
of our existing and potential competitors have substantially greater financial, marketing, sales,
distribution, manufacturing and technological resources. These competitors also may be in the
process of seeking FDA or other regulatory approvals, or patent protection, for new products. Our
competitors may commercialize new products in advance of our products. Our products also face
competition from numerous existing products and procedures, which currently are considered part of
the standard of care. In order to compete effectively, our products will have to achieve
widespread market acceptance.
Regulatory Matters
FDA Regulation
Each of our products must be cleared or approved by the FDA before it is marketed in the
United States. Before and after approval or clearance in the United States, our product candidates
are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act
and/or the Public Health Service Act, as well as by other regulatory bodies. FDA regulations
govern, among other things, the development, testing, manufacturing, labeling, safety, storage,
record-keeping, market clearance or approval, advertising and promotion, import and export,
marketing and sales, and distribution of medical devices and pharmaceutical products.
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In the United States, the FDA subjects medical products to rigorous review. If we do not
comply with applicable requirements, we may be fined, the government may refuse to approve our
marketing applications or to allow us to manufacture or market our products, and we may be
criminally prosecuted. Failure to comply with the law could result in, among other things, warning
letters, civil penalties, delays in approving or refusal to approve a product candidate, product
recall, product seizure, interruption of production, operating restrictions, suspension or
withdrawal of product approval, injunctions, or criminal prosecution.
The FDA has determined that our technology and product candidates constitute “medical
devices.” The FDA determines what center or centers within the FDA will review the product and its
indication for use, and also determines under what legal authority the product will be reviewed.
For the current indications, our product candidate is being reviewed by the Center for Devices and
Radiological Health. However, we cannot be sure that the FDA will not select a different center
and/or legal authority for one or more of our other product candidates, in which case the
governmental review requirements would vary in some respects.
FDA Approval or Clearance of Medical Devices
In the United States, medical devices are subject to varying degrees of regulatory control and
are classified in one of three classes depending on the extent of controls the FDA determines are
necessary to reasonably ensure their safety and efficacy:
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Class I: general controls, such as labeling and adherence to quality system regulations; |
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Class II: special controls, pre-market notification (510(k)), specific controls such as
performance standards, patient registries, and postmarket surveillance, and additional
controls such as labeling and adherence to quality system regulations; and |
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Class III: special controls and approval of a pre-market approval (“PMA”) application. |
Each of our product candidates require FDA authorization prior to marketing, by means of
either a 510(k) clearance or a PMA approval. We are currently proceeding along the path that
dermaPACE is a Class III device requiring a PMA approval. To date, we have corresponded with the
FDA pertaining to possible reclassification of PACE technology for certain indications within the
Class II designation. The FDA continues to maintain that PACE should remain a Class III
technology. Reclassification of the technology is possible but the path through the FDA for such
reclassification will be lengthy and involved. In the meantime, we may leverage existing PMA
approval for Ossatron in order to obtain the same indication (treatment of plantar fasciitis) for
orthoPACE as a line extension for the technology. This route may not require clinical trials and
will be time effective. We may be able to leverage the expected approval for dermaPACE in much the
same manner for other indications utilizing existing clinical experience.
To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market
notification demonstrating that the proposed device is substantially equivalent to another legally
marketed medical device, has the same intended use, and is as safe and effective as a legally
marketed device and does not raise different questions of safety and effectiveness than does a
legally marketed device. 510(k) submissions generally include, among other things, a description
of the device and its manufacturing, device labeling, medical devices to which the device is
substantially equivalent, safety and biocompatibility information, and the results of performance
testing. In some cases, a 510(k) submission must include data from human clinical studies.
Marketing may commence only when the FDA issues a clearance letter finding substantial equivalence.
After a device receives 510(k) clearance, any product modification that could significantly affect
the safety or effectiveness of the product, or that would constitute a significant change in
intended use, requires a new 510(k) clearance or, if the device would no longer be substantially
equivalent, would require a PMA. If the FDA determines that the product does not qualify for
510(k) clearance, then the company must submit and the FDA must approve a PMA before marketing can
begin.
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A PMA application must provide a demonstration of safety and effectiveness, which generally
requires extensive pre-clinical and clinical trial data. Information about the device and its
components, device design, manufacturing and labeling, among other information, must also be
included in the PMA. As part of the PMA review, the FDA will inspect the manufacturer’s facilities
for compliance with Quality System Regulation, or QSR, requirements, which govern testing, control,
documentation and other aspects of quality assurance with respect to manufacturing. If the FDA
determines the
application or manufacturing facilities are not acceptable, the FDA may outline the
deficiencies in the submission and often will request additional testing or information.
Notwithstanding the submission of any requested additional information, the FDA ultimately may
decide that the application does not satisfy the regulatory criteria for approval. During the
review period, an FDA advisory committee, typically a panel of clinicians and statisticians, is
likely to be convened to review the application and recommend to the FDA whether, or upon what
conditions, the device should be approved. The FDA is not bound by the advisory panel decision,
but the FDA often follows the panel’s recommendation. If the FDA finds the information
satisfactory, it will approve the PMA. The PMA approval can include post-approval conditions,
including, among other things, restrictions on labeling, promotion, sale and distribution, or
requirements to do additional clinical studies post-approval. Even after approval of a PMA, a new
PMA or PMA supplement is required to authorize certain modifications to the device, its labeling or
its manufacturing process. Supplements to a PMA often require the submission of the same type of
information required for an original PMA, except that the supplement is generally limited to that
information needed to support the proposed change from the product covered by the original PMA.
During the review of either a 510(k) submission or PMA application, the FDA may request more
information or additional studies and may decide that the indications for which we seek approval or
clearance should be limited. We cannot be sure that our product candidates will be cleared or
approved in a timely fashion or at all. In addition, laws and regulations and the interpretation
of those laws and regulations by the FDA may change in the future. We cannot foresee what effect,
if any, such changes may have on us.
The FDA has just released new guidelines for approval of a Class II device via the 510(k)
process. In the past, the FDA has been criticized for their lack of predictability, reliability,
and efficiency of the 510(k) process. Under these new, developing guidelines, the FDA will
implement internal programs to address these concerns. The new paradigm is intended to clarify
requirements for manufacturers and to streamline the approval process. These changes may also
require device manufacturers to provide more clinical data to prove their claims. While we do not
anticipate device regulatory pathways via the 510(k) route with our current technology, we must
remain cognizant of these regulatory changes for future device pathways via this route.
Obtaining medical device clearance, approval, or licensing in the United States or abroad can
be an expensive process. The fees for submitting an original PMA to the FDA for consideration of
device approval are substantial. Fees for supplement PMA’s are less costly but still can be
substantial. International fee structures vary from minimal to substantial, depending on the
country. In addition, we are subject to annual establishment registration fees in the United
States and abroad. Device licenses require periodic renewal with associated fees as well. In the
United States, there is an annual requirement for submitting device reports for Class III/PMA
devices, along with an associated fee. Currently, we are registered as a Small Business
Manufacturer with the FDA and as such this places us in a reduced fee structure. As future
revenues exceed a certain annual threshold limit, we may not qualify for the Small Business
Manufacturer reduced fee structure and will be required to pay full fee amounts.
Clinical Trials of Medical Devices
One or more clinical trials are almost always required to support a PMA application and are
sometimes required to support a 510(k) submission. Clinical studies of unapproved or uncleared
medical devices or devices being studied for uses for which they are not approved or cleared
(investigational devices) must be conducted in compliance with FDA requirements. If an
investigational device could pose a significant risk to patients, the sponsor company must submit
an IDE application to the FDA prior to initiation of the clinical study. An IDE application must
be supported by appropriate data, such as animal and laboratory test results, showing that it is
safe to test the device on humans and that the testing protocol is scientifically sound. The IDE
will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the
company that the investigation may not begin. Clinical studies of investigational devices may not
begin until an institutional review board (the “IRB”) has approved the study.
During the study, the sponsor must comply with the FDA’s IDE requirements. These requirements
include investigator selection, trial monitoring, adverse event reporting, and record keeping. The
investigators must obtain patient informed consent, rigorously follow the investigational plan and
study protocol, control the disposition of investigational devices, and comply with reporting and
record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical
trial is being conducted may suspend a clinical trial at any time for various reasons, including a
belief that the subjects are being exposed to an unacceptable risk. During the approval or
clearance process, the FDA typically
inspects the records relating to the conduct of one or more investigational sites
participating in the study supporting the application.
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Post-Approval Regulation of Medical Devices
After a device is cleared or approved for marketing, numerous and pervasive regulatory
requirements continue to apply. These include:
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the FDA Quality Systems Regulation (“QSR”), which governs, among other things, how
manufacturers design, test, manufacture, exercise quality control over, and document
manufacturing of their products; |
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labeling and claims regulations, which prohibit the promotion of products for unapproved
or “off-label” uses and impose other restrictions on labeling; and |
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the Medical Device Reporting regulation, which requires reporting to the FDA of certain
adverse experiences associated with use of the product. |
We continue to be subject to inspection by the FDA to determine our compliance with regulatory
requirements, as do our suppliers, contract manufacturers, and contract testing laboratories.
International sales of medical devices manufactured in the United States that are not approved
or cleared by the FDA are subject to FDA export requirements. Exported devices are subject to the
regulatory requirements of each country to which the device is exported. Exported devices may also
fall under the jurisdiction of the United States Department of Commerce/Bureau of Industry and
Security and compliance with export regulations may be required for certain countries.
Manufacturing cGMP Requirements
If and when we manufacture medical devices, we will be required to comply with applicable FDA
manufacturing requirements contained in the FDA’s current good manufacturing practices (the “cGMP”)
set forth in the quality system regulations promulgated under section 520 of the Food, Drug and
Cosmetic Act. cGMP regulations require, among other things, quality control and quality assurance
as well as the corresponding maintenance of records and documentation. The manufacturing facility
for our products must meet cGMP requirements to the satisfaction of the FDA pursuant to a pre-PMA
approval inspection before we can use them. We and some of our third party service providers are
also subject to periodic inspections of facilities by the FDA and other authorities, including
procedures and operations used in the testing and manufacture of our products to assess our
compliance with applicable regulations. Failure to comply with statutory and regulatory
requirements subjects a manufacturer to possible legal or regulatory action, including the seizure
or recall of products, injunctions, consent decrees placing significant restrictions on or
suspending manufacturing operations, and civil and criminal penalties. Adverse experiences with
the product must be reported to the FDA and could result in the imposition of marketing
restrictions through labeling changes or in product withdrawal. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems concerning safety or
efficacy of the product occur following the approval.
International Regulation
We are subject to regulations and product registration requirements in many foreign countries
in which we may sell our products, including in the areas of product standards, packaging
requirements, labeling requirements, import and export restrictions and tariff regulations, duties
and tax requirements. The time required to obtain clearance required by foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for licensing a product in
a foreign country may differ significantly from FDA requirements.
The primary regulatory body in Canada is Health Canada. In addition to needing appropriate
data to obtain market licensing in Canada, we must have an ISO 13485:2003 certification, as well as
meet additional requirements of Canadian laws. We currently have this certification and will need
to maintain it in order to have the potential to gain approval of a product candidate in Canada.
We obtained a device license for dermaPACE from Health Canada in 2010 for the indication of
“devices for application of shock waves (pulsed acoustic waves) on acute and chronic defects of the
skin and subcutaneous soft tissue”.
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The primary regulatory environment in Europe is the European Union, which consists of 25
member states and 42 competent authorities encompassing most of the major countries in Europe. In
the European Union, the European Medicines Agency (“EMA”) and the European Union Commission have
determined that dermaPACE, orthoPACE, Ossatron and Evotron will be regulated as medical device
products. These devices have been determined to be Class IIb devices. These devices are CE Marked
and as such can be marketed and distributed within the European Economic Area.
The primary regulatory bodies and paths in Asia and Australia are determined by the requisite
country authority. In most cases, establishment registration and device licensing are applied for
at the applicable Ministry of Health through a local intermediary. The requirements placed on the
manufacturer are typically the same as those contained in ISO 9001 or ISO 13485.
European Good Manufacturing Practices
In the European Union, the manufacture of medical devices is subject to good manufacturing
practice (“GMP”), as set forth in the relevant laws and guidelines of the European Union and its
member states. Compliance with GMP is generally assessed by the competent regulatory authorities.
Typically, quality system evaluation is performed by a Notified Body, which also recommends to the
relevant competent authority for the European Community CE Marking of a device. The Competent
Authority may conduct inspections of relevant facilities, and review manufacturing procedures,
operating systems and personnel qualifications. In addition to obtaining approval for each
product, in many cases each device manufacturing facility must be audited on a periodic basis by
the Notified Body. Further inspections may occur over the life of the product.
United States Anti-Kickback and False Claims Laws
In the United States, there are Federal and state anti-kickback laws that prohibit the payment
or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or
recommendation of healthcare products and services. Violations of these laws can lead to civil and
criminal penalties, including exclusion from participation in Federal healthcare programs. These
laws are potentially applicable to manufacturers of products regulated by the FDA as medical
devices, such as us, and hospitals, physicians and other potential purchasers of such products.
Other provisions of state and Federal law provide civil and criminal penalties for presenting, or
causing to be presented, to third-party payers for reimbursement, claims that are false or
fraudulent, or which are for items or services that were not provided as claimed. In addition,
certain states have implemented regulations requiring medical device and pharmaceutical companies
to report all gifts and payments over $50 to medical practitioners. This does not apply to
instances involving clinical trials. Although we intend to structure our future business
relationships with clinical investigators and purchasers of our products to comply with these and
other applicable laws, it is possible that some of our business practices in the future could be
subject to scrutiny and challenge by Federal or state enforcement officials under these laws.
Third Party Reimbursement
We anticipate that sales volumes and prices of the products we commercialize will depend in
large part on the availability of coverage and reimbursement from third party payers. Third party
payers include governmental programs such as Medicare and Medicaid, private insurance plans, and
workers’ compensation plans. These third party payers may deny coverage and reimbursement for a
product or therapy, in whole or in part, if they determine that the product or therapy was not
medically appropriate or necessary. The third party payers also may place limitations on the types
of physicians or clinicians that can perform specific types of procedures. In addition, third
party payers are increasingly challenging the prices charged for medical products and services.
Some third party payers must also pre-approve coverage for new or innovative devices or therapies
before they will reimburse health care providers who use the products or therapies. Even though a
new product may have been approved or cleared by the FDA for commercial distribution, we may find
limited demand for the device until adequate reimbursement has been obtained from governmental and
private third party payers.
In international markets, reimbursement and healthcare payment systems vary significantly by
country, and many countries have instituted price ceilings on specific product lines and
procedures. There can be no assurance that procedures using our products will be considered
medically reasonable and necessary for a specific indication, that our products will be considered
cost-effective by third party payers, that an adequate level of reimbursement will be available or
that the third party payers’ reimbursement policies will not adversely affect our ability to sell
our products profitably.
17
In the United States, some insured individuals are receiving their medical care through
managed care programs, which monitor and often require pre-approval of the services that a member
will receive. Some managed care programs are paying their providers on a per capita basis, which
puts the providers at financial risk for the services provided to their patients by paying these
providers a predetermined payment per member per month, and consequently, may limit the willingness
of these providers to use products, including ours.
One of the components in the reimbursement decision by most private insurers and governmental
payers, including the Centers for Medicare & Medicaid Services, which administers Medicare, is the
assignment of a billing code. Billing codes are used to identify the procedures performed when
providers submit claims to third party payers for reimbursement for medical services. They also
generally form the basis for payment amounts. New billing codes for our wound care indications of
our product candidates will be sought as part of our efforts to commercialize such products.
The initial phase of establishing a billing code for a medical service typically includes
applying for a Category III Current Procedural Terminology (“CPT”) code. This is a tracking code
without relative value assigned that allows third party payers to identify and monitor the service
as well as establish value if deemed medically necessary. The process includes CPT application
submission, clinical discussion with Medical Professional Society CPT advisors as well as American
Medical Association (“AMA”) CPT Editorial Panel review. A new Category III CPT code will be
assigned if the AMA CPT Editorial Panel committee deems it meets criteria and is appropriate. The
secondary phase in the CPT billing code process includes the establishment of a Category I CPT code
in which relative value is analyzed and established by the AMA. The approval of this code, among
other criteria, is based on widespread usage and established clinical efficacy of the medical
service.
We believe that the overall escalating costs of medical products and services has led to, and
will continue to lead to, increased pressures on the healthcare industry to reduce the costs of
products and services. In addition, recent healthcare reform measures, as well as legislative and
regulatory initiatives at the Federal and state levels, create significant additional
uncertainties. There can be no assurance that third-party coverage and reimbursement will be
available or adequate, or that future legislation, regulation, or reimbursement policies of third
party payers will not adversely affect the demand for our products or our ability to sell these
products on a profitable basis. The unavailability or inadequacy of third party payer coverage or
reimbursement would have a material adverse effect on our business, operating results and financial
condition
Environmental and Occupational Safety and Health Regulations
Our operations are subject to extensive Federal, state, provincial and municipal environmental
statutes, regulations and policies, including those promulgated by the Occupational Safety and
Health Administration, the United States Environmental Protection Agency, Environment Canada,
Alberta Environment, the Department of Health Services, and the Air Quality Management District,
that govern activities and operations that may have adverse environmental effects such as
discharges into air and water, as well as handling and disposal practices for solid and hazardous
wastes. Some of these statutes and regulations impose strict liability for the costs of cleaning
up, and for damages resulting from, sites of spills, disposals, or other releases of contaminants,
hazardous substances and other materials and for the investigation and remediation of environmental
contamination at properties leased or operated by us and at off-site locations where we have
arranged for the disposal of hazardous substances. In addition, we may be subject to claims and
lawsuits brought by private parties seeking damages and other remedies with respect to similar
matters. We have not to date needed to make material expenditures to comply with current
environmental statutes, regulations and policies. However, we cannot predict the impact and costs
those future statutes, regulations and policies will have on our business.
Milestone and Royalty Payments
Under an agreement with Sci-Do AG, an Austrian company from which we purchased certain
patents, we are required to make various milestone and royalty payments based on the occurrence of
certain events. Pursuant to the terms of the agreement, we are required to make a royalty payment
of $100,000 upon FDA approval of our product for wound care. In addition, we are required to make
royalty payments, based on a percentage of operating profit, for sales of FDA-approved wound care
products in excess of $500,000 of earnings before interest and taxes. There were no payments under
the agreement for the year ended December 31, 2010. During the year ended December 31, 2009, we
paid $50,000 under the agreement.
18
Employees
As of December 31, 2010, we had a total of 28 employees in the United States. Of these 28
full-time employees, 12 were engaged in research and development, including clinical, regulatory
and quality. None of our employees are represented by a labor union or covered by a collective
bargaining agreement. We believe our relationship with our employees is good.
Risks Related to Our Business
We have a history of losses and we expect to continue to incur losses and may not achieve or
maintain profitability.
We have invested and continue to invest a significant portion of our time and resources in
developing and testing our PACE product candidates, with current emphasis on dermaPACE. As a
result of our significant research, clinical development, regulatory compliance and general and
administrative expenses, we expect to incur losses for at least the next several years as we
continue to incur expenses for seeking FDA approval for our dermaPACE device and then
commercialization in the United States after FDA approval. As of December 31, 2010, we had an
accumulated deficit of $54.3 million. We continue to focus our expertise and future development
efforts on the development of our PACE technology in wound care, orthopedic/spine, plastic/cosmetic
and cardiac applications. Even if we succeed in developing and commercializing one or more of our
product candidates, we may not be able to generate sufficient revenues and we may never achieve or
be able to maintain profitability.
Current economic conditions could adversely affect our operations.
According to the National Bureau of Economic Research, the United States economy was in a
recession from December 2007 through June 2009. This economic downturn was the longest recession
since World War II. The related instability of markets have impacted us in the short term by
making it difficult to raise the necessary capital to fund our research and development programs,
as well as the infrastructure needed to plan for follow-on programs, upcoming regulatory
submissions, product approvals, market launches and insurance reimbursement interactions. In
addition, any change in the economy as a result of this long recession may impact the demand for
medical procedures that we are targeting with our product candidates, or may impact the pricing of
our products. Since our anticipated United States product launch for our lead product device,
dermaPACE, remains up to a year away, the impact of the recession on commercial markets for that
product remains uncertain.
There is a risk that one or more suppliers, clinical investigators, consultants and other
partners may encounter difficulties during these challenging economic times, which would directly
affect our ability to attain our operating goals on schedule and on budget.
The current economic conditions may also adversely affect our potential customers, including
patients, medical professionals and their practices, hospitals and other healthcare providers.
These conditions may also impact the overall amount spent on healthcare generally. This could
result in a decrease in the demand for our products, longer sales cycles, slower adoption of our
new technology and increased price competition.
Our product candidates may not be developed or commercialized successfully.
Our product candidates are based on a technology that often times has not been used previously
in the manner we propose and must compete with more established treatments currently accepted as
the standards of care. Market acceptance of our products will largely depend on our ability to
demonstrate their relative safety, efficacy, cost-effectiveness and ease of use.
We are subject to the risks that:
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the FDA or a foreign regulatory authority finds our product candidates ineffective
or unsafe; |
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we do not receive necessary regulatory approvals; |
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we are unable to get our product candidates in commercial quantities at reasonable
costs; and |
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the patient and physician community does not accept our product candidates. |
19
In addition, our product development program may be curtailed, redirected, eliminated or
delayed at any time for many reasons, including:
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adverse or ambiguous results; |
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undesirable side effects that delay or extend the trials; |
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the inability to locate, recruit, qualify and retain a sufficient number of clinical
investigators or patients for our trials; and |
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regulatory delays or other regulatory actions. |
We cannot predict whether we will successfully develop and commercialize our product
candidates. If we fail to do so, we will not be able to generate substantial revenues, if any.
The medical device/therapeutic product industries are highly competitive and subject to rapid
technological change. If our competitors are better able to develop and market products that are
safer and more effective than any products we may develop, our commercial opportunities will be
reduced or eliminated.
Our success depends, in part, upon our ability to maintain a competitive position in the
development of technologies and products. We face competition from established medical device,
pharmaceutical and biotechnology companies, as well as from academic institutions, government
agencies, and private and public research institutions in the United States and abroad. Many of
our principal competitors have significantly greater financial resources and expertise than we do
in research and development, manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products. Smaller or early-stage companies
may also prove to be significant competitors, particularly through collaborative arrangements with,
or mergers with, or acquisitions by large and established companies, or through the development of
novel products and technologies.
The industry in which we operate has undergone, and we expect it to continue to undergo, rapid
and significant technological change, and we expect competition to intensify as technological
advances are made. Our competitors may develop and commercialize pharmaceutical, biotechnology or
medical devices that are safer or more effective, have fewer side effects or are less expensive
than any products that we may develop. We also compete with our competitors in recruiting and
retaining qualified scientific and management personnel, in establishing clinical trial sites and
patient registration for clinical trials, and in acquiring technologies and technology licenses
complementary to our programs or advantageous to our business.
If our products and product candidates do not gain market acceptance among physicians, patients and
the medical community, we may be unable to generate significant revenues, if any.
Even if we obtain regulatory approval for our product candidates, they may not gain market
acceptance among physicians, healthcare payers, patients and the medical community. Market
acceptance will depend on our ability to demonstrate the benefits of our approved products in terms
of safety, efficacy, convenience, ease of administration and cost effectiveness. In addition, we
believe market acceptance depends on the effectiveness of our marketing strategy, the pricing of
our approved products and the reimbursement policies of government and third party payers.
Physicians may not prescribe our approved products for a variety of reasons and patients may
determine for any reason that our product is not useful to them. If any of our approved products
fail to achieve market acceptance, our ability to generate revenues will be limited.
We currently purchase most of our product component materials from single suppliers. If we are
unable to obtain product component materials and other products from our suppliers that we depend
on for our operations, our ability to deliver our products to market will likely be impeded.
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.
Our suppliers may encounter problems during manufacturing due to a variety of reasons, including
failure to follow specific protocols and procedures, failure to comply with applicable regulations,
equipment malfunction and
environmental factors. 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.
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If we are unable to secure on a timely basis sufficient quantities of the materials we depend
on to manufacture our products, if we encounter delays or contractual or other difficulties in our
relationships with these suppliers, or if we cannot find replacement suppliers at an acceptable
cost, then the manufacturing of our products may be disrupted, which could increase our costs and
have a material adverse effect on our revenues.
The loss of our key management and scientific personnel would likely hinder our ability to execute
our business plan.
As a small company with 28 employees, our success depends on the continuing contributions of
our management team and scientific personnel, and on maintaining relationships with the network of
medical and academic centers that conduct our clinical trials. We depend on the services of our
key scientific employees and principal members of our management team. Our success depends in
large part on our ability to attract and retain highly qualified personnel. We face intense
competition in our hiring efforts from other pharmaceutical, biotechnology and medical device
companies, as well as from universities and nonprofit research organizations, and we may have to
pay higher salaries to attract and retain qualified personnel. The loss of one or more of these
individuals, or our inability to attract additional qualified personnel, could substantially impair
our ability to implement our business plan.
We face an inherent risk of liability in the event that the use or misuse of our product candidates
results in personal injury or death.
The use of our product candidates in clinical trials and the sale of any approved products may
expose us to product liability claims which could result in financial loss. Our clinical and
commercial product liability insurance coverage may not be sufficient to cover claims that may be
made against us. In addition, we may not be able to maintain insurance coverage at a reasonable
cost, or in sufficient amounts or scope, to protect us against losses. Any claims against us,
regardless of their merit, could severely harm our financial condition, strain our management team
and other resources, and adversely impact or eliminate the prospects for commercialization of the
product candidate, or sale of the product, which is the subject of any such claim. Although we do
not promote any off-label use, off-label uses of products are common and the FDA does not regulate
a physician’s choice of treatment. Off-label uses of any product for which we obtain approval may
subject us to additional liability.
Regulatory Risks
The results of our clinical trials may be insufficient to obtain regulatory approval for our
product candidates.
We will only receive regulatory approval to commercialize a product candidate if we can
demonstrate to the satisfaction of the FDA or the applicable foreign regulatory agency, in well
designed and conducted clinical trials, that the product candidate is safe and effective. If we
are unable to demonstrate that a product candidate will be safe and effective in advanced clinical
trials involving larger numbers of patients, we will be unable to submit the necessary application
to receive regulatory approval to commercialize the product candidate. We face risks that:
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the product candidate may not prove to be safe or effective; |
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the product candidate’s benefits may not outweigh its risks; |
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the results from more advanced clinical trials may not confirm the positive results
from pre-clinical studies and early clinical trials; |
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the FDA or comparable foreign regulatory authorities may interpret data from
pre-clinical and clinical testing in different ways than us; and |
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the FDA or other regulatory agencies may require additional or expanded trials. |
We are subject to extensive governmental regulation, including the requirement of FDA approval or
clearance, before our product candidates may be marketed.
The process of obtaining FDA approval is lengthy, expensive and uncertain, and we cannot be
sure that our product candidates will be approved in a timely fashion, or at all. If the FDA does
not approve or clear our product candidates in a timely fashion, or at all, our business and
financial condition would likely be adversely affected. We
cannot be sure that the FDA will not select a different center and/or different legal authority for
our other product candidates, in which case the path to regulatory approval would be different and
could be more lengthy and costly.
21
Both before and after approval or clearance of our product candidates, we, our product
candidates, our suppliers, our contract manufacturers and our contract testing laboratories are
subject to extensive regulation by governmental authorities in the United States and other
countries. Failure to comply with applicable requirements could result in, among other things, any
of the following actions:
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fines and other monetary penalties; |
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unanticipated expenditures; |
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delays in FDA approval and clearance, or FDA refusal to approve or clear a product
candidate; |
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product recall or seizure; |
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interruption of manufacturing or clinical trials; |
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operating restrictions; |
In addition to the approval and clearance requirements, other numerous and pervasive
regulatory requirements apply, both before and after approval or clearance, to us, our products and
product candidates, and our suppliers, contract manufacturers and contract laboratories. These
include requirements related to the following:
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reporting to the FDA certain adverse experiences associated with the use of the
products; and |
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obtaining additional approvals or clearances for certain modifications to the
products or their labeling or claims. |
We are also subject to inspection by the FDA to determine our compliance with regulatory
requirements, as are our suppliers, contract manufacturers and contract testing laboratories, and
we cannot be sure that the FDA will not indentify compliance issues that may disrupt production or
distribution, or require substantial resources to correct.
The FDA’s requirements may change and additional government regulations may be promulgated
that could affect us, our product candidates, and our suppliers, contract manufacturers and
contract laboratories. We cannot predict the likelihood, nature or extent of government regulation
that may arise from future legislation or administrative action. There can be no assurance that we
will not be required to incur significant costs to comply with such laws and regulations in the
future, or that such laws or regulations will not have a material adverse effect upon our business.
Federal regulatory reforms may adversely affect our ability to sell our products profitably.
From time to time, legislation is drafted and introduced in the United States Congress that
could significantly change the statutory provisions governing the clearance or approval,
manufacture and marketing of a device. In addition, FDA regulations and guidance are often revised
or reinterpreted by the agency in ways that may significantly affect our business and our products.
It is impossible to predict whether legislative changes will be enacted or FDA regulations,
guidance or interpretations changed, and what the impact of such changes, if any, may be.
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our
products abroad.
International sales of our products and any of our product candidates that we commercialize
are subject to the regulatory requirements of each country in which the products are sold.
Accordingly, the introduction of our product candidates in markets outside the United States will
be subject to regulatory approvals in those jurisdictions. The
regulatory review process varies from country to country. Many countries impose product standards,
packaging and labeling requirements, and import restrictions on medical devices. In addition, each
country has its own tariff regulations, duties and tax requirements. The approval by foreign
government authorities is unpredictable and uncertain, and can be expensive. Our ability to market
our approved products could be substantially limited due to delays in receipt of, or failure to
receive, the necessary approvals or clearances.
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Prior to marketing our products in any country outside the United States, we must obtain
marketing approval in that country. Approval and other regulatory requirements vary by
jurisdiction and differ from the United States’ requirements. We may be required to perform
additional pre-clinical or clinical studies even if FDA approval has been obtained.
If we fail to obtain an adequate level of reimbursement for our approved products by third party
payers, there may be no commercially viable markets for our approved products or the markets may be
much smaller than expected.
The availability and levels of reimbursement by governmental and other third party payers
affect the market for our approved products. The efficacy, safety, performance and
cost-effectiveness of our product and product candidates, and of any competing products, will
determine the availability and level of reimbursement. Reimbursement and healthcare payment
systems in international markets vary significantly by country, and include both government
sponsored healthcare and private insurance. To obtain reimbursement or pricing approval in some
countries, we may be required to produce clinical data, which may involve one or more clinical
trials, that compares the cost-effectiveness of our approved products to other available therapies.
We may not obtain international reimbursement or pricing approvals in a timely manner, if at all.
Our failure to receive international reimbursement or pricing approvals would negatively impact
market acceptance of our approved products in the international markets in which those approvals
are sought.
We believe that future reimbursement may be subject to increased restrictions both in the
United States and in international markets. Future legislation, regulation or reimbursement
policies of third party payers may adversely affect the demand for our future approved products
currently under development and limit our ability to sell our approved products on a profitable
basis. In addition, third party payers continually attempt to contain or reduce the costs of
healthcare by challenging the prices charged for healthcare products and services. If
reimbursement for our approved products is unavailable or limited in scope or amount, or if pricing
is set at unsatisfactory levels, market acceptance of our approved products would be impaired and
our future revenues, if any, would be adversely affected.
If we fail to comply with the United States Federal Anti-Kickback Statute and similar state laws,
we could be subject to criminal and civil penalties and exclusion from the Medicare and Medicaid
programs, which would have a material adverse effect on our business and results of operations.
A provision of the Social Security Act, commonly referred to as the Federal Anti-Kickback
Statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in
return for referring, ordering, leasing, purchasing or arranging for, or recommending the ordering,
purchasing or leasing of, items or services payable by Medicare, Medicaid or any other Federal
healthcare program. The Federal Anti-Kickback Statute is very broad in scope and many of its
provisions have not been uniformly or definitively interpreted by existing case law or regulations.
In addition, most of the states in which our approved products may be sold have adopted laws
similar to the Federal Anti-Kickback Statute, and some of these laws are even broader than the
Federal Anti-Kickback Statute in that their prohibitions are not limited to items or services paid
for by Federal healthcare programs, but instead apply regardless of the source of payment.
Violations of the Federal Anti-Kickback Statute may result in substantial civil or criminal
penalties and exclusion from participation in Federal healthcare programs.
All of our financial relationships with healthcare providers and others who provide products
or services to Federal healthcare program beneficiaries are potentially governed by the Federal
Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the
Federal Anti-Kickback Statute and similar state laws. However, we cannot be certain that we will
not be subject to investigations or litigation alleging violations of these laws, which could be
time-consuming and costly to us and could divert management’s attention from operating our
business, which in turn could have a material adverse effect on our business. In addition, if our
arrangements were found to violate the Federal Anti-Kickback Statute or similar state laws, the
consequences of such violations would likely have a material adverse effect on our business and
results of operations.
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Patients may discontinue their participation in our clinical studies, which may negatively impact
the results of these studies and extend the timeline for completion of our development programs.
Clinical trials for our product candidates require sufficient patient enrollment. We may not
be able to enroll a sufficient number of patients in a timely or cost-effective manner. Patients
enrolled in our clinical studies may discontinue their participation at any time during the study
as a result of a number of factors, including withdrawing their consent or experiencing adverse
clinical events, which may or may not be judged to be related to our product candidates under
evaluation. If a large number of patients in any one of our studies discontinue their
participation in the study, the results from that study may not be positive or may not support a
filing for regulatory approval of our product candidates.
In addition, the time required to complete clinical trials is dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a function of many factors,
including the following:
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the size of the patient population; |
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the nature of the clinical protocol requirements; |
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the availability of other treatments or marketed therapies (whether approved or
experimental); |
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our ability to recruit and manage clinical centers and associated trials; |
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the proximity of patients to clinical sites; and |
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the patient eligibility criteria for the study. |
Product quality or performance issues may be discovered through ongoing regulation by the FDA and
by comparable international agencies, as well as through our internal standard quality process.
The medical device industry is subject to substantial regulation by the FDA and by comparable
international agencies. In addition to requiring clearance or approval to market new or improved
devices, we are subject to ongoing regulation as a device manufacturer. Governmental regulations
cover many aspects of our operations, including quality systems, marketing and device reporting.
As a result, we continually collect and analyze information about our product quality and product
performance through field observations, customer feedback and other quality metrics. If we fail to
comply with applicable regulations or if post market safety issues arise, we could be subject to
enforcement sanctions, our promotional practices may be restricted, and our marketed products could
be subject to recall or otherwise impacted. Each of these potential actions could result in a
material adverse effect on our operating results.
The use of hazardous materials in our operations may subject us to environmental claims or
liability.
We conduct research and development and manufacturing operations in our facilities. Our
research and development process may, at times, involve the controlled use of hazardous materials
and chemicals. We will conduct experiments that are common in the medical device industry, in
which we may use small quantities of chemicals, including those that are corrosive, toxic and
flammable. The risk of accidental injury or contamination from these materials cannot be
eliminated. We do not maintain a separate insurance policy for these types of risks. In the event
of an accident or environmental discharge or contamination, we may be held liable for any resulting
damages, and any liability could exceed our resources. We are subject to Federal, state and local
laws and regulations governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and regulations could be
significant.
Risks Related to Intellectual Property
The protection of our intellectual property is critical to our success and any failure on our part
to adequately protect those rights could materially adversely affect our business.
Our commercial success depends to a significant degree on our ability to:
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obtain and/or maintain protection for our product candidates under the patent
laws of the United States and other countries; |
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defend and enforce our patents once obtained; |
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obtain and/or maintain appropriate licenses to patents, patent applications or
other proprietary rights held by others with respect to our technology, both in the
United States and other countries; |
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maintain trade secrets and other intellectual property rights relating to our
product candidates; and |
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operate without infringing upon the patents, trademarks, copyrights and
proprietary rights of third parties. |
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The degree of intellectual property protection for our technology is uncertain, and only
limited intellectual property protection may be available for our product candidates, which may
prevent us from gaining or keeping any competitive advantage against our competitors. Although we
believe the patents that we own or license, and the patent applications that we own or license,
generally provide us a competitive advantage, the patent positions of biotechnology,
biopharmaceutical and medical device companies are generally highly uncertain, involve complex
legal and factual questions and have been the subject of much litigation. Neither the United
States Patent & Trademark Office nor the courts have a consistent policy regarding the breadth of
claims allowed or the degree of protection afforded under many biotechnology patents. Even if
issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our
ability to stop competitors from marketing similar products or limit the length of term of patent
protection we may have for our products. Further, a court or other government agency could
interpret our patents in a way such that the patents do not adequately cover our current or future
product candidates. Changes in either patent laws or in interpretations of patent laws in the
United States and other countries may diminish the value of our intellectual property or narrow the
scope of our patent protection.
We also rely upon trade secrets and unpatented proprietary know-how and continuing
technological innovation in developing our products, especially where we do not believe patent
protection is appropriate or obtainable. We seek to protect this intellectual property, in part,
by generally requiring our employees, consultants, and current and prospective business partners to
enter into confidentiality agreements in connection with their employment, consulting or advisory
relationships with us, where appropriate. We also require our employees, consultants, researchers
and advisors who we expect to work on our products and product candidates to agree to disclose and
assign to us all inventions conceived during the work day, developed using our property or which
relate to our business. We may lack the financial or other resources to successfully monitor and
detect, or to enforce our rights in respect of, infringement of our rights or breaches of these
confidentiality agreements. In the case of any such undetected or unchallenged infringements or
breaches, these confidentiality agreements may not provide us with meaningful protection of our
trade secrets and unpatented proprietary know-how or adequate remedies. In addition, others may
independently develop technology that is similar or equivalent to our trade secrets or know-how.
If any of our trade secrets, unpatented know-how or other confidential or proprietary information
is divulged to third parties, including our competitors, our competitive position in the
marketplace could be harmed and our ability to sell our products successfully could be severely
compromised. Enforcing a claim that a party illegally obtained and is using trade secrets that
have been licensed to us or that we own is also difficult, expensive and time consuming, and the
outcome is unpredictable. In addition, courts outside the United States may be less willing to
protect trade secrets. Costly and time consuming litigation could be necessary to seek to enforce
and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret
protection could have a material adverse effect on our business. Moreover, some of our academic
institution licensees, evaluators, collaborators and scientific advisors have rights to publish
data and information to which we have rights. If we cannot maintain the confidentiality of our
technologies and other confidential information in connection with our collaborations, our ability
to protect our proprietary information or obtain patent protection in the future may be impaired,
which could have a material adverse effect on our business.
In particular, we cannot assure you that:
| |
• |
|
we or the owners or other inventors of the patents that we own or that have been
licensed to us, or that may be issued or licensed to us in the future, were the first to
file patent applications or to invent the subject matter claimed in patent applications
relating to the technologies upon which we rely; |
| |
• |
|
others will not independently develop similar or alternative technologies or
duplicate any of our technologies; |
| |
• |
|
any of our patent applications will result in issued patents; |
| |
• |
|
the patents and the patent applications that we own or that have been licensed to us,
or that may be issued or licensed to us in the future, will provide a basis for
commercially viable products or will provide us with any competitive advantages, or will
not be challenged by third parties; |
| |
• |
|
the patents and the patent applications that have been licensed to us are valid and
enforceable; |
| |
• |
|
we will develop additional proprietary technologies that are patentable; |
| |
• |
|
we will be successful in enforcing the patents that we own or license and any patents
that may be issued or licensed to us in the future against third parties; |
| |
• |
|
the patents of third parties will not have an adverse effect on our ability to do
business; or |
| |
• |
|
our trade secrets and proprietary rights will remain confidential. |
25
Accordingly, we may fail to secure meaningful patent protection relating to any of our
existing or future product candidates or discoveries despite the expenditure of considerable
resources. Further, there may be widespread patent infringement in countries in which we may seek
patent protection, including countries in Europe and Asia, which may instigate expensive and time
consuming litigation which could adversely affect the scope of our patent protection. In addition,
others may attempt to commercialize products similar to our product candidates in countries where
we do not have adequate patent protection. Failure to obtain adequate patent protection for our
product candidates, or the failure by particular countries to enforce patent laws or allow
prosecution for alleged patent infringement, may impair our ability to be competitive. The
availability of infringing products in markets where we have patent protection, or the availability
of competing products in markets where we do not have adequate patent protection, could erode the
market for our product candidates, negatively impact the prices we can charge for our product
candidates, and harm our reputation if infringing or competing products are manufactured to
inferior standards.
Patent applications owned by or licensed to us may not result in issued patents, and our
competitors may commercialize the discoveries we attempt to patent.
The patent applications that we own and that have been licensed to us, and any future patent
applications that we may own or that may be licensed to us, may not result in the issuance of any
patents. The standards that the United States Patent & Trademark Office and foreign patent offices
use to grant patents are not always applied predictably or uniformly and can change. Consequently,
we cannot be certain as to the type and scope of patent claims to which we may in the future be
entitled under our license agreements or that may be issued to us in the future. These
applications may not be sufficient to meet the statutory requirements for patentability and,
therefore, may not result in enforceable patents covering the product candidates we want to
commercialize. Further, patent applications in the United States that are not filed in other
countries may not be published or generally are not published until at least 18 months after they
are first filed, and patent applications in certain foreign countries generally are not published
until many months after they are filed. Scientific and patent publication often occurs long after
the date of the scientific developments disclosed in those publications. As a result, we cannot be
certain that we will be the first creator of inventions covered by our patents or applications, or
the first to file such patent applications. As a result, our issued patents and our patent
applications could become subject to challenge by third parties that created such inventions or
filed patent applications before us or our licensors, resulting in, among other things,
interference proceedings in the United States Patent & Trademark Office to determine priority of
discovery or invention. Interference proceedings, if resolved adversely to us, could result in the
loss of or significant limitations on patent protection for our products or technologies. Even in
the absence of interference proceedings, patent applications now pending or in the future filed by
third parties may prevail over the patent applications that have been or may be owned by or
licensed to us or that we may file in the future, or may result in patents that issue alongside
patents issued to us or our licensors or that may be issued or licensed to us in the future,
leading to uncertainty over the scope of the patents owned by or licensed to us or that may in the
future be owned by us or our freedom to practice the claimed inventions.
Our patents may not be valid or enforceable, and may be challenged by third parties.
We cannot assure you that the patents that have been issued or licensed to us would be held
valid by a court or administrative body or that we would be able to successfully enforce our
patents against infringers, including our competitors. The issuance of a patent is not conclusive
as to its validity or enforceability, and the validity and enforceability of a patent is
susceptible to challenge on numerous legal grounds, including the possibility of reexamination
proceedings brought by third parties in the United States Patent & Trademark Office against issued
patents and similar validity challenges under foreign patent laws. Challenges raised in patent
infringement litigation brought by or against us may result in determinations that patents that
have been issued or licensed to us or any patents that may be issued to us or our licensors in the
future are invalid, unenforceable or otherwise subject to limitations. In the event of any such
determinations, third parties may be able to use the discoveries or technologies claimed in these
patents without paying licensing fees or royalties to us, which could significantly diminish the
value of our intellectual property and our competitive advantage. Even if our patents are held to
be enforceable, others may be able to design around our patents or develop products similar to our
products that are not within the scope of any of our patents.
In addition, enforcing the patents that we own or license, and any patents that may be issued
to us in the future, against third parties may require significant expenditures regardless of the
outcome of such efforts. Our inability to enforce our patents against infringers and competitors
may impair our ability to be competitive and could have a material adverse effect on our business.
26
Issued patents and patent licenses may not provide us with any competitive advantage or provide
meaningful protection against competitors.
The discoveries or technologies covered by issued patents we own or license may not have any
value or provide us with a competitive advantage, and many of these discoveries or technologies may
not be applicable to our product candidates at all. We have devoted limited resources to
identifying competing technologies that may have a competitive advantage relative to ours,
especially those competing technologies that are not perceived as infringing on our intellectual
property rights. In addition, the standards that courts use to interpret and enforce patent rights
are not always applied predictably or uniformly and can change, particularly as new technologies
develop. Consequently, we cannot be certain as to how much protection, if any, will be afforded by
these patents with respect to our products if we, our licensees or our licensors attempt to enforce
these patent rights and those rights are challenged in court.
The existence of third party patent applications and patents could significantly limit our
ability to obtain meaningful patent protection. If patents containing competitive or conflicting
claims are issued to third parties, we may be enjoined from pursuing research, development or
commercialization of product candidates or may be required to obtain licenses, if available, to
these patents or to develop or obtain alternative technology. If another party controls patents or
patent applications covering our product candidates, we may not be able to obtain the rights we
need to those patents or patent applications in order to commercialize our product candidates or we
may be required to pay royalties, which could be substantial, to obtain licenses to use those
patents or patent applications.
In addition, issued patents may not provide commercially meaningful protection against
competitors. Other parties may seek and/or be able to duplicate, design around or independently
develop products having effects similar or identical to our patented product candidates that are
not within the scope of our patents.
Limitations on patent protection in some countries outside the United States, and the
differences in what constitutes patentable subject matter in these countries, may limit the
protection we have under patents issued outside of the United States. We do not have patent
protection for our product candidates in a number of our target markets. The failure to obtain
adequate patent protection for our product candidates in any country would impair our ability to be
commercially competitive in that country.
The ability to market the products we develop is subject to the intellectual property rights of
third parties.
The biotechnology, biopharmaceutical and medical device industries are characterized by a
large number of patents and patent filings and frequent litigation based on allegations of patent
infringement. Competitors may have filed patent applications or have been issued patents and may
obtain additional patents and proprietary rights related to products or processes that compete with
or are similar to ours. We may not be aware of all of the patents potentially adverse to our
interests that may have been issued to others. Because patent applications can take many years to
issue, there may be currently pending applications, unknown to us, which may later result in issued
patents that our product candidates or proprietary technologies may infringe. Third parties may
claim that our products or related technologies infringe their patents. Further, we, our licensees
or our licensors, may need to participate in interference, opposition, protest, reexamination or
other potentially adverse proceedings in the United States Patent & Trademark Office or in similar
agencies of foreign governments with regards to our patents, patent applications, and intellectual
property rights. In addition, we, our licensees or our licensors may need to initiate suits to
protect our intellectual property rights.
Litigation or any other proceeding relating to intellectual property rights, even if resolved
in our favor, may cause us to incur significant expenses, divert the attention of our management
and key personnel from other business concerns and, in certain cases, result in substantial
additional expenses to license technologies from third parties. Some of our competitors may be
able to sustain the costs of complex patent litigation more effectively than we can because they
have substantially greater resources. An unfavorable outcome in any patent infringement suit or
other adverse intellectual property proceeding could require us to pay substantial damages,
including possible treble damages and attorneys’ fees, cease using our technology or developing or
marketing our products, or require us to seek licenses, if available, of the disputed rights from
other parties and potentially make significant payments to those parties. There is no guarantee
that any prevailing party would offer us a license or that we could acquire any license made
available to us on commercially acceptable terms. Even if we are able to obtain rights to a third
party’s patented intellectual property, those rights may be nonexclusive and, therefore, our
competitors may obtain access to the same intellectual property. Ultimately, we may be unable to
commercialize our product candidates or may have to cease some of our business operations as a
result of patent infringement claims, which could materially harm our business. We cannot
guarantee that our products or technologies
will not conflict with the intellectual property rights of others.
27
If we need to redesign our products to avoid third party patents, we may suffer significant
regulatory delays associated with conducting additional studies or submitting technical, clinical,
manufacturing or other information related to any redesigned product and, ultimately, in obtaining
regulatory approval. Further, any such redesigns may result in less effective and/or less
commercially desirable products, if the redesigns are possible at all.
Additionally, any involvement in litigation in which we, our licensees or our licensors are
accused of infringement may result in negative publicity about us or our products, injure our
relations with any then-current or prospective customers and marketing partners, and cause delays
in the commercialization of our products.
Risks Related to Our Common Stock
We are no longer able to rely on Prides Capital Partners, LLC and NightWatch Capital LLC for
financial support, and must now rely on third parties for financing.
In the past, we have relied on Prides Capital Partners, LLC (“Prides Capital”) and NightWatch
Capital LLC (“NightWatch Capital”) for the ongoing financial support necessary to operate our
business. Neither Prides Capital nor NightWatch Capital currently provides us with financing or
financial support, nor do they currently intend to provide us with any additional financing or
financial support in the future. To the extent we must obtain financing to support our cash needs,
we will be entirely reliant on third parties. We do not have any lines of credit or other
financing arrangements in place with banks or other financial institutions. We will require
additional financing in the future, and additional financing may not be available at times, in
amounts or on terms acceptable to us, or at all, which would have a material adverse effect on our
business.
If we are unable to successfully raise additional capital in the future, our product development
could be limited and our long term viability may be threatened; however, if we do raise additional
capital, your percentage ownership as a stockholder could decrease and constraints could be placed
on the operations of our business.
We have experienced negative operating cash flows since our inception and have funded our
operations primarily from proceeds received from sales of our capital stock, the issuance of notes
payable to related parties, the issuance of promissory notes, the sale of our veterinary division
in June 2009 and product sales. We will seek to obtain additional funds in the future through
equity or debt financings, or strategic alliances with third parties, either alone or in
combination with equity financings. These financings could result in substantial dilution to the
holders of our common stock, or require contractual or other restrictions on our operations or on
alternatives that may be available to us. If we raise additional funds by issuing debt securities,
these debt securities could impose significant restrictions on our operations. Any such required
financing may not be available in amounts or on terms acceptable to us, and the failure to procure
such required financing could have a material adverse effect on our business, financial condition
and results of operations, or threaten our ability to continue as a going concern.
A variety of factors could impact our need to raise additional capital, the timing of any
required financings and the amount of such financings. Factors that may cause our future capital
requirements to be greater than anticipated or could accelerate our need for funds include, without
limitation:
| |
• |
|
unforeseen developments during our pre-clinical activities and clinical trials; |
| |
• |
|
delays in timing of receipt of required regulatory approvals; |
| |
• |
|
unanticipated expenditures in research and development or manufacturing activities; |
| |
• |
|
delayed market acceptance of any approved product; |
| |
• |
|
unanticipated expenditures in the acquisition and defense of intellectual property
rights; |
| |
• |
|
the failure to develop strategic alliances for the marketing of some of our product
candidates; |
| |
• |
|
additional inventory builds to adequately support the launch of new products; |
| |
• |
|
unforeseen changes in healthcare reimbursement for procedures using any of our
approved products; |
| |
• |
|
inability to train a sufficient number of physicians to create a demand for any of
our approved products; |
| |
• |
|
lack of financial resources to adequately support our operations; |
| |
• |
|
difficulties in maintaining commercial scale manufacturing capacity and capability; |
| |
• |
|
unforeseen problems with our third party manufacturers, service providers or
specialty suppliers of certain raw materials; |
28
| |
• |
|
unanticipated difficulties in operating in international markets; |
| |
• |
|
unanticipated financial resources needed to respond to technological changes and
increased competition; |
| |
• |
|
unforeseen problems in attracting and retaining qualified personnel to market our
approved products; |
| |
• |
|
enactment of new legislation or administrative regulations; |
| |
• |
|
the application to our business of new court decisions and regulatory
interpretations; |
| |
• |
|
claims that might be brought in excess of our insurance coverage; |
| |
• |
|
the failure to comply with regulatory guidelines; and |
| |
• |
|
the uncertainty in industry demand and patient wellness behavior as businesses and
individuals suffer from the current economic downturn. |
In addition, although we have no present commitments or understandings to do so, we may seek
to expand our operations and product line through acquisitions or joint ventures. Any acquisition
or joint venture would likely increase our capital requirements.
If adequate financing is not available, we may be required to delay, scale back or eliminate
our operations. Consequently, our long-term viability would be threatened.
Prides Capital and NightWatch Capital control and may continue to control us and may have conflicts
of interest with us or you in the future.
As of March 15, 2011, Prides Capital owned 52.5% of our outstanding common stock and
NightWatch Capital owned 12.3% of our outstanding common stock on a fully diluted basis. In
addition, Kevin A. Richardson, II, who is managing partner of Prides Capital, owns 15.9% of our
outstanding common stock on a fully diluted basis. Mr. Richardson was appointed by Prides Capital
and John F. Nemelka was appointed by NightWatch Capital to serve on our board of directors. For as
long as Prides Capital and NightWatch Capital own a majority of our shares of common stock, they
will be able to control the election of all of the members of our board of directors and control
the vote of stockholders on other matters. For as long as they own a significant percentage of our
outstanding stock, even if less than a majority, Prides Capital and NightWatch Capital will be able
to control and exercise significant influence over our business affairs, including the general
strategic direction of our business, the incurrence of indebtedness by us, the issuance of any
additional equity securities, the repurchase of equity securities and the payment of dividends, and
will have the power to determine or significantly influence the outcome of matters submitted to a
vote of our stockholders, including mergers, consolidations, sales or dispositions of assets,
reductions in share capital, other business combinations and amendments to our articles of
incorporation. Prides Capital and NightWatch Capital may take actions with which you or we do not
agree, including actions that delay, defer or prevent a change in control of our Company or that
could adversely affect the market price of our common stock. In addition, they may take other
action that might be favorable to them, but not favorable to us or our other stockholders. Also,
if either Prides Capital or NightWatch Capital sells all or a portion of its interest in us, it may
cause the value of your investment to decrease.
Our stock price is volatile.
The market price of our common stock is volatile and could fluctuate widely in response to
various factors, many of which are beyond our control, including the following:
| |
• |
|
changes in our industry; |
| |
• |
|
our ability to obtain additional financing and, if available, the terms and
conditions of the financing; |
| |
• |
|
additions or departures of key personnel; |
| |
• |
|
sales of our common stock; |
| |
• |
|
our ability to execute our business plan; |
| |
• |
|
operating results that fall below expectations; |
| |
• |
|
period-to-period fluctuations in our operating results; |
| |
• |
|
new regulatory requirements and changes in the existing regulatory environment; and |
| |
• |
|
general economic conditions and other external factors. |
In addition, the securities markets have from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of particular companies. These
market fluctuations may also materially and adversely affect the market price of our common stock.
29
There is currently a limited trading market for our common stock and we cannot predict how liquid
the market might become.
To date, there has been a limited trading market for our common stock and we cannot predict
how liquid the market for our common stock might become. Our common stock is quoted on the
Over-the-Counter Bulletin Board (the “OTCBB”), which is an inter-dealer, over-the-counter market
that provides significantly less liquidity than the New York Stock Exchange or the NASDAQ Stock
Market. The quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists. The market price for our common stock is
subject to volatility and holders of our common stock may be unable to resell their shares at or
near their original purchase price, or at any price. In the absence of an active trading market:
| |
• |
|
investors may have difficulty buying and selling, or obtaining market quotations; |
| |
• |
|
market visibility for our common stock may be limited; and |
| |
• |
|
a lack of visibility for our common stock may have a depressive effect on the market
for our common stock. |
Trading for our common stock is limited under the SEC’s penny stock regulations, which has an
adverse effect on the liquidity of our common stock.
The trading price of our common stock is less than $5.00 per share and, as a result, our
common stock is considered a “penny stock,” and trading in our common stock is subject to
requirements of Rule 15g-9 under the Securities Exchange Act of 1934, as amended. Under this rule,
broker-dealers who recommend low-priced securities to persons other than established customers and
accredited investors must satisfy special sales practice requirements. Generally, the
broker-dealer must make an individualized written suitability determination for the purchaser and
receive the purchaser’s written consent prior to the transaction.
SEC Regulations also require additional disclosure in connection with any trades involving a
“penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and its associated risks. These requirements severely
limit the liquidity of securities in the secondary market because only a few brokers or dealers are
likely to undertake these compliance activities. Compliance with these requirements may make it
more difficult for holders of our common stock to resell their shares to third parties or to
otherwise dispose of them in the market.
We have not voluntarily implemented various corporate governance measures, in the absence of which,
shareholders may have more limited protections against interested director transactions, conflicts
of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the
adoption of various corporate governance measures designed to promote the integrity of corporate
management and the securities markets. Some of these measures have been adopted in response to
legal requirements and others have been adopted by companies in response to the requirements of
national securities exchanges, such as the New York Stock Exchange and the NASDAQ Stock Market.
Among the corporate governance measures that are required under the rules of the national
securities exchanges are those that address board of directors’ independence, audit committee
oversight and the adoption of a code of ethics. While we intend to adopt certain corporate
governance measures, such as a code of ethics and an established audit committee, we presently only
have one independent director. It is possible that if we were to have more independent directors
on our board of directors, shareholders would benefit from somewhat greater assurances that
internal corporate decisions were being made by disinterested directors and that policies had been
implemented to define responsible conduct. For example, in the absence of a compensation committee
comprised of at least a majority of independent directors, decisions concerning matters such as
compensation packages to our executive officers may be made by our directors who have an interest
in the outcome of the matters being decided. Prospective investors should bear in mind our current
lack of both corporate governance measures and a majority of independent directors in formulating
their investment decisions.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any
return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the
foreseeable future. The payment of dividends on our common stock will depend on earnings,
financial condition and other business and economic factors affecting us at such time as our board
of directors may consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if our stock price appreciates.
|
|
|
| Item 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
30
Our operations are headquartered in a leased facility in Alpharetta, Georgia, consisting of
15,025 square feet of space under a sublease which expires on October 31, 2012.
Our production and research and development office is in a leased facility in Alpharetta,
Georgia, consisting of 5,168 square feet of space under a lease which expires on October 31, 2012.
|
|
|
| Item 3. |
|
LEGAL PROCEEDINGS |
Other than legal proceedings described below and those relating to our intellectual property,
there are no material pending legal proceedings to which we are a party or of which any of our
properties are subject; nor are there material proceedings known to us to be contemplated by any
governmental authority. We have one pending legal proceeding relating to our patents. For
information regarding this legal proceeding, please see “Intellectual Property — Patents” above.
HealthTronics, 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.
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.
There are no material proceedings known to us, pending or contemplated, in which any of our
directors, officers or affiliates or any of our principal security holders, or any associate of any
of the foregoing, is a party or has an interest adverse to us.
|
|
|
| Item 4. |
|
[Removed and Reserved] |
PART II
|
|
|
| Item 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The Company’s stock is quoted on the OTCBB under the symbol “SNWV.” Prior to the Merger, the
Company’s common stock was quoted on the OTCBB under the symbol “RBME;” however, there was no
established public trading market for the common stock. From our initial quotation in October 2008
until the Merger, no trades occurred.
The following table sets forth, for the periods indicated, the high and low sales prices per
share of our common stock, as reported on the OTCBB, since our common stock commenced public
trading after the Merger on September 25, 2009. The quotations reflect inter-dealer prices,
without mark-up, mark-down or commissions, and may not represent actual transactions:
| |
|
|
|
|
|
|
|
|
| |
|
Price Range |
|
| |
|
High |
|
|
Low |
|
2010 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
4.30 |
|
|
$ |
4.05 |
|
Second Quarter |
|
$ |
4.45 |
|
|
$ |
4.10 |
|
Third Quarter |
|
$ |
4.10 |
|
|
$ |
2.25 |
|
Fourth Quarter |
|
$ |
4.80 |
|
|
$ |
2.15 |
|
31
| |
|
|
|
|
|
|
|
|
| |
|
Price Range |
|
| |
|
High |
|
|
Low |
|
2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
|
N/A |
|
|
|
N/A |
|
Second Quarter |
|
|
N/A |
|
|
|
N/A |
|
Third Quarter |
|
$ |
5.25 |
|
|
$ |
5.25 |
|
Fourth Quarter |
|
$ |
6.00 |
|
|
$ |
4.00 |
|
Holders of the Common Stock
As of March 15, 2011, there were 75 holders of record of the Company’s common stock.
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company
intends to retain future earnings, if any, to finance the expansion of its business. As a result,
the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of |
|
| |
|
|
|
|
|
|
|
|
|
securities |
|
| |
|
|
|
|
|
|
|
|
|
remaining |
|
| |
|
Number of |
|
|
|
|
|
|
available for |
|
| |
|
securities to be |
|
|
Weighted- |
|
|
future issuance |
|
| |
|
issued upon |
|
|
average exercise |
|
|
under equity |
|
| |
|
exercise of |
|
|
price of |
|
|
compensation |
|
| |
|
outstanding |
|
|
outstanding |
|
|
plans (excluding |
|
| |
|
options, |
|
|
options, |
|
|
securities |
|
| |
|
warrants and |
|
|
warrants and |
|
|
reflected in |
|
| Plan Category |
|
rights |
|
|
rights |
|
|
column (a)) |
|
| |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
2,992,796 |
|
|
$ |
3.20 |
|
|
|
3,695,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,992,796 |
|
|
$ |
3.20 |
|
|
|
3,695,649 |
|
|
|
|
|
|
|
|
|
|
|
Unregistered Sales of Securities Not Otherwise Reported on Form 10-Q or Form 8-K
On November 19, 2010, and December 7, 2010 in conjunction with offerings of securities of the
Company under the Act, we issued 142,500 and 382,500 units to “accredited investors” for $285,000
and $765,000, respectively. 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 525,000 units which consisted of 525,000 shares of
common stock, 525,000 Class D warrants and 525,000 options to purchase another unit for $2.00 per
unit which had an expiration date, as amended, of January 31, 2011.
32
|
|
|
| Item 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Restatement of Previously Issued Consolidated Financial Statements
In this Annual Report on Form 10-K, we have restated our previously reported consolidated
balance sheet at December 31, 2009 and the consolidated statement of stockholders’ equity (deficit)
at January 1, 2009 and related disclosures, to record the effect of the non-cash stock compensation
expense which was incorrectly understated by $687,309 in the consolidated financial statements for
the year ended December 31, 2008 due to an error in determining the vesting period for the stock
options issued in 2008.
In April 2008, the Company granted, as adjusted for the Merger, 1,043,990 options to employees
at an exercise price of $2.92 per share. Using the Black-Scholes option pricing model, the options
granted in April 2008 had a weighted average fair value per share of $1.42, resulting in total
compensation cost over the vesting period of the options of $1,481,207.
The Company determined during the audit for the year ended December 31, 2010 that the non-cash
stock compensation expense was incorrectly recorded in the financial statements for the year ended
December 31, 2008. The 2008 non-cash stock compensation expense had been calculated based on a
four-year straight-line vesting schedule instead of taking into account that many of the stock
options issued in 2008, in accordance with their terms, were 50% vested at the date of grant. As
such, the non-cash stock compensation expense recorded in general and administrative expenses in
the consolidated statement of operations and comprehensive loss for the year ended December 31,
2008 was understated by $687,309.
This is a non-cash item which resulted in an understatement at December 31, 2008 of additional
paid-in capital of $687,309 and an understatement of retained deficit of $687,309. There was no
impact on the net cash used by operating activities of $7,009,402 as reported in the consolidated
statement of cash flows for the year ended December 31, 2008.
There was no impact on the consolidated financial statements for the year ended December 31,
2009 other than to increase the beginning of the year balance of additional paid-in capital by
$687,309 and the beginning of the year balance of retained deficit by $687,309.
Overview
We are an emerging global regenerative medicine company focused on the development and
commercialization of non-invasive, biological response activating devices for the repair and
regeneration of tissue, musculoskeletal and vascular structures. Our portfolio of products and
product candidates activate biologic signaling and angiogenic responses, including new
vascularization and microcirculatory improvement, helping to restore the body’s normal healing
processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE)
technology in wound healing, orthopedic/spine, plastic/cosmetic and cardiac conditions.
We believe we have demonstrated that our PACE technology is safe and effective in
stimulating healing in chronic conditions of the foot and the elbow through our United States FDA
Class III PMA approved Ossatron device, and in the stimulation of bone and chronic tendonitis
regeneration in the musculoskeletal environment through the utilization of our Ossatron and
Evotron, and newly introduced orthoPACE devices in Europe. Our lead product candidate for the
global wound care market, dermaPACE, has received the European CE Mark allowing for commercial use
on acute and chronic defects of the skin and subcutaneous soft tissue.
We are now entirely focused on developing our PACE technology to stimulate healing in:
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• |
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wound conditions, including diabetic foot ulcers, venous ulcers, pressure sores, burns
and other skin eruption conditions; |
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orthopedic/spine applications, such as speeding the healing of fractures (including
nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones
in the extremities and spine, eliminating chronic pain in joints from trauma or arthritis,
and other potential sports injury applications; |
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• |
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plastic/cosmetic applications such as cellulite smoothing, graft and transplant
acceptance, skin tightening, scarring and other potential aesthetic uses; and |
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• |
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cardiac applications for removing plaque due to atherosclerosis and improving heart
muscle performance. |
33
Recent Developments
We have completed our multi-site, randomized, double-blind, sham controlled FDA
investigational device exemption wound care clinical study focused on the healing of diabetic foot
ulcers utilizing our lead product candidate, dermaPACE, and released top-line data. The primary
study goal is to establish superiority in diabetic foot ulcer healing rates using the dermaPACE
treatment compared to sham control, when both are combined with the current standard of care. The
standard of care includes wet-to-dry dressings, the most widely used primary dressing material in
the United States, and offloading with a walking boot for ulcers located on the plantar surface of
the foot. A total of 206 patients entered the dermaPACE study at 24 sites. The patients in the
study were followed for a total of 24 weeks. The study’s primary endpoint, wound closure, is
defined as “successful” if the skin is 100% reepithelialized at 12 weeks without drainage or
dressing requirements confirmed at two consecutive study visits. We have filed the first and
second module of the three of our PMA. We expect to file our final module with the FDA in the second quarter of 2011 and, pending a favorable response from the FDA, to launch dermaPACE
in the United States in early 2012.
We launched in Europe the orthoPACE device intended for use in orthopedic, trauma and sports
medicine indications following CE Mark approval in June 2010. The device features a new, unique
applicator that is less painful for some indications and may reduce or completely eliminate
anesthesia for some patients. In the orthopedic setting, the orthoPACE will initially be used to
treat tendinopathies and acute and nonunion fractures, including the soft tissue surrounding the
fracture to accelerate healing and prevent secondary complications and their associated treatment
costs. The first shipments of the new orthoPACE device were made in the third quarter of 2010.
We have established clinical, manufacturing and development relationships and multiple
regulatory pathways to product development. We believe that these relationships and pathways,
coupled with the well-characterized biologic response, history of safe use and clinically-proven
efficacy of our PACE technology, all position us to become a leader in the development and
commercialization of non-invasive, biological response devices for the repair and regeneration of
tissue, musculoskeletal and vascular structures that will capitalize on the growing market for
these products in wound healing, orthopedic/spine, plastic/cosmetic and cardiac applications.
Although the results of our studies have been positive to date, we cannot provide any assurance
that we will be successful in developing, obtaining regulatory approval for, or commercializing our
current product candidates, or that we will do so in a timely fashion.
We believe that these studies suggest that our platform technology will be effective in our
target applications. If successful, we expect these clinical studies should lead to regulatory
approval of our regenerative product candidates in the United States, Europe and Asia. If approved
by the appropriate regulatory authorities, we believe that our product candidates will offer new,
effective and non-invasive treatment options in wound healing, orthopedic/spine injuries,
plastic/cosmetic uses and cardiac procedures, improving the quality of life for millions of
patients suffering from injuries or deterioration of tissue, bones and vascular structures.
Financial Overview
Since our inception in 2005, we have funded our operations from the sale of capital stock, the
issuance of notes payable to related parties, the issuance of promissory notes, the sale of our
veterinary division in June 2009, and product sales. At December 31, 2010, the balance of cash and
cash equivalents totaled $417,457.
We continue to incur research and development expenses for clinical trials and the development
of products for additional indications. We expect to continue to incur significant research and
development expenses as a result of new and ongoing clinical and pre-clinical studies in the United
States and in Europe, as well as expenses associated with regulatory filings. In addition, we
anticipate that our general and administrative expenses will continue to increase as we expand our
operations, facilities and other administrative activities related to our efforts to bring our
product candidates to commercialization. We will require additional capital to continue to
implement our business strategies. There can be no assurance that we will be successful in raising
such capital. See “Liquidity and Capital Resources.”
Since our inception, we have incurred losses from operations each year. As of December 31,
2010, we had an accumulated deficit of $54.3 million. Although the size and timing of our future
operating losses are subject to significant uncertainty, we expect that operating losses will
continue over the next few years as we continue to fund our research and development activities,
clinical trials and the FDA approval process and as we prepare for a future sales network to
represent our products. We incurred a net loss of $14.9 million and $6.2 million during the years
ended December 31, 2010 and 2009, respectively. We had a working capital deficiency of $7,029,635
and $187,459 at December 31, 2010 and 2009, respectively. These operating losses and working
capital deficiency create an uncertainty about our ability to continue as a going concern.
Although no assurances can be given, we believe that potential additional issuances of equity,
promissory notes or other potential financing will provide the necessary funding for us to continue
as a going concern.
34
We cannot reasonably estimate the nature, timing and costs of the efforts necessary to
complete the development and approval of, or the period in which material net cash flows are
expected to be generated from, any of our products, due to the numerous risks and uncertainties
associated with developing products, including the uncertainty of:
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the scope, rate of progress and cost of our clinical trials; |
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future clinical trial results; |
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the cost and timing of regulatory approvals; |
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the establishment of successful marketing, sales and distribution; |
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the cost and timing associated with establishing reimbursement for our products; |
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the timing and results of our pre-clinical research programs; |
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the effects of competing technologies and market developments; and |
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the industry demand and patient wellness behavior as businesses and individuals
suffer from the current economic recession. |
Any failure to complete the development of our product candidates in a timely manner, or any
failure to successfully market and commercialize our product candidates, would have a material
adverse effect on our operations, financial position and liquidity. A discussion of the risks and
uncertainties associated with us and our business are set forth under the section entitled “Risk
Factors — Risks Related to Our Business”.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with United States
generally accepted accounting principles. The preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those related to
revenue recognition, accrued expenses, fair valuation of inventory, fair valuation of stock related
to stock-based compensation and income taxes. We base our estimates on authoritative literature
and pronouncements, historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources.
Our actual results may differ from these estimates under different assumptions or conditions. The
discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements. The results of our operations for any historical period are not
necessarily indicative of the results of our operations for any future period.
While our significant accounting policies are more fully described in Note 1 to our
consolidated financial statements filed with this Annual Report on Form 10-K, we believe that the
following accounting policies relating to revenue recognition, research and development costs,
inventory valuation, stock-based compensation and income taxes are significant and; therefore, they
are important to aid you in fully understanding and evaluating our reported financial results.
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.
35
Research and Development Costs
We expense costs associated with research and development activities as incurred. We evaluate
payments made to suppliers and other vendors and determine the appropriate accounting treatment
based on the nature of the services provided, the contractual terms, and the timing of the
obligation. Research and development costs include payments to third parties that specifically
relate to our products in clinical development, such as payments to contract research
organizations, clinical investigators, clinical related consultants, contract manufacturer
development costs 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.
Inventory Valuation
We value our inventory at the lower of our actual cost or the current estimated market value.
We regularly review existing inventory quantities and expiration dates of existing inventory to
evaluate a provision for excess, expired, obsolete and scrapped inventory based primarily on our
historical usage and anticipated future usage. Although we make every effort to ensure the
accuracy of our forecasts of future product demand, any significant unanticipated change in demand
or technological developments could have an impact on the value of our inventory and our reported
operating results.
Inventory is carried at the lower of cost or market, which is valued using first in, first out
(“FIFO”), and consists primarily of devices and the component material for assembly of finished
products, less reserves for obsolescence.
Stock-based Compensation
During 2006, SANUWAVE, Inc.’s board of directors approved the adoption of the 2006 Stock
Incentive Plan which was assumed by the Company following the Merger. On November 1, 2010, the
board of directors of the Company approved the Amended and Restated 2006 Stock Incentive Plan of
SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Amended Plan”). The Amended Plan
provides that stock options, and other equity interests or equity-based incentives, may be granted
to key personnel and directors at the fair value exercise price at the time the option is granted
which is approved by the Company’s board of directors. The maximum term of any option granted
pursuant to the Amended Plan is ten years from the date of grant.
In accordance with ASC 718, Compensation — Stock Compensation (formerly included in SFAS No.
123(R), Accounting for Stock-Based Compensation), the fair value of each option award is estimated
on the date of grant using the Black-Scholes option pricing model. The expected terms of options
granted represent the period of time that options granted are estimated to be outstanding and are
derived from the contractual terms of the options granted. We amortize the fair value of each
option over each option’s vesting period.
Income Taxes
We account for income taxes 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 bases 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 related to future years, including loss carryforwards, if
there is not sufficient evidence to indicate that the results of operations will generate
sufficient taxable income to realize the net deferred tax asset in future years.
We have adopted a provision of ASC 740, Income Taxes (formerly FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48)). ASC 740 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.
36
Results of Operations for the Years ended December 31, 2010 and 2009
Revenues and Cost of Revenues
Revenues for the year ended December 31, 2010 were $728,446, compared to $660,725 for the same
period in 2009, an increase of $67,721, or 10%. Revenues resulted primarily from sales in Europe
of our new product orthoPACE for orthopedic, trauma and sports medicine indications and from sales
in Europe of our legacy Evotron device and the related applicators for these devices.
Cost of revenues for the year ended December 31, 2010 was $250,326, compared to $225,790 for
the same period in 2009. Gross profit as a percentage of revenues was 66% in 2010 and 2009. The
gross profit in 2010 remained consistent with 2009 due to a similar mix of devices and applicators
sold in each year.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2010 were $3,879,146,
compared to $3,387,204 for the same period in 2009, an increase of $491,942, or 15%. Research and
development costs include payments to third parties that specifically relate to our products in
clinical development, such as payments to contract research organizations, clinical investigators,
clinical related consultants, contract manufacturer development costs 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. Research
and development costs increased in 2010 as compared to the same period in 2009 due to higher costs
of the clinical trial of dermaPACE for diabetic foot ulcers in the United States as enrollment
ended during the first quarter of 2010 and statisticians and consultants were engaged to assist in
the patient follow-up and data compiling phases of the clinical trial.
We expect to continue to incur significant research and development expenses as a result of
next generation technology development, the finalization of our clinical trial of dermaPACE for
diabetic foot ulcers in the United States and other new product candidates, as well as continuing
expenses associated with pre-clinical studies and regulatory filings.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2010 were $7,100,621,
compared to $5,026,425 for the same period in 2009, an increase of $2,074,196, or 41%. General
and administrative expenses include the non-cash compensation costs for stock compensation of
$3,037,634 and $1,078,128 for the years ended December 31, 2010 and 2009, respectively. The
increase in non-cash compensation costs for stock compensation of $1,959,506 for the year ended
December 31, 2010, as compared to the same period in 2009, was primarily due to a shorter requisite
period on new grants of options to employees and directors of the Company in 2010 as compared to
2009.
Excluding the non-cash compensation costs for stock compensation, general and
administrative expenses were $4,062,987 for the year ended December 31, 2010, as compared to
$3,948,297 for the same period in 2009, an increase of $114,690, or 3%.
We expect that general and administrative expenses will increase as we expand our operations
and other administrative activities related to our efforts to bring our products to
commercialization.
Depreciation, Amortization and Write Down of Assets Held for Sale
Depreciation for the year ended December 31, 2010 was $829,576, compared to $365,108 for the
same period in 2009, an increase of $464,468, or 127%. On October 31, 2008, the Company
discontinued its Ossatron mobile service business and accordingly displayed the related assets of
this business as “discontinued operations.” As of October 1, 2009, management determined that the
used Ossatron device fixed assets and related parts inventory should be reclassified to continuing
operations as it was not likely the used devices would be sold within the next twelve months.
Therefore, depreciation expense on the used Ossatron device fixed assets was restarted at October
1, 2009. As of December 31, 2010, we recorded additional depreciation expense of $201,153 to fully
depreciate the used Ossatron devices and recorded a write down of assets held for sale of $169,581
to fully reserve for the related parts inventory for these devices. As of December 31, 2010,
management determined that the market for selling the used Ossatron mobile service devices was not
probable due to the age of the devices and changes in international electrical standards for which
the devices are no longer compliant. Management currently has no plans to utilize these devices in
the United States. The combination of these factors contributed to management’s decision to write
down these assets.
37
Amortization for the year ended December 31, 2010 was $306,757, compared to $306,756 for
the same period in 2009.
Other Income (Expense)
On June 3, 2009, we sold our veterinary division to Pulse Veterinary Technologies, LLC (“Pulse
Vet”). Under terms of the asset purchase agreement, we will continue to provide production
services at the direction of Pulse Vet for a fee until April 30, 2012, unless Pulse Vet elects to
terminate the agreement at an earlier date. The income for these transitional services was
$360,125 and $230,625 for the years ended December 31, 2010 and 2009, respectively, an increase of
$129,500 or 56%. The increase was due to a full year of providing operational services in 2010,
partially offset by accounting and IT support services that Pulse Vet discontinued in 2009.
During the year ended December 31, 2010, we issued ten promissory notes totaling $2,450,000.
On October 12, 2010, in conjunction with an offering of securities, we amended the terms of the ten
outstanding promissory notes such that the unpaid principal and interest on each note was exchanged
into units consisting of a share of common stock, a Class D warrant, and an option which, as
amended, expires on January 31, 2011, to purchase another share of common stock and a Class D
warrant. We recorded a loss from extinguishment of debt of $2,693,896 which was the difference
between the estimated fair value of the units on the date of exchange of $5,211,556 as compared to
the carrying value of the promissory notes of $2,517,660.
Interest expense for the year ended December 31, 2010 was $961,585, compared to $739,847 for
the same period in 2009, an increase of $221,738, or 30%. The increase was primarily due to
interest accruing at 15% per annum on notes payable, related parties, totaling $2,125,000 issued
during the year ended December 31, 2009, which were outstanding throughout 2010.
Provision for Income Taxes
In November 2010, we were awarded a cash grant totaling $244,479 under the United States
government’s Qualifying Therapeutic Discovery Project (“QTDP”) program. The QTDP program was
created by the United States Congress as part of the Patient Protection and Affordable Care Act of
2010, and provides a tax credit or grant equal to eligible costs and expenses for tax years 2009
and 2010. The QTDP program is aimed at creating and sustaining high-quality, high-paying jobs in
the United States, while advancing the nation’s competitiveness in life, biological and medical
sciences. We submitted applications and received the award based on our dermaPACE IDE study for
diabetic foot ulcers.
At December 31, 2010, we had federal net operating loss carryforwards of approximately $40.9
million that will begin to expire in 2025. Our ability to use these net operating loss
carryforwards to reduce our future federal income tax liabilities could be subject to annual
limitations. 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, we
may not be able to take advantage of our net operating loss carryforwards for federal income tax
purposes.
Income from Discontinued Operations
On June 3, 2009, we sold our veterinary division for $3,500,000 in cash to Pulse Vet and
recognized a gain, net of taxes, of $1,486,345. The income from discontinued operations, net of
taxes, was $344,200 for the year ended December 31, 2009.
Net Loss
Net loss for the year ended December 31, 2010 was $14,922,441, or ($1.15) per basic and
diluted share, compared to a net loss of $6,153,040, or ($0.54) per basic and diluted share, for
the year ended December 31, 2009. The loss from continuing operations was $14,922,441, or ($1.15)
per basic and diluted share, for the year ended December 31, 2010, compared to a loss from
continuing operations of $7,983,585, or ($0.70) per basic and diluted share, for the year ended
December 31, 2009. We anticipate that our operating losses will continue over the next several
years as we continue to fund our research and development activities and clinical trials, and as we
prepare for a future sales network to represent our products.
38
Liquidity and Capital Resources
We incurred a net loss of $14,922,441 and $6,153,040 for the years ended December 31, 2010 and
2009, respectively. These operating losses create uncertainty about our ability to continue as a
going concern. Although no assurances can be given, management of the Company believes that
potential additional issuances of equity, promissory notes, or other potential financing will
provide the necessary funding for the Company to continue as a going concern. Our condensed
consolidated financial statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern. We are dependent upon future capital
contributions or financing to fund ongoing operations. At December 31, 2010, we had $417,457 in
cash and cash equivalents held in three financial institutions.
We expect to devote substantial resources to continue our research and development efforts,
including clinical trials. Because of the significant time it will take for our products to
complete the clinical trial process, and for us to obtain approval from regulatory authorities and
successfully commercialize our products, we will require substantial additional capital resources.
Additional financing may not be available on acceptable terms, if at all. Capital may become
difficult or impossible to obtain due to poor market or other conditions outside of our control.
We may raise additional capital through public or private equity offerings, outstanding
warrant exercises, debt financings, corporate collaborations or other means. We may also attempt
to raise additional capital if there are favorable market conditions or other strategic
considerations even if we have sufficient funds for planned operations. To the extent that we
raise additional funds by issuance of equity securities, our stockholders will experience dilution,
and debt financings, if available, may involve restrictive covenants or may otherwise constrain our
financial flexibility. To the extent that we raise additional funds through collaborative
arrangements, it may be necessary to relinquish some rights to our intellectual property or grant
licenses on terms that are not favorable to us. In addition, payments made by potential
collaborators or licensors generally will depend upon our achievement of negotiated development and
regulatory milestones. Failure to achieve these milestones would harm our future capital position.
During 2010, we issued ten promissory notes totaling $2,450,000. On October 12, 2010, the
unpaid principal and interest on the notes totaled $2,517,660, and this sum was exchanged into a
total of 1,258,830 units which consisted of 1,258,830 shares of common stock, 1,258,830 Class D
warrants and 1,258,830 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.
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.
As of December 31, 2010, the option holders exercised 101,163 options for total gross proceeds
of $202,326 to us. In connection with the exercise of the options, we issued 101,163 shares of
common stock and 101,163 Class D warrants.
Subsequent to year end December 31, 2010, between January 1 and January 31, 2011, the option
holders from above exercised 1,950,167 options for total gross proceeds of $3,900,334 to us. In
connection with the exercise of options, we issued 1,950,167 shares of common stock and 1,950,167
Class D warrants. The 132,500 options that remained unexercised at January 31, 2011 expired by
their terms.
For the year ended December 31, 2010, net cash used by continuing operations for operating
activities was $5,867,276, primarily consisting of salaries, clinical trials, research and
development activities and general corporate operations. Net cash provided by continuing
operations for financing activities for the year ended December 31, 2010 was $4,502,326, which
consisted of the proceeds from the issuance of promissory notes totaling $2,450,000 and from the
sale of capital stock units totaling $2,052,326. Cash and cash equivalents decreased by $1,368,912
for the year ended December 31, 2010.
39
For the year ended December 31, 2009, net cash used by continuing operations for operating
activities was $5,513,688, primarily consisting of salaries, clinical trials, research and
development activities and general corporate operations. Net cash provided by continuing
operations for financing activities for the year ended December 31, 2009 was $3,694,929, which
consisted of the proceeds from the issuance of notes payable to related parties of $2,125,000 and
the sale of common stock to certain “accredited investors” of $1,819,844 offset by the repurchase
of common stock of $180,000 and payment of development period liabilities of $69,915 prior to the
Merger. Net cash used by discontinued operations for operating activities was $758,244 for the
year ended December 31, 2009. Net cash provided by discontinued operations for investing
activities was $3,601,772 for the year ended December 31, 2009 from the sale of the veterinarian
division. Cash and cash equivalents increased by $1,242,743 for the year ended December 31, 2009.
Segment Information
We have determined that we are principally engaged in one operating segment. Our product
candidates are primarily used for the repair and regeneration of tissue, musculoskeletal and
vascular structures in wound healing, orthopedic/spine, plastic/cosmetic and cardiac conditions.
Other Comprehensive Income (Loss)
FASB ASC 220, Comprehensive Income (formerly SFAS No. 130, Reporting Comprehensive Income),
establishes standards for reporting and display of comprehensive income (loss) and its components
in the consolidated financial statements. Our other comprehensive income (loss) as defined by ASC
220 is the total of net income (loss) and all other changes in equity resulting from non-owner
sources, including unrealized gains (losses) on foreign currency translation adjustments.
Contractual Obligations
Our major outstanding contractual obligations relate to our operating leases for our
facilities, purchase and supplier obligations for product component materials and equipment, and
our notes payable.
In October 2006, we entered into a sublease agreement for the corporate office in Alpharetta,
Georgia for 15,025 square feet of space. Under the terms of the sublease, we pay monthly rent of
$18,468, as adjusted on an annual basis for additional proportionate operating and insurance costs
associated with the building over the base amount. The initial term of the sublease expired
September 30, 2009, and we have exercised the option to extend the term to October 31, 2012.
In April 2007, we entered into a lease agreement for the production and research and
development office for 5,168 square feet of space. Under the terms of the lease, we pay monthly
rent of $8,075, as adjusted on an annual basis for additional proportionate operating and insurance
costs associated with the building over the base amount. The initial term of the lease expired on
July 31, 2010, and we have extended the lease until October 31, 2012.
We have developed a network of suppliers, manufacturers, and contract service providers to
provide sufficient quantities of product component materials for our products through the
development, clinical testing and commercialization phases. We have contractual obligations under
a supply agreement with Swisstronics Contract Manufacturing AG for the manufacture of our devices.
In August 2005, as part of the purchase of the orthopedic division assets of HealthTronics, we
entered into two notes with HealthTronics for $2,000,000 each. The notes bear interest at 6%
annually. 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 on the notes not payable until
August 2015 totaled $1,372,743 and $1,215,253 at December 31, 2010 and 2009, respectively.
During the period October 2008 through May, 2009 we issued notes payable to Prides Capital
Fund I, L.P. for $3,125,000 in total and one note payable to NightWatch Capital Partners II, L.P.
for $75,000. The notes payable bear interest at 15% annually. Quarterly interest through December
31, 2010, was accrued and added to the principal balance. Unpaid accrued interest and principal is
due September 30, 2011. All or any portion of the unpaid principal can be converted into common
stock with a conversion price of $2.92 per share. Accrued interest on the notes payable totaled
$1,047,290 and $472,728 at December 31, 2010 and 2009, respectively.
40
Recently Issued Accounting Standards
Fair Value Measurements and Disclosures
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures — Topic 855 (“ASU 2010-06”). ASU
2010-06 provides amendments to ASC 820-10, Fair Value Measurements (“ASC 820-10”). ASC 820-10
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 three categories (level 1, level
2 or level 3). ASU 2010-06 provides amendments to ASC 820-10 to require new disclosures for
transfers in and out of levels 1 and 2, as well as a reconciliation of activity within level 3.
Furthermore, ASU 2010-06 provides amendments that clarify existing disclosures regarding levels of
disaggregation and inputs and valuation techniques. The new disclosures and clarifications of
existing disclosures required by ASU 2010-06 are effective for interim and annual reporting periods
beginning after December 15, 2009 (except for disclosures in the reconciliation of activity within
level 3, which are effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years). We adopted ASU 2010-06 as of January 1, 2010, and the adoption
did not have a material impact on our consolidated financial statements.
Subsequent Events
In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to
Certain Recognition and Disclosure Requirements (“ASU 2010-09”), to amend ASC 855, Subsequent
Events (“ASC 855”). ASC 855, which was originally issued by the FASB in May 2009 (as SFAS No. 165,
Subsequent Events ), provides guidance on events that occur after the balance sheet date but prior
to the issuance of the financial statements. ASC 855 distinguishes events requiring recognition in
the financial statements and those that may require disclosure in the financial statements. As a
result of ASU 2010-09, companies are not required to disclose the date through which management
evaluated subsequent events in the financial statements, either in originally issued financial
statements or reissued financial statements. ASC 855 was effective for interim and annual periods
ending after September 15, 2009, and ASU 2010-09 was effective immediately. We have evaluated
subsequent events in accordance with ASU 2010-09, and the evaluation did not have a material impact
on our consolidated financial statements.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities, including the use of
structured finance, special purpose entities or variable interest entities.
Effects of Inflation
Because our assets are, to an extent, liquid in nature, they are not significantly affected by
inflation. However, the rate of inflation affects such expenses as employee compensation, office
space leasing costs and research and development charges, which may not be readily recoverable
during the period of time that we are bringing the product candidates to market. To the extent
inflation results in rising interest rates and has other adverse effects on the market, it may
adversely affect our consolidated financial condition and results of operations.
|
|
|
| Item 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements required by this item are attached hereto as Exhibit
99.1 and the index to such consolidated financial statements is contained in Item 15(1) of this
Annual Report on Form 10-K.
|
|
|
| Item 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
41
|
|
|
| Item 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are
designed to provide reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the Company’s management, including its principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. We carried out an evaluation under the supervision
and with the participation of our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness
of the design and operation of our disclosure controls and procedures as of December 31, 2010.
Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were not operating effectively as of December 31, 2010. Our
disclosure controls and procedures were not effective because of the “material weaknesses”
described below under “Management’s Annual Report on Internal Control over Financial Reporting,”
which are in the process of being remediated as described below under “Management Plan to Remediate
Material Weaknesses.”
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The
Company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with United States generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance of achieving their control objectives.
Management, with the participation of the Chief Executive Officer (Principal Executive
Officer) and the Chief Financial Officer (Principal Financial Officer), evaluated the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2010. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control — Integrated Framework. As a result of such
assessment, management concluded that our internal control over financial reporting was not
effective as of December 31, 2010.
A “material weakness” is defined under SEC rules as a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of a company’s annual or interim financial statements will
not be prevented or detected on a timely basis by the company’s internal controls. As a result of
its review, management concluded that we had material weaknesses in our internal control over
financial reporting process for the lack of internal expertise and resources to analyze and
properly apply generally accepted accounting principles to complex and non-routine transactions
related to the appropriate treatments of complex financial
instruments, derivatives and stock based compensation.
Management believes the material weaknesses indentified above were due to the complex and
non-routine nature of the Company’s complex financial
instruments, derivatives and stock based compensation.
Management Plan to Remediate Material Weaknesses
Management is
actively engaged in developing a remediation plan to address the material
weakness related to its processes and procedures surrounding the accounting for non-cash stock based
compensation expense. Implementation of the remediation plan is in process and consists of, among
other things, redesigning the procedures to enhance its identification, capture, review, approval
and recording of contractual terms included in equity arrangements. Management is also pursuing
engaging, as necessary, an outside consultant to assist in the application of United States GAAP to
complex transactions, including the accounting for complex financial instruments, derivatives and stock based compensation. These measures are intended both to address the identified material weaknesses and
to enhance our overall internal control environment.
This Annual Report on Form 10-K does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant to rules of the
SEC that permit us to provide only management’s report in the Annual Report on Form 10-K.
42
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred
during the period covered by this report that materially affect, or are reasonably likely to
materially affect, our internal control over financial reporting, except as discussed above.
|
|
|
| Item 9B. |
|
OTHER INFORMATION |
Item 4.02 Non-reliance on Previously Issued Financial Statements or a Related Audit Report or
Completed Interim Review.
On March 23, 2011, our board of directors determined that the consolidated financial statements for
the fiscal year ended December 31, 2008 should no longer be relied upon because of certain errors
in such financial statements as more particularly described below.
All adjustments are non-cash in nature.
The facts surrounding the foregoing determination are as follows:
| (a) |
|
In April 2008, we granted, as adjusted for the Merger, 1,043,990
options to employees at an exercise price of $2.92 per share. Using
the Black-Scholes option pricing model, the options granted in April
2008 had a weighted average fair value per share of $1.42, resulting
in total compensation cost over the vesting period of the options of
$1,481,207. |
| |
| (b) |
|
We determined during the audit for the year ended December 31, 2010
that the non-cash stock compensation expense was incorrectly recorded
in the consolidated financial statements for the year ended December
31, 2008. The 2008 non-cash stock compensation expense had been
calculated based on a four-year straight-line vesting schedule instead
of taking into account that many of the stock options issued in 2008,
in accordance with their terms, were 50% vested at the date of grant.
As such, the non-cash stock compensation expense recorded in general
and administrative expenses in the consolidated statement of
operations and comprehensive loss for the year ended December 31, 2008
was understated by $687,309. |
| |
| (c) |
|
This is a non-cash item which resulted in an understatement at
December 31, 2008 of additional paid-in capital of $687,309 and an
understatement of retained deficit of $687,309. There was no impact
on the net cash used by operating activities of $7,009,402 as reported
in the consolidated statement of cash flows for the year ended
December 31, 2008. |
| |
| (d) |
|
There was no impact on the consolidated financial statements for the
year ended December 31, 2009 other than to increase the beginning of
the year balance of additional paid-in capital by $687,309 and the
beginning of the year balance of retained deficit by $687,309. |
We have included the effect of the adjustment to the 2008 consolidated financial statements in
this Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
43
PART III
|
|
|
| Item 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
MANAGEMENT
Below are the names and certain information regarding the Company’s executive officers and
directors.
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position Held |
Christopher M. Cashman
|
|
|
43 |
|
|
President, Chief Executive Officer and Director |
Barry J. Jenkins
|
|
|
48 |
|
|
Chief Financial Officer |
Thomas H. Robinson
|
|
|
52 |
|
|
Director |
Kevin A. Richardson, II
|
|
|
42 |
|
|
Director |
John F. Nemelka
|
|
|
44 |
|
|
Director |
Christopher M. Cashman joined the Company as Chief Executive Officer and President in
September of 2009 and as a director in October of 2009, and joined SANUWAVE, Inc. as President,
Chief Executive Officer and a director in December of 2005. Mr. Cashman brings to our board of
directors, among other skills and qualifications, a unique understanding of our strategies and
operations through his years of experience with various public and private healthcare companies.
Immediately prior to joining SANUWAVE, Inc., he served as President of Therapeutic Surfaces for
Kinetic Concepts, Inc., a global leader in advanced wound care, from October of 2005 to December of
2005. In November of 2001, Mr. Cashman conducted a management buyout of Snowden Pencer, Inc., a
minimally invasive surgical device manufacturer, and assumed the role of Chief Executive Officer
and President until Snowden Pencer, Inc. was sold to Cardinal Health, Inc. in March 2004. Mr.
Cashman also served as a business unit head with Genzyme Biosurgery and held several senior sales
and marketing positions with Genzyme Surgical Products and Deknatel Snowden Pencer. Mr. Cashman
graduated from the United States Naval Academy in 1989 with a B.S. in Economics and served on a
fast attack submarine as Supply Officer. He received his M.B.A. in 2001 from the Kellogg Graduate
School of Management at Northwestern University.
Barry J. Jenkins joined the Company as Chief Financial Officer in September of 2009 and joined
SANUWAVE, Inc. as Chief Financial Officer in April of 2006. Prior to joining SANUWAVE, Inc., he
served as Chief Financial Officer for the Benefit Services Division of Automatic Data Processing,
Inc. from March of 2005 to April of 2006. Previously, he was the Chief Financial Officer of
Snowden Pencer, Inc. from January of 2002 to November of 2004. Mr. Jenkins is a certified public
accountant with 27 years of financial management experience and a cum laude graduate of Virginia
Tech.
Thomas H. Robinson joined the Company as a member of the board of directors in October of 2009
and joined SANUWAVE, Inc. as a member of the board of directors in August of 2005. Mr. Robinson
brings to our board of directors experience based on his diverse experience with medical device
companies both in providing executive search services to them as well as working for them in
leadership and Director positions. Since 2010, Mr. Robinson has been a partner with Russell
Reynolds Associates, a global executive search firm, in their global Medical Technology Practice
leading senior executive searches. From 1998 to 2010, Mr. Robinson served as managing partner of
Spencer Stuart, Inc.’s North American medical technology practice. From 1993 to 1997, Mr. Robinson
served as President of the emerging markets business at Boston Scientific Corporation, a global
medical devices manufacturer. From 1991 to 1993, Mr. Robinson served as President and Chief
Operating Officer of Brunswick Biomedical, a cardiology medical device company. Mr. Robinson is
also a member of the board of directors and is chairman of the compensation committee of Cynosure,
Inc., a publicly traded aesthetic medical laser company.
Kevin A. Richardson, II joined the Company as chairman of the board of directors in October of
2009 and joined SANUWAVE, Inc. as chairman of the board of directors in August of 2005. Mr.
Richardson brings to our board of directors a broad array of financial knowledge for healthcare and
other industries. Since 2004, Mr. Richardson has served as managing partner of Prides Capital LLC,
an investment management firm. Mr. Richardson is also a member of the board of directors of
eDiets.com, Inc., a publicly traded weight loss solutions company, and Pegasus Solutions, Inc., a
travel technology company.
John F. Nemelka joined the Company as a member of the board of directors in October of 2009
and joined SANUWAVE, Inc. as a member of the board of directors in August of 2005. Mr. Nemelka
brings to our board of directors a diverse financial and operational experience. Since 2001, Mr.
Nemelka has served as a managing principal of NightWatch Capital Advisors, LLC, an investment
management firm. Mr. Nemelka is also interim Chief Executive Officer and a member of the board of
directors of SWK Holdings Corporation, a publicly traded holding company, formerly named KANA
Software, Inc., a provider of customer service software solutions.
44
CODE OF CONDUCT AND ETHICS AND AUDIT COMMITTEE FINANCIAL EXPERT
It is our policy to conduct our affairs in accordance with all applicable laws, rules and
regulations of the jurisdictions in which we do business. While we intend to adopt certain
corporate governance measures, we have not established a formal code of ethics or an audit
committee, as we presently have only one independent director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons
who own more than 10% of our equity securities which are registered pursuant to Section 12 of the
Exchange Act, to file with the SEC initial reports of ownership and reports of changes in ownership
of our equity securities. Officers, directors and greater than 10% shareholders are required by
SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based solely upon a review of the Forms 3, 4 and 5 (and amendments thereto) furnished to us
for our fiscal year ended December 31, 2010, we have determined that our directors, officers and
greater-than-10% beneficial owners complied with all applicable Section 16 filing requirements.
|
|
|
| Item 11. |
|
EXECUTIVE COMPENSATION |
Summary Compensation Table for Fiscal Years 2010 and 2009
The following table provides certain information for the fiscal years ended December 31, 2010
and 2009 concerning compensation earned for services rendered in all capacities by our named
executive officers during the fiscal years ended December 31, 2010 and 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Equity |
|
|
Deferred |
|
|
|
|
|
|
|
| Name and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Option |
|
|
Incentive Plan |
|
|
Compensation |
|
|
All Other |
|
|
|
|
| Principal |
|
|
|
|
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Earnings |
|
|
Compensation |
|
|
Total |
|
| Position |
|
Year |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($)(4) |
|
|
($) |
|
| (a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
|
(i) |
|
|
(j) |
|
Christopher M. Cashman |
|
|
2010 |
|
|
$ |
350,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
668,500 |
(2) |
|
|
— |
|
|
|
— |
|
|
$ |
23,027 |
|
|
$ |
1,041,527 |
|
Chief Executive Officer and President (Principal Executive Officer) |
|
|
2009 |
|
|
$ |
305,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
1,463,957 |
(2) |
|
|
— |
|
|
|
— |
|
|
$ |
20,012 |
|
|
$ |
1,788,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry J. Jenkins |
|
|
2010 |
|
|
$ |
233,730 |
|
|
|
— |
|
|
|
— |
|
|
$ |
384,371 |
(3) |
|
|
— |
|
|
|
— |
|
|
$ |
22,689 |
|
|
$ |
640,790 |
|
Chief Financial Officer |
|
|
2009 |
|
|
$ |
222,600 |
|
|
|
— |
|
|
|
— |
|
|
$ |
555,835 |
(3) |
|
|
— |
|
|
|
— |
|
|
$ |
19,149 |
|
|
$ |
797,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornelius A. Hofman (1) |
|
|
2010 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Former Sole Officer and Director |
|
|
2009 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
| (1) |
|
Cornelius A. Hofman resigned as an officer and director, effective October 17, 2009,
following the Merger. |
| |
| (2) |
|
This dollar amount reflects the full fair value of the grant at the date of issuance and is
recognized for financial statement reporting purposes with respect to each fiscal year over
the vesting terms in accordance with ASC 718-10. Mr. Cashman was granted 241,106 shares of
restricted common stock on September 15, 2009. Mr. Cashman was granted options to purchase
44,527 shares of common stock at $2.92 per share and granted options to purchase 487,086
shares of commons stock at $5.25 per share on September 15, 2009. Mr. Cashman was granted
options to purchase 350,000 shares of common stock at $2.00 per share on November 1, 2010. |
| |
| (3) |
|
This dollar amount reflects the full fair value of the grant at the date of issuance and is
recognized for financial statement reporting purposes with respect to each fiscal year over
the vesting terms in accordance with ASC 718-10. Mr. Jenkins was granted 118,653 shares of
restricted common stock on September 15, 2009. Mr. Jenkins was granted options to purchase
20,660 shares of common stock at $2.92 per share and granted options to purchase 121,722
shares of common stock at $5.25 per share on September 15, 2009. Mr. Jenkins was granted
options to purchase 20,000 shares of common stock at $4.05 per share on January 29, 2010. Mr.
Jenkins was granted options to purchase 175,000 shares of common stock at $2.00 per share on
November 1, 2010. |
| |
| (4) |
|
Includes health, dental, life and disability insurance premiums and employee 401(k) matching
contributions. |
45
Employment Agreements
Christopher M. Cashman
General Terms. Pursuant to his employment agreement, as amended, Mr. Cashman agreed to serve
as the Chief Executive Officer and President of the Company for a term commencing on December 19,
2005 and with no specific duration. Mr. Cashman is entitled to an annual base salary, effective
January 1, 2010, of $350,000, and effective January 1, 2011, he is entitled to an annual base
salary of not less than $385,000. He is also entitled to a performance and compensation review not
less often than annually, at which time compensation may be adjusted as determined by the board of
directors; provided that such annual compensation is at least 105% of his previous annual base
salary. With respect to each full fiscal year, Mr. Cashman is eligible to earn an annual bonus
award of not less than 50% and not more than 200% of his annual base salary based on the
achievement of certain performance goals established by the board of directors and generally
consistent with the Company’s budget and performance goals established for other management
employees. Mr. Cashman is also entitled to participate in the Company’s employee benefit plans
(other than annual bonus and incentive plans). In the event of Mr. Cashman’s death during the term
of his employment, his heirs will receive a death benefit equal to at least $1,500,000 pursuant to
a life insurance policy on the life of Mr. Cashman, the premiums for which will be paid by the
Company. 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.
Equity Arrangements. Upon the execution of his employment agreement, Mr. Cashman was granted
options to purchase 201,300 shares of common stock, at an exercise price of $2.92 per share. The
options vest and became exercisable in four equal installments on December 19, 2006, 2007, 2008 and
2009. Upon the execution of his employment agreement and his commencement of employment, Mr.
Cashman purchased 88,151 shares of common stock, at a purchase price of $2.92 per share.
In addition, upon the execution of his employment agreement, Mr. Cashman was granted three
supplemental options to purchase common stock. The terms of the supplemental options were amended
on September 15, 2009. The first and second supplemental options each provided him with the right
to purchase 139,167 shares of common stock and the third supplemental option provided him with the
right to purchase 208,752 shares of common stock. The initial exercise price of the supplemental
options is $2.92 per share. The first supplemental option will fully vest on the earlier of (i)
December 19, 2011, and (ii) the date that the Company or its shareholders (A) enters into a
transaction that establishes a value for the Company on a per share basis equal to at least $8.76
per share, or (B) receives a valuation that establishes a value for the Company on a per share
basis equal to at least $8.76 per share. Notwithstanding the above, if the common stock closing
price equals or exceeds three times the closing price as of the first date that the common stock
was listed ($5.25), the first supplemental option will fully vest. In such an event, the exercise
price of the first supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). The second supplemental option will fully
vest on the earlier of (i) December 19, 2011, and (ii) the date that the Company or its
shareholders (A) enters into a transaction that establishes a value for the Company on a per share
basis equal to at least $17.53 per share, or (B) receives a valuation that establishes a value for
the Company on a per share basis equal to at least $17.53 per share. Notwithstanding the above, if
the common stock closing price equals or exceeds six times the closing price as of the first date
that the common stock was listed ($5.25), the second supplemental option will fully vest. In such
an event, the exercise price of the second supplemental option will adjust to be the closing price
of the common stock on the first date that the common stock was listed ($5.25). The third
supplemental option will fully vest on the earlier of (i) December 19, 2011, and (ii) the date that
the Company or its shareholders (A) enters into a transaction that establishes a value for the
Company on a per share basis equal to at least $26.29 per share, or (B) receives a valuation that
establishes a value for the Company on a per share basis equal to at least $26.29 per share.
Notwithstanding the above, if the common stock closing price equals or exceeds nine times the
closing price as of the first date that the common stock was listed ($5.25), the third supplemental
option will fully vest. In such an event, the exercise price of the third supplemental option will
adjust to be the closing price of the common stock on the first date that the common stock was
listed ($5.25).
In addition, upon the execution of the first amendment to his employment agreement, Mr.
Cashman was granted the right to receive annually shares of common stock equal to two and one-half
times his annual base salary in effect on the date of execution of the first amendment. The shares
vest in four equal installments on each twelve month anniversary of the date of grant, provided
that the vesting may be accelerated upon the achievement of certain performance goals established
by the board of directors. No restricted stock was issued to Mr. Cashman under this provision in
2010 or 2009.
46
Gross-Ups. In the event that any payment made to Mr. Cashman under his employment agreement
or under any other plan maintained by the Company is subject to the excise tax imposed by Section
4999 of the Internal Revenue Code, the Company will pay Mr. Cashman an additional amount to
compensate him for the economic cost of the (1) excise tax of such payment, (2) federal, state and
local income tax, and (3) excise tax on the gross-up payment.
Termination. Mr. Cashman’s employment may be terminated by either party at any time and for
any reason; provided that Mr. Cashman will be required to give the Company at least 30 days advance
written notice of any resignation. If Mr. Cashman is terminated by the Company for cause or
resigns without good reason, he will be entitled to receive his (1) base salary through the
termination date, (2) any annual bonus earned, but unpaid as of the date of termination for the
immediately preceding fiscal year, (3) reimbursement for certain unreimbursed business expenses,
and (4) such employee benefits to which he may be entitled under the employee benefit plans of the
Company. If Mr. Cashman is terminated by the Company without cause or resigns for good reason, he
will be entitled to receive all of the above plus (1) subject to his compliance with certain other
provisions of the employment agreement related to non-competition and confidentiality and the
execution of an effective release of claims, continued payment of the base salary until twelve
months following the date of termination, and (2) continued coverage of him and his beneficiaries
under the Company’s health insurance programs for a period of up to twelve months.
Effective as of the first anniversary of the Merger, if Mr. Cashman is terminated by the
Company without cause or resigns with good reason, he will be entitled to receive (1) his base
salary through the termination date, (2) any annual bonus earned, but unpaid as of the date of
termination for the immediately preceding fiscal year, (3) reimbursement for certain unreimbursed
business expenses, (4) such employee benefits to which he may be entitled under the employee
benefit plans of the Company, (5) subject to his compliance with certain other provisions of the
employment agreement related to confidentiality and the execution of an effective release of
claims, a payment equal to 200% of his annual base salary then in effect plus the sum of the cash
bonuses paid to him during the previous two fiscal years (but in no case less than 50% of the value
of 200% of his annual base salary then in effect), (6) full vesting of all outstanding options and
shares of common stock, and (7) a lump sum payment equal to 24 months of the monthly premium cost
of providing continuation coverage for Mr. Cashman and his beneficiaries under the Consolidated
Omnibus Budget Reconciliation Act of 1986, as amended.
Change of Control. In addition to any other termination benefits that Mr. Cashman may be
entitled to receive, if a change of control (as defined below) occurs, then subject to his
compliance with certain other provisions of the employment agreement related to non-competition and
confidentiality and the execution of an effective release of claims, Mr. Cashman will also be
entitled to receive 100% accelerated vesting of his options. Effective as of the first anniversary
of the Merger, Mr. Cashman’s right to receive the above change of control termination benefits will
no longer be subject to his compliance with the non-compete provisions of his employment agreement.
A change in control is defined in the employment agreement as the occurrence of any of the
following events: (1) the sale, exchange, lease or other disposition of all or substantially all
of the assets of the Company to a person (other than Prides Capital or NightWatch Capital) that
will continue the business of the Company in the future; (2) a merger or consolidation involving
the Company in which the voting securities of the Company owned by the shareholders of the Company
immediately prior to such merger or consolidation do not represent, after conversion if applicable,
more than 50% of the total voting power of the surviving controlling entity outstanding immediately
after such merger or consolidation; or (3) any person (other than Prides Capital or NightWatch
Capital) is or becomes the beneficial owner, directly or indirectly, of more than 50% of the total
voting power of the voting stock of the Company and the representatives of Prides Capital and
NightWatch Capital cease to have the ability to elect a majority of the board of directors.
Barry J. Jenkins
General Terms. Pursuant to his employment agreement, Mr. Jenkins agreed to serve as the Chief
Financial Officer of the Company for a term commencing on April 10, 2006 and with no specific
duration. Mr. Jenkins is entitled to an annual base salary of $205,000, 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. With respect to each full fiscal year, Mr. Jenkins is
eligible to earn an annual bonus award of 40% of his annual base salary based on the achievement of
certain performance goals established by the board of directors and generally consistent with the
Company’s budget and performance goals established for other management employees. Mr. Jenkins 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.
47
Equity Arrangements. Upon the execution of his employment agreement, Mr. Jenkins was
granted options to purchase 104,677 shares of common stock, at an exercise price of $2.92 per
share. The options vest and became exercisable in four equal installments on April 10, 2007, 2008,
2009 and 2010. Upon the execution of his employment agreement and his commencement of employment,
Mr. Jenkins purchased 35,089 shares of common stock, at a purchase price of $2.92 per share.
In addition, upon the execution of his employment agreement, Mr. Jenkins was granted three
supplemental options to purchase common stock. The terms of the supplemental options were amended
on September 15, 2009. The first and second supplemental options each provided him with the right
to purchase 34,778 shares of common stock and the third supplemental option provided him with the
right to purchase 52,166 shares of common stock. The initial exercise price of the supplemental
options is $2.92 per share. The first supplemental option will fully vest on the earlier of (i)
April 10, 2012, and (ii) the date that the Company or its shareholders (A) enters into a
transaction that establishes a value for the Company on a per share basis equal to at least $8.76
per share, or (B) receives a valuation that establishes a value for the Company on a per share
basis equal to at least $8.76 per share. Notwithstanding the above, if the common stock closing
price equals or exceeds three times the closing price as of the first date that the common stock
was listed ($5.25), the first supplemental option will fully vest. In such an event, the exercise
price of the first supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). The second supplemental option will fully
vest on the earlier of (i) April 10, 2012, and (ii) the date that the Company or its shareholders
(A) enters into a transaction that establishes a value for the Company on a per share basis equal
to at least $17.53 per share, or (B) receives a valuation that establishes a value for the Company
on a per share basis equal to at least $17.53 per share. Notwithstanding the above, if the common
stock closing price equals or exceeds six times the closing price as of the first date that the
common stock was listed ($5.25), the second supplemental option will fully vest. In such an event,
the exercise price of the second supplemental option will adjust to be the closing price of the
common stock on the first date that the common stock was listed ($5.25). The third supplemental
option will fully vest on the earlier of (i) April 10, 2012, and (ii) the date that the Company or
its shareholders (A) enters into a transaction that establishes a value for the Company on a per
share basis equal to at least $26.29 per share, or (B) receives a valuation that establishes a
value for the Company on a per share basis equal to at least $26.29 per share. Notwithstanding the
above, if the common stock closing price equals or exceeds nine times the closing price as of the
first date that the common stock was listed ($5.25), the third supplemental option will fully vest.
In such an event, the exercise price of the third supplemental option will adjust to be the
closing price of the common stock on the first date that the common stock was listed ($5.25).
Termination. Mr. Jenkins’ employment may be terminated by either party at any time and for
any reason; provided that Mr. Jenkins will be required to give the Company at least 30 days advance
written notice of any resignation. If Mr. Jenkins is terminated by the Company for cause or
resigns without good reason, he will be entitled to receive his (1) base salary through the
termination date, (2) any annual bonus earned, but unpaid as of the date of termination for the
immediately preceding fiscal year, (3) reimbursement for certain unreimbursed business expenses,
and (4) such employee benefits to which he may be entitled under the employee benefit plans of the
Company. If Mr. Jenkins is terminated by the Company without cause or resigns for good reason, he
will be entitled to receive all of the above plus (1) subject to his compliance with certain other
provisions of the employment agreement related to non-competition and confidentiality and the
execution of an effective release of claims, continued payment of the base salary until six months
following the date of termination, and (2) continued coverage of him and his beneficiaries under
the Company’s health insurance programs for a period of up to six months.
Change of Control. In addition to any other termination benefits that Mr. Jenkins may be
entitled to receive, if a change of control (as defined above) occurs, then subject to his
compliance with certain other provisions of the employment agreement related to non-competition and
confidentiality and the execution of an effective release of claims, Mr. Jenkins will also be
entitled to receive 100% accelerated vesting of his options.
48
Stock Incentive Plan
On October 24, 2006, SANUWAVE, Inc.’s board of directors adopted the 2006 Stock Incentive Plan
of SANUWAVE, Inc. (the “2006 Plan”). 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
“Amended Plan”). The Amended Plan permits grants of awards to selected employees and directors of
the Company in the form of restricted stock or options to purchase shares of common stock. Options
granted may include nonstatutory options as well as qualified incentive stock options. The Amended
Plan is currently administered by the board of directors of the Company. The Amended 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 Amended Plan are
nonstatutory options which vest over a period of up to four years, and have a ten year term. The
options are granted at an exercise price equal to the fair market value of the common stock on the
date of the grant which is approved by the board of directors of the Company. The Amended Plan has
5,000,000 shares of common stock reserved for grant.
The terms of the options granted under the Amended Plan expire as determined by individual
option agreements (or on the tenth anniversary of the grant date), unless terminated earlier on the
first to occur of the following: (1) the date on which the participant’s service with the Company
is terminated by the Company for cause; (2) 60 days after the participant’s death; or (3) 60 days
after the termination of the participant’s service with the Company for any reason other than cause
or the participant’s death; provided that, if during any part of such 60 day period the option is
not exercisable solely because of specified securities law restrictions, the option will not expire
until the earlier of the expiration date or until it has been exercisable for an aggregate period
of 60 days after the termination of the participant’s service with the Company. The options vest
as provided for in individual option agreements and the exercise prices for the options are
determined by the board of directors at the time the option is granted; provided that the exercise
price shall in no event be less than the fair market value per share of the Company’s common stock
on the grant date. In the event of any change in the common stock underlying the options, by
reason of any merger or exchange of shares of common stock, the board of directors shall make such
substitution or adjustment as it deems to be equitable to (1) the class and number of shares
underlying such option, (2) the exercise price applicable to such option, or (3) any other affected
terms of such option.
In the event of a change of control, unless specifically modified by an individual option
agreement: (1) all options outstanding as of the date of such change of control will become fully
vested; and (2) notwithstanding (1) above, in the event of a merger or share exchange, the board of
directors may, in its sole discretion, determine that any or all options granted pursuant to the
Amended Plan will not vest on an accelerated basis if the board of directors, the surviving
corporation or the acquiring corporation, as the case may be, has taken such action as in the
opinion of the board of directors is equitable or appropriate to protect the rights and interests
of the participants under the Amended Plan.
On December 31, 2010, there were 3,695,649 shares of common stock available for grant under
the Amended Plan. For the year ended December 31, 2010, there were 545,000 options granted to the
Company’s executive officers under the Amended Plan. No options were granted to the Company’s
executive officers during the year ended December 31, 2009, under the 2006 Plan.
49
Outstanding Equity Awards at 2010 Fiscal Year End
The following table provides certain information concerning the outstanding equity awards for
each named executive officer as of December 31, 2010.
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Option Awards |
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Stock Awards |
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Equity |
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Equity |
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Incentive |
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Incentive Plan |
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Equity |
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Plan |
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Awards: |
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Incentive Plan |
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Awards: |
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Market or |
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Awards: |
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Number |
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Market |
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Number of |
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Payout Value |
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Number of |
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Number of |
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Number of |
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of Shares |
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Value of |
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Unearned |
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of Unearned |
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Securities |
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Securities |
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Securities |
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or Units |
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Shares or |
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Shares, Units |
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Shares, Units |
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Underlying |
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Underlying |
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Underlying |
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of Stock |
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Units of |
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or Other |
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or Other |
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Unexercised |
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Unexercised |
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Unexercised |
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Option/ |
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Option/ |
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That Have |
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Stock That |
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Rights That |
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Rights That |
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Options/ |
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Options/ |
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Unearned |
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Warrant |
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Warrant |
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Not |
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Have Not |
|
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Have Not |
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Have Not |
|
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|
Warrants (#) |
|
|
Warrants (#) |
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|
Options |
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|
Exercise |
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Expiration |
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Vested |
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Vested |
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|
Vested |
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|
Vested |
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| Name |
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Exercisable |
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Unexercisable |
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|
(#) |
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Price ($) |
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Date |
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(#) |
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($) |
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(#) |
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($) |
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| (a) |
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(b) |
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(c) |
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(d) |
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(e) |
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(f) |
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(g) |
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(h) |
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(i) |
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(j) |
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Christopher M. Cashman |
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723,600 |
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|
— |
|
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|
— |
|
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$2.92 |
|
12/19/2015 |
|
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— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
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139,167 |
(1) |
|
|
— |
|
|
$2.92/$5.25 |
|
12/19/2015 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
139,167 |
(2) |
|
|
— |
|
|
$2.92/$5.25 |
|
12/19/2015 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
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208,752 |
(3) |
|
|
— |
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$2.92/$5.25 |
|
12/19/2015 |
|
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— |
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|
|
— |
|
|
|
— |
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|
— |
|
|
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350,000 |
|
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|
— |
|
|
|
— |
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$2.00 |
|
11/01/2020 |
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— |
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— |
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— |
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— |
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|
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|
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Barry J. Jenkins |
|
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356,037 |
|
|
|
— |
|
|
|
— |
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$2.92 |
|
10/24/2016 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
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34,778 |
(4) |
|
|
— |
|
|
$2.92/$5.25 |
|
10/24/2016 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
34,778 |
(5) |
|
|
— |
|
|
$2.92/$5.25 |
|
10/24/2016 |
|
|
— |
|
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|
— |
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|
|
— |
|
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|
— |
|
|
|
|
— |
|
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52,166 |
(6) |
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|
— |
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|
$2.92/$5.25 |
|
10/24/2016 |
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|
— |
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— |
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— |
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— |
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|
|
— |
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20,000 |
(7) |
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|
— |
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|
$4.05 |
|
01/29/2020 |
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|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
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175,000 |
|
|
|
— |
|
|
|
— |
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|
$2.00 |
|
11/01/2020 |
|
|
— |
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|
— |
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— |
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— |
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Cornelius A. Hofman |
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|
— |
|
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|
— |
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— |
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— |
|
— |
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— |
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— |
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|
— |
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|
— |
|
|
|
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| (1) |
|
The supplemental option will fully vest on the earlier of (i) December 19, 2011, and (ii) the
date that the Company or its shareholders (A) enters into a transaction that establishes a
value for the Company on a per share basis equal to at least $8.76 per share, or (B) receives
a valuation that establishes a value for the Company on a per share basis equal to at least
$8.76 per share. Notwithstanding the above, if the common stock closing price equals or
exceeds three times the closing price as of the first date that the common stock was listed
($5.25), the first supplemental option will fully vest. In such an event, the exercise price
of the first supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). |
| |
| (2) |
|
The supplemental option will fully vest on the earlier of (i) December 19, 2011, and (ii) the
date that the Company or its shareholders (A) enters into a transaction that establishes a
value for the Company on a per share basis equal to at least $17.53 per share, or (B) receives
a valuation that establishes a value for the Company on a per share basis equal to at least
$17.53 per share. Notwithstanding the above, if the common stock closing price equals or
exceeds six times the closing price as of the first date that the common stock was listed
($5.25), the second supplemental option will fully vest. In such an event, the exercise price
of the second supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). |
| |
| (3) |
|
The supplemental option will fully vest on the earlier of (i) December 19, 2011, and (ii) the
date that the Company or its shareholders (A) enters into a transaction that establishes a
value for the Company on a per share basis equal to at least $26.29 per share, or (B) receives
a valuation that establishes a value for the Company on a per share basis equal to at least
$26.29 per share. Notwithstanding the above, if the common stock closing price equals or
exceeds nine times the closing price as of the first date that the common stock was listed
($5.25), the third supplemental option will fully vest. In such an event, the exercise price
of the third supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). |
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| (4) |
|
The supplemental option will fully vest on the earlier of (i) April 10, 2012, and (ii) the
date that the Company or its shareholders (A) enters into a transaction that establishes a
value for the Company on a per share basis equal to at least $8.76 per share, or (B) receives
a valuation that establishes a value for the Company on a per share basis equal to at least
$8.76 per share. Notwithstanding the above, if the common stock closing price equals or
exceeds three times the closing price as of the first date that the common stock was listed
($5.25), the first supplemental option will fully vest. In such an event, the exercise price
of the first supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). |
| |
| (5) |
|
The supplemental option will fully vest on the earlier of (i) April 10, 2012, and (ii) the
date that the Company or its shareholders (A) enters into a transaction that establishes a
value for the Company on a per share basis equal to at least $17.53 per share, or (B) receives
a valuation that establishes a value for the Company on a per share basis equal to at least
$17.53 per share. Notwithstanding the above, if the common stock closing price equals or
exceeds six times the closing price as of the first date that the common stock was listed
($5.25), the second supplemental option will fully vest. In such an event, the exercise price of the second supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). |
| |
| (6) |
|
The supplemental option will fully vest on the earlier of (i) April 10, 2012, and (ii) the
date that the Company or its shareholders (A) enters into a transaction that establishes a
value for the Company on a per share basis equal to at least $26.29 per share, or (B) receives
a valuation that establishes a value for the Company on a per share basis equal to at least
$26.29 per share. Notwithstanding the above, if the common stock closing price equals or
exceeds nine times the closing price as of the first date that the common stock was listed
($5.25), the third supplemental option will fully vest. In such an event, the exercise price
of the third supplemental option will adjust to be the closing price of the common stock on
the first date that the common stock was listed ($5.25). |
| |
| (7) |
|
The option was granted January 29, 2010 and vests 25% annually for four years. |
50
Director Compensation Table for Fiscal 2010
The following table provides certain information concerning compensation for each director
during the fiscal year ended December 31, 2010.
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|
| |
|
Fees Earned |
|
|
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|
|
|
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|
|
|
|
|
|
Nonqualified |
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|
|
|
|
|
|
| |
|
or |
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|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
Deferred |
|
|
|
|
|
|
|
| |
|
Paid in |
|
|
Stock |
|
|
Option |
|
|
Incentive Plan |
|
|
Compensation |
|
|
All Other |
|
|
|
|
| |
|
Cash |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Earnings |
|
|
Compensation |
|
|
Total |
|
| Name(1) |
|
($) |
|
|
($) |
|
|
($)(2) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
| (a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas H. Robinson |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin A. Richardson, II |
|
|
— |
|
|
|
— |
|
|
$ |
22,080 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
22,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F. Nemelka |
|
|
— |
|
|
|
— |
|
|
$ |
22,080 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
22,080 |
|
|
|
|
| (1) |
|
Christopher M. Cashman, who is a member of our board of directors, has been omitted from this
table since he received no compensation for serving on our board of directors. |
| |
| (2) |
|
The following are the aggregate number of option awards outstanding that have been granted to
each of our nonemployee directors as of December 31, 2010: Mr. Robinson — 15,000; Mr.
Richardson — 15,000; and Mr. Nemelka — 15,000. |
Discussion of Director Compensation
The Company did not pay any director cash compensation for serving on our board of directors
during the fiscal years ended December 31, 2010 or 2009. The Company may begin to compensate its
directors in cash at some time in the future. On November 1, 2010, the Company issued options to
purchase the Company’s common stock at $2.00 per share to certain non-employee directors as
follows: options to purchase 5,000 shares to Kevin A. Richardson, II and options to purchase 5,000
shares to John F. Nemelka. The options were vested when granted and expire ten years after the
date of the grant. On January 29, 2010, the Company issued options to purchase the Company’s
common stock at $4.05 per share to certain non-employee directors as follows: options to purchase
5,000 shares to Kevin A. Richardson, II and options to purchase 5,000 to John F. Nemelka. The
options are vested equally over a four year period and expire ten years after the date of the
grant.
|
|
|
| Item 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information, as of March 15, 2011, with respect to the
beneficial ownership of the Company’s outstanding stock by (i) any holder of more than five
percent, (ii) each of the Company’s executive officers and directors, and (iii) the Company’s
directors and executive officers as a group.
| |
|
|
|
|
|
|
|
|
| |
|
Number of Shares |
|
|
Percent of |
|
| |
|
Beneficially |
|
|
Shares |
|
| Name of Beneficial Owner(1) |
|
Owned(2) |
|
|
Outstanding |
|
Christopher M. Cashman (3) |
|
|
1,411,673 |
|
|
|
7.9 |
% |
Barry J. Jenkins (4) |
|
|
693,287 |
|
|
|
4.0 |
% |
Kevin A. Richardson, II (5) |
|
|
2,892,258 |
|
|
|
15.9 |
% |
Thomas H. Robinson |
|
|
15,000 |
|
|
|
* |
|
John F. Nemelka |
|
|
11,750 |
|
|
|
* |
|
David N. Nemelka (6) |
|
|
2,637,027 |
|
|
|
14.8 |
% |
Prides Capital Fund I, LP (7) |
|
|
9,942,760 |
|
|
|
52.5 |
% |
NightWatch Captial Partners II, LP (8) |
|
|
2,094,409 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (5 persons) |
|
|
5,023,968 |
|
|
|
27.9 |
% |
|
|
|
| * |
|
Less than 1% of outstanding shares. |
| |
| (1) |
|
Unless otherwise noted, each beneficial owner has the same address as the Company. |
| |
| (2) |
|
“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 March 15, 2011. 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 Securities Exchange Act of 1934, as amended, referred to in this current report as the
Exchange Act. Pursuant to the rules of the Securities and Exchange Commission, referenced to
in this current report as the SEC, certain shares of our common stock that a beneficial owner
has the right to acquire within 60 days pursuant to the exercise of stock options or warrants
are deemed to be outstanding for the purpose of computing the percentage ownership of such
owner, but are not deemed outstanding for the purpose of computing the percentage ownership of
any other person. |
| |
| (3) |
|
Includes options to purchase up to 1,073,600 shares of common stock and warrants to purchase
up to 8,816 shares of common stock. |
| |
| (4) |
|
Includes options to purchase up to 536,037 shares of common stock and warrants to purchase up
to 3,508 shares of common stock. |
| |
| (5) |
|
Includes options to purchase up to 11,250 shares of common stock and warrants to purchase up
to 1,440,504 shares of common stock. |
| |
| (6) |
|
Based solely on information contained in filings made on schedule 13D, as amended, and on
Form 4’s with the securities and exchange commission by the reporting person. Includes
warrants to purchase up to 1,122,504 shares of common stock. The principal address of David
N. Nemelka is 2662 Stonebury Loop Road, Springville, UT 84663. |
51
|
|
|
| (7) |
|
Based solely on information contained in filings made on schedule 13D, as amended, with the
securities and exchange commission by the reporting person. Includes warrants to purchase
775,726 shares of common stock and notes convertible into, up to 1,409,768 shares of common
stock. The principal business address of Prides Capital Fund, I, LP is 200 State Street,
13th floor, Boston, MA 02109. |
| |
| (8) |
|
Based solely on information contained in filings made on schedule 13D, as amended, with the
securities and exchange commission by the reporting person. Includes warrants to purchase
187,522 shares of common stock and a note convertible into, up to 36,145 shares of common
stock. The principal business address of NightWatch Capital Partners II, LP is 5314 River Run
Drive, Suite 350, Provo, UT 84604. |
|
|
|
| Item 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Other than as described below, for the fiscal year ended December 31, 2010, there were no
transactions with related persons required to be disclosed in this report.
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 a member of
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 (as described in the “Liquidity and Capital Resources” section). 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.
Our board of directors has determined that Thomas H. Robinson qualifies as an independent
director based on the NASDAQ Stock Market definition of “independent director.”
|
|
|
| Item 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table summarizes the fees that we have paid or accrued for audit and other
services provided by our principal independent public accounting firm, HLB Gross Collins, P.C.,
for each of the last two fiscal years:
| |
|
|
|
|
|
|
|
|
| Fee Category |
|
2010 |
|
|
2009 |
|
Audit fees |
|
$ |
101,000 |
|
|
$ |
92,000 |
|
Tax fees |
|
|
10,000 |
|
|
|
13,700 |
|
Audit related fees |
|
|
— |
|
|
|
— |
|
All other fees |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Total fees |
|
$ |
111,000 |
|
|
$ |
105,700 |
|
|
|
|
|
|
|
|
For purposes of the preceding table:
| |
• |
|
Audit fees consist of fees for the annual audit of our consolidated
financial statements, the review of the interim financial statements included in our
quarterly reports of Forms 10-Q, and other professional services provided in
connection with statutory and regulatory filings and consents related to capital
markets transactions and engagements for those fiscal years. |
| |
• |
|
Tax fees consist of fees for tax compliance, tax advice and tax
planning services for those fiscal years. |
| |
• |
|
Audit related fees consist of fees for assurance and related services
that are reasonably related to the performance of the audit or review. |
| |
• |
|
All other fees consist of fees for all other products and services. |
52
The board of directors must pre-approve all audits and permitted non-audit services to be
provided by our principal independent public accounting firm unless an exception to such
pre-approval exists under the Exchange Act or the rules of the Securities and Exchange Commission.
Each year, the board of directors approves the retention of the independent auditor to audit our
consolidated financial statements, including the associated fee. At this time, the board of
directors evaluates other known potential engagements of the independent auditor, including the
scope of audit-related services, tax services and other services proposed to be performed and the
proposed fees, and approves or rejects each service, taking into account whether the services are
permissible under applicable law and the possible impact of each non-audit service on the
independent auditor’s independence from management.
PART IV
|
|
|
| Item 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
1. All financial statements
The following
financial statements are included in this annual report on Form
10-K and incorporated herein by reference:
| |
|
|
|
|
| |
|
Page |
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
2. Financial statement schedules
No schedules are required because either the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements or the notes thereto.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference
as part of this report.
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
SANUWAVE Health, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
as of December 31, 2010 and 2009 (as restated), and the related consolidated statements of
operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the
years in the two-year period ended December 31, 2010. SANUWAVE Health, Inc. and Subsidiaries’
management is responsible for these consolidated financial statements. Our responsibility is to
express an opinion on these consolidated 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 consolidated 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 its
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 consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
consolidated 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 as of December
31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in
the two-year period ended December 31, 2010, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 21 to the consolidated financial statements, the accompanying
consolidated balance sheet at December 31, 2009 and the consolidated statement of stockholders’
equity (deficit) at January 1, 2009 have been restated for the correction of an error in the
recognition of stock based compensation expense for the year ended December 31, 2008.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the consolidated financial statements, the
Company incurred a net loss of approximately $14,922,000 and $6,153,000 during the years ended
December 31, 2010 and 2009, respectively, and, as of those dates, had a working capital deficiency
of approximately $7,030,000 and $187,000, respectively. As described more fully in Note (2) to the
consolidated financial statements, the Company is economically dependent upon future capital
contributions or financing to fund ongoing operations. This condition raises substantial doubt
about the Company’s ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
| |
|
|
|
/s/ HLB Gross Collins, P.C.
Atlanta, Georgia
|
|
|
March 25, 2011 |
|
|
F-2
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
ASSETS |
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
417,457 |
|
|
$ |
1,786,369 |
|
Accounts receivable — trade, net of allowance for doubtful accounts
of $36,903 in 2010 and $20,762 in 2009 (Note 1) |
|
|
95,549 |
|
|
|
47,966 |
|
Inventory (Note 5) |
|
|
463,643 |
|
|
|
592,589 |
|
Prepaid expenses |
|
|
121,084 |
|
|
|
121,157 |
|
Due from Pulse Veterinary Technologies, LLC |
|
|
45,389 |
|
|
|
127,878 |
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS |
|
|
1,143,122 |
|
|
|
2,675,959 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Note 6) |
|
|
13,386 |
|
|
|
88,706 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
32,253 |
|
|
|
32,169 |
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, at cost, less accumulated amortization (Note 7) |
|
|
1,840,538 |
|
|
|
2,147,295 |
|
|
|
|
|
|
|
|
|
|
ASSETS HELD FOR SALE (Note 8) |
|
|
— |
|
|
|
922,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
3,029,299 |
|
|
$ |
5,867,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,829,815 |
|
|
$ |
1,069,423 |
|
Accrued employee compensation |
|
|
1,101,410 |
|
|
|
509,905 |
|
Accrued expenses (Note 9) |
|
|
256,204 |
|
|
|
629,029 |
|
Notes payable, related parties (Note 12) |
|
|
4,247,290 |
|
|
|
— |
|
Interest payable, related parties (Note 12) |
|
|
82,977 |
|
|
|
— |
|
Liabilities related to discontinued operations (Note 4) |
|
|
655,061 |
|
|
|
655,061 |
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES |
|
|
8,172,757 |
|
|
|
2,863,418 |
|
|
|
|
|
|
|
|
|
|
NOTES PAYABLE, RELATED PARTIES (Note 12) |
|
|
5,372,743 |
|
|
|
8,887,981 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
13,545,500 |
|
|
|
11,751,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 17) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
GOING CONCERN (Note 2) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT) |
|
PREFERRED STOCK, par value $0.001, 5,000,000 shares
authorized; no shares issued and outstanding (Note 15) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
COMMON STOCK, par value $0.001, 50,000,000 shares
authorized; 14,794,650 and 12,509,657 issued and outstanding
at December 31, 2010 and 2009, respectively (Note 14) |
|
|
14,795 |
|
|
|
12,510 |
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL (Note 21) |
|
|
43,728,133 |
|
|
|
33,428,902 |
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME |
|
|
10,902 |
|
|
|
21,864 |
|
|
|
|
|
|
|
|
|
|
RETAINED DEFICIT (Note 21) |
|
|
(54,270,031 |
) |
|
|
(39,347,590 |
) |
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
(10,516,201 |
) |
|
|
(5,884,314 |
) |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
$ |
3,029,299 |
|
|
$ |
5,867,085 |
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-3
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years Ended December 31, 2010 and 2009
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
$ |
728,446 |
|
|
$ |
660,725 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES |
|
|
250,326 |
|
|
|
225,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
478,120 |
|
|
|
434,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Research and development |
|
|
3,879,146 |
|
|
|
3,387,204 |
|
General and administrative |
|
|
7,100,621 |
|
|
|
5,026,425 |
|
Depreciation |
|
|
829,576 |
|
|
|
365,108 |
|
Amortization |
|
|
306,757 |
|
|
|
306,756 |
|
Write down of assets held for sale (Note 8) |
|
|
169,581 |
|
|
|
— |
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES |
|
|
12,285,681 |
|
|
|
9,085,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS |
|
|
(11,807,561 |
) |
|
|
(8,650,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
Transitional services provided to Pulse Veterinary Technologies, LLC |
|
|
360,125 |
|
|
|
230,625 |
|
Gain on sale of assets |
|
|
6,565 |
|
|
|
3,207 |
|
Extinguishment of debt (Note 13) |
|
|
(2,693,896 |
) |
|
|
— |
|
Interest expense |
|
|
(961,585 |
) |
|
|
(739,847 |
) |
Loss on foreign currency exchange |
|
|
(66,058 |
) |
|
|
(30,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME (EXPENSE) |
|
|
(3,354,849 |
) |
|
|
(536,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
|
|
(15,162,410 |
) |
|
|
(9,186,757 |
) |
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT |
|
|
239,969 |
|
|
|
1,203,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS |
|
|
(14,922,441 |
) |
|
|
(7,983,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS (Note 4) |
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
of $226,234 in 2009 |
|
|
— |
|
|
|
344,200 |
|
Gain on sale of veterinary division, net of tax of $976,938 in 2009 |
|
|
— |
|
|
|
1,486,345 |
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
— |
|
|
|
1,830,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
|
(14,922,441 |
) |
|
|
(6,153,040 |
) |
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(10,962 |
) |
|
|
218,510 |
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME (LOSS) |
|
$ |
(14,933,403 |
) |
|
$ |
(5,934,530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE: (Note 11) |
|
|
|
|
|
|
|
|
Loss from continuing operations — basic |
|
$ |
(1.15 |
) |
|
$ |
(0.70 |
) |
|
|
|
|
|
|
|
Loss from continuing operations — diluted |
|
$ |
(1.15 |
) |
|
$ |
(0.70 |
) |
|
|
|
|
|
|
|
Income from discontinued operations — basic |
|
$ |
— |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
Income from discontinued operations — diluted |
|
$ |
— |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
Net loss — basic |
|
$ |
(1.15 |
) |
|
$ |
(0.54 |
) |
|
|
|
|
|
|
|
Net loss — diluted |
|
$ |
(1.15 |
) |
|
$ |
(0.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
|
|
12,924,872 |
|
|
|
11,405,490 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted |
|
|
12,924,872 |
|
|
|
11,405,490 |
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-4
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Years Ended December 31, 2010 and 2009
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preferred Stock |
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
Shares |
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
Issued and |
|
|
|
|
|
|
Issued and |
|
|
|
|
|
|
Additional Paid- |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
| |
|
Outstanding |
|
|
Par Value |
|
|
Outstanding |
|
|
Par Value |
|
|
in Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008, as originally reported |
|
|
283,250 |
|
|
$ |
2,833 |
|
|
|
8,863 |
|
|
$ |
89 |
|
|
$ |
30,103,124 |
|
|
$ |
(32,507,241 |
) |
|
$ |
(196,646 |
) |
|
$ |
(2,597,841 |
) |
Adjustment for prior period error in
stock based compensation (Note 21) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
687,309 |
|
|
|
(687,309 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2009, as restated |
|
|
283,250 |
|
|
|
2,833 |
|
|
|
8,863 |
|
|
|
89 |
|
|
|
30,790,433 |
|
|
|
(33,194,550 |
) |
|
|
(196,646 |
) |
|
|
(2,597,841 |
) |
Shares issued for cash |
|
|
— |
|
|
|
— |
|
|
|
18,198 |
|
|
|
182 |
|
|
|
1,819,662 |
|
|
|
— |
|
|
|
— |
|
|
|
1,819,844 |
|
Recapitalization pursuant to Merger |
|
|
(283,250 |
) |
|
|
(2,833 |
) |
|
|
12,079,566 |
|
|
|
11,836 |
|
|
|
(9,003 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Shares purchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(180,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(180,000 |
) |
Payment of development period
liabilities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(69,915 |
) |
|
|
— |
|
|
|
— |
|
|
|
(69,915 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,153,040 |
) |
|
|
— |
|
|
|
(6,153,040 |
) |
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
403,030 |
|
|
|
403 |
|
|
|
1,077,725 |
|
|
|
— |
|
|
|
— |
|
|
|
1,078,128 |
|
Foreign currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
218,510 |
|
|
|
218,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2009 |
|
|
— |
|
|
|
— |
|
|
|
12,509,657 |
|
|
|
12,510 |
|
|
|
33,428,902 |
|
|
|
(39,347,590 |
) |
|
|
21,864 |
|
|
|
(5,884,314 |
) |
Shares issued for cash, related parties |
|
|
— |
|
|
|
— |
|
|
|
175,000 |
|
|
|
175 |
|
|
|
349,825 |
|
|
|
— |
|
|
|
— |
|
|
|
350,000 |
|
Shares issued for cash |
|
|
— |
|
|
|
— |
|
|
|
750,000 |
|
|
|
750 |
|
|
|
1,499,250 |
|
|
|
— |
|
|
|
— |
|
|
|
1,500,000 |
|
Promissory notes exchanged for shares,
related parties |
|
|
— |
|
|
|
— |
|
|
|
1,156,504 |
|
|
|
1,157 |
|
|
|
4,786,769 |
|
|
|
— |
|
|
|
— |
|
|
|
4,787,926 |
|
Promissory notes exchanged for shares |
|
|
— |
|
|
|
— |
|
|
|
102,326 |
|
|
|
102 |
|
|
|
423,528 |
|
|
|
— |
|
|
|
— |
|
|
|
423,630 |
|
Shares issued for unit option exercise |
|
|
— |
|
|
|
— |
|
|
|
101,163 |
|
|
|
101 |
|
|
|
202,225 |
|
|
|
— |
|
|
|
— |
|
|
|
202,326 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,922,441 |
) |
|
|
— |
|
|
|
(14,922,441 |
) |
Stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,037,634 |
|
|
|
— |
|
|
|
— |
|
|
|
3,037,634 |
|
Foreign currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,962 |
) |
|
|
(10,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2010 |
|
|
— |
|
|
$ |
— |
|
|
|
14,794,650 |
|
|
$ |
14,795 |
|
|
$ |
43,728,133 |
|
|
$ |
(54,270,031 |
) |
|
$ |
10,902 |
|
|
$ |
(10,516,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-5
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010 and 2009
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(14,922,441 |
) |
|
$ |
(7,983,585 |
) |
Adjustments to reconcile net loss to net cash
used by operating activities |
|
|
|
|
|
|
|
|
Amortization |
|
|
306,757 |
|
|
|
306,756 |
|
Accrued interest |
|
|
799,712 |
|
|
|
756,166 |
|
Depreciation |
|
|
829,576 |
|
|
|
365,108 |
|
Change in allowance for doubtful accounts |
|
|
16,141 |
|
|
|
(43,728 |
) |
Gain on sale of property and equipment |
|
|
(6,565 |
) |
|
|
(3,207 |
) |
Stock-based compensation |
|
|
3,037,634 |
|
|
|
1,078,128 |
|
Extinguishment of debt |
|
|
2,693,896 |
|
|
|
— |
|
Write down of assets held for sale |
|
|
169,581 |
|
|
|
— |
|
Changes in assets — (increase)/decrease |
|
|
|
|
|
|
|
|
Accounts receivable — trade |
|
|
(63,724 |
) |
|
|
48,176 |
|
Inventory |
|
|
128,946 |
|
|
|
92,161 |
|
Prepaid expenses |
|
|
73 |
|
|
|
(14,540 |
) |
Due from Pulse Veterinary Technologies, LLC |
|
|
82,489 |
|
|
|
(127,878 |
) |
Other |
|
|
(1,400 |
) |
|
|
48,848 |
|
Changes in liabilities — increase/(decrease) |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
760,392 |
|
|
|
93,612 |
|
Accrued employee compensation |
|
|
591,505 |
|
|
|
(310,492 |
) |
Accrued expenses |
|
|
(372,825 |
) |
|
|
180,787 |
|
Interest payable, related parties |
|
|
82,977 |
|
|
|
— |
|
|
|
|
|
|
|
|
NET CASH USED BY CONTINUING OPERATIONS |
|
|
(5,867,276 |
) |
|
|
(5,513,688 |
) |
NET CASH USED BY DISCONTINUED OPERATIONS |
|
|
— |
|
|
|
(758,244 |
) |
|
|
|
|
|
|
|
NET CASH USED BY OPERATING ACTIVITIES |
|
|
(5,867,276 |
) |
|
|
(6,271,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
7,000 |
|
|
|
9,827 |
|
Purchase of property and equipment |
|
|
— |
|
|
|
(10,363 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED (USED) BY CONTINUING OPERATIONS |
|
|
7,000 |
|
|
|
(536 |
) |
NET CASH PROVIDED BY DISCONTINUED OPERATIONS |
|
|
— |
|
|
|
3,601,772 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY INVESTING ACTIVITIES |
|
|
7,000 |
|
|
|
3,601,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
|
|
|
|
Proceeds from notes payable, related parties |
|
|
— |
|
|
|
2,125,000 |
|
Proceeds from promissory notes, related parties |
|
|
2,250,000 |
|
|
|
— |
|
Proceeds from promissory notes |
|
|
200,000 |
|
|
|
— |
|
Proceeds from sale of capital stock units, related parties |
|
|
350,000 |
|
|
|
— |
|
Proceeds from sale of capital stock units |
|
|
1,702,326 |
|
|
|
— |
|
Proceeds from sale of common stock |
|
|
— |
|
|
|
1,819,844 |
|
Repurchase of common stock |
|
|
— |
|
|
|
(180,000 |
) |
Payment of development period liabilities |
|
|
— |
|
|
|
(69,915 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
4,502,326 |
|
|
|
3,694,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS |
|
|
(10,962 |
) |
|
|
218,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(1,368,912 |
) |
|
|
1,242,743 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
1,786,369 |
|
|
|
543,626 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
$ |
417,457 |
|
|
$ |
1,786,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
81,864 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital stock units issued in exchange for promissory notes, related
parties (Note 13) |
|
|
2,313,008 |
|
|
|
— |
|
Capital stock units issued in exchange for promissory notes (Note 13) |
|
|
204,652 |
|
|
|
— |
|
|
|
|
|
|
|
|
TOTAL NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
$ |
2,517,660 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-6
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
Restatement of historical consolidated financial statements
The accompanying consolidated balance sheet at December 31, 2009 and the consolidated
statement of stockholders’ equity (deficit) at January 1, 2009 have been restated in this
report for the correction of an error in the recognition of non-cash stock based
compensation expense for the year ended December 31, 2008 as more fully described in Note
21.
| (1) |
|
Summary of significant accounting policies |
Description of the business — SANUWAVE Health, Inc. and subsidiaries (the “Company”)
is an emerging global regenerative medicine company focused on the development and
commercialization of non-invasive, biological response activating devices for the repair and
regeneration of tissue, musculoskeletal and vascular structures. The Company’s portfolio of
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/spine,
plastic/cosmetic and cardiac conditions. The Company currently does not have any commercial
products in the United States. Revenues are from sales of CE Marked devices and accessories
in Europe.
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 as cumulative translation adjustments and are
shown as a separate component of accumulated other comprehensive income (loss) in the
consolidated statements of stockholders’ equity (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 of allowances
for deferred taxes, estimated fair value of stock based compensation, estimated fair value
of intangible assets, and the estimated fair value assigned to the capital stock units
exchanged for the promissory notes.
F-7
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (1) |
|
Summary of significant accounting policies (continued) |
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.
Concentration of credit risk — 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. For the year ended December 31, 2010,
two distributors accounted for 28% and 22% of revenues. For the year ended December 31,
2009, one distributor accounted for 12% of revenues. The Company maintains its cash in bank
accounts which may exceed federally insured limits. The Company does not believe it is
exposed to any significant credit risk in such accounts.
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 considered past due on average 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 valuation allowance. The following is a
summary of accounts receivable allowances:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
20,762 |
|
|
$ |
64,490 |
|
Reserve adjustments — increase (decrease) |
|
|
14,720 |
|
|
|
(43,728 |
) |
Write-offs, net of recovery |
|
|
1,421 |
|
|
|
— |
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
36,903 |
|
|
$ |
20,762 |
|
|
|
|
|
|
|
|
Inventory — Inventory consists of finished medical equipment and parts and is stated at
the lower of cost or market, which is valued using first in, first out (“FIFO”). 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 all 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 are recorded at cost. Intangible assets subject
to amortization include patents. Patents are amortized on a straight-line basis over the
average life of 11.4 years.
Fair value of financial instruments — The book values of trade accounts receivable,
trade accounts payable, and other financial instruments approximate their fair values,
principally because of the short-term maturities of these instruments. The Company’s
long-term debt is carried at historical cost, their respective estimated fair values
approximate carrying values due to their limited terms.
F-8
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (1) |
|
Summary of significant accounting policies (continued) |
Impairment of long-lived assets — The Company reviews long-lived assets, other than
goodwill and other intangible assets with indefinite lives, 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.
Deferred 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). 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 related to future
years, including loss carryforwards, if there is not sufficient evidence to indicate that
the results of operations will generate sufficient taxable income to realize the net
deferred tax asset in future years.
Effective January 1, 2007, the Company adopted a provision of ASC 740, Income Taxes
(formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48)).
ASC 740 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.
F-9
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (1) |
|
Summary of significant accounting policies (continued) |
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 (Note 11).
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. Examples of
items to be included in comprehensive income (loss), which are excluded from net income
(loss), include foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities.
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).
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, contract manufacturer
development costs 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.
F-10
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (1) |
|
Summary of significant accounting policies (continued) |
Discontinued operations —The Company accounts for long-lived assets in accordance with
the provisions of ASC 360, Impairment or Disposal of Long-Lived Assets (formerly SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets). ASC 360 addresses
financial accounting and reporting for the impairment or disposal of long-lived assets.
This statement requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. ASC 360 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held
for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
On October 31, 2008, the Company discontinued the Ossatron mobile service business and
sold certain assets.
On June 3, 2009, the Company sold the net assets and liabilities of the veterinary
business.
As required by ASC 360, the results of operations from these businesses have been
reported as discontinued operations in the consolidated statements of operations and
comprehensive loss. All of the assets and liabilities related to these discontinued
operations have been reclassified to current assets, non-current assets, and current
liabilities related to discontinued operations, as applicable.
The results of operations for these businesses allocated to discontinued operations
were those results the Company believed were eliminated from the ongoing operations of the
entity as a result of the disposal transactions. The Company identified such results via a
line item review of the statement of operations and comprehensive loss. The income tax rate
used for the tax effect of the discontinued operations is based on the effective tax rate
for the Company.
F-11
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (1) |
|
Summary of significant accounting policies (continued) |
Recent pronouncements — In January 2010, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and
Disclosures — Topic 855 (“ASU 2010-06”). ASU 2010-06 provides amendments to ASC 820-10,
Fair Value Measurements (“ASC 820-10”). ASC 820-10 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 three categories (level 1, level 2 or
level 3). ASU 2010-06 provides amendments to ASC 820-10 to require new disclosures for
transfers in and out of levels 1 and 2, as well as a reconciliation of activity within level
3. Furthermore, ASU 2010-06 provides amendments that clarify existing disclosures regarding
levels of disaggregation and inputs and valuation techniques. The new disclosures and
clarifications of existing disclosures required by ASU 2010-06 are effective for interim and
annual reporting periods beginning after December 15, 2009 (except for disclosures in the
reconciliation of activity within level 3, which are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years). The Company
adopted ASU 2010-06 as of January 1, 2010, and the adoption did not have a material impact
on the Company’s consolidated financial statements.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”), to amend ASC
855, Subsequent Events (“ASC 855”). ASC 855, which was originally issued by the FASB in May
2009 (as SFAS No. 165, Subsequent Events ), provides guidance on events that occur after
the balance sheet date but prior to the issuance of the financial statements. ASC 855
distinguishes events requiring recognition in the financial statements and those that may
require disclosure in the financial statements. As a result of ASU 2010-09, companies are
not required to disclose the date through which management evaluated subsequent events in
the financial statements, either in originally issued financial statements or reissued
financial statements. ASC 855 was effective for interim and annual periods ending after
September 15, 2009, and ASU 2010-09 was effective immediately. The Company has evaluated
subsequent events in accordance with ASU 2010-09, and the evaluation did not have a material
impact on the Company’s consolidated financial statements.
F-12
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
As shown in the accompanying consolidated financial statements, the Company incurred a
net loss of $14,922,441 and $6,153,040 during the years ended December 31, 2010 and 2009,
respectively. As of December 31, 2010, the Company had an accumulated deficit of
$54,270,031. The Company had a working capital deficiency of $7,029,635 and $187,459 at
December 31, 2010 and 2009, respectively. These operating losses and working capital
deficiency create an uncertainty about the Company’s ability to continue as a going concern.
Although no assurances can be given, management of the Company believes that potential
additional issuances of equity, promissory notes or other potential financing will 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. The Company is economically dependent upon future
capital contributions or financing to fund ongoing operations.
| (3) |
|
Reverse merger transaction |
On September 25, 2009, the Company (formerly named Rub Music Enterprises, Inc.) and RME
Delaware Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of the Company
(the “Merger Sub”) entered into a reverse merger agreement (the “Merger Agreement”) with
SANUWAVE, Inc. Pursuant to the Merger Agreement, the Merger Sub merged with and into
SANUWAVE, Inc., with SANUWAVE, Inc. as the surviving entity (the “Merger”). In connection
with the Merger, the Company acquired 100% of the outstanding capital stock of SANUWAVE,
Inc. and the stockholders of SANUWAVE, Inc. received 11,009,657 shares of the Company’s
common stock, Class A warrants to purchase 1,106,627 shares of the Company’s common stock at
$4.00 per share, and Class B warrants to purchase an additional 1,106,627 shares of the
Company’s common stock at $8.00 per share. In addition, in connection with the Merger,
certain stockholders of the Company agreed to cancel all of their shares of common stock of
the Company, except for 1,500,000 shares of common stock, for an aggregate price of $180,000
(the “Share Repurchase”). At the time of the Merger, the Company had 1,500,000 Class C
warrants outstanding to purchase the Company’s common stock at $4.00 per share.
As a result of the Merger and the Share Repurchase, the stockholders of SANUWAVE, Inc.
controlled approximately 88% of the Company’s outstanding common stock, holding 11,009,657
of the 12,509,657 outstanding shares, and SANUWAVE, Inc. was considered the accounting
acquirer in this Merger. The Company was a “shell company” as such term is defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) immediately
prior to the Merger. As a result of the Merger, the Company’s operations are now focused in
global medical technology and the Company is no longer a shell company.
| (4) |
|
Discontinued operations |
On October 31, 2008, the Company discontinued the Ossatron mobile service business and
sold certain assets.
On June 3, 2009, the Company sold its veterinary business for a total cash
consideration of $3,500,000. As a result of the sale, the Company recorded a gain of
$2,463,283.
F-13
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (4) |
|
Discontinued operations (continued) |
Accordingly, the Company’s consolidated financial statements have been prepared with
the net assets, results of operations, and cash flows of these businesses displayed
separately as “discontinued operations.
The operating results of the discontinued operations are summarized as follows for the
years ended December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
|
$ |
1,458,107 |
|
Cost of revenues |
|
|
— |
|
|
|
372,547 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
1,085,560 |
|
Operating expenses |
|
|
— |
|
|
|
510,632 |
|
|
|
|
|
|
|
|
Operating income |
|
|
— |
|
|
|
574,928 |
|
Other expense |
|
|
— |
|
|
|
4,494 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
— |
|
|
|
570,434 |
|
Income tax expense |
|
|
— |
|
|
|
226,234 |
|
|
|
|
|
|
|
|
Income, net of income tax |
|
$ |
— |
|
|
$ |
344,200 |
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, the Company’s liabilities related to discontinued
operations were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
(655,061 |
) |
|
$ |
(655,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities of discontinued operations |
|
$ |
(655,061 |
) |
|
$ |
(655,061 |
) |
|
|
|
|
|
|
|
Inventory consists of the following at December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Inventory — finished goods |
|
$ |
539,141 |
|
|
$ |
667,998 |
|
Inventory — parts |
|
|
78,202 |
|
|
|
108,068 |
|
|
|
|
|
|
|
|
Gross inventory |
|
|
617,343 |
|
|
|
776,066 |
|
Provision for losses and obsolescence |
|
|
(153,700 |
) |
|
|
(183,477 |
) |
|
|
|
|
|
|
|
Net inventory |
|
$ |
463,643 |
|
|
$ |
592,589 |
|
|
|
|
|
|
|
|
F-14
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (6) |
|
Property and equipment |
Property and equipment consists of the following at December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Machines and equipment |
|
$ |
199,520 |
|
|
$ |
199,520 |
|
Office and computer equipment |
|
|
296,120 |
|
|
|
311,791 |
|
Leasehold improvements |
|
|
67,421 |
|
|
|
67,421 |
|
Furniture and fixtures |
|
|
24,613 |
|
|
|
24,613 |
|
Vehicles |
|
|
22,531 |
|
|
|
38,897 |
|
Software |
|
|
40,233 |
|
|
|
40,233 |
|
Other assets |
|
|
5,080 |
|
|
|
4,585 |
|
|
|
|
|
|
|
|
Total |
|
|
655,518 |
|
|
|
687,060 |
|
Accumulated depreciation |
|
|
(642,132 |
) |
|
|
(598,354 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
13,386 |
|
|
$ |
88,706 |
|
|
|
|
|
|
|
|
The aggregate depreciation charged to operations was $74,885 and $194,828 for the years
ended December 31, 2010 and 2009, respectively. The depreciation policies followed by the
Company are described in Note (1).
Intangible assets consist of the following at December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Patents, at cost |
|
$ |
3,502,135 |
|
|
$ |
3,502,135 |
|
Less accumulated amortization |
|
|
(1,661,597 |
) |
|
|
(1,354,840 |
) |
|
|
|
|
|
|
|
Net intangible assets |
|
$ |
1,840,538 |
|
|
$ |
2,147,295 |
|
|
|
|
|
|
|
|
The aggregate amortization expense charged to operations was $306,757 and $306,756 for
the years ended December 31, 2010 and 2009, respectively. The amortization policies
followed by the Company are described in Note (1).
F-15
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (7) |
|
Intangible assets (continued) |
Amortization expense for the future years is summarized as follows:
| |
|
|
|
|
| Years ending December 31, |
|
Amount |
|
|
|
|
|
|
2011 |
|
$ |
306,756 |
|
2012 |
|
|
306,756 |
|
2013 |
|
|
306,756 |
|
2014 |
|
|
306,756 |
|
2015 |
|
|
306,756 |
|
2016 |
|
|
306,758 |
|
|
|
|
|
Total |
|
$ |
1,840,538 |
|
|
|
|
|
The weighted average amortization period for intangible assets is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Period |
|
| |
|
Amount |
|
|
(Years) |
|
|
|
|
|
|
|
|
|
|
Patents |
|
$ |
3,502,135 |
|
|
|
11.4 |
|
On October 31, 2008, the Company discontinued its Ossatron mobile service business and
accordingly displayed the related assets of this business as “discontinued operations.” In
accordance with FASB ASC 205-20, Presentation of Financial Statements — Discontinued
Operations, a quarterly review of the discontinued assets was performed to determine if they
should continue to be recorded as “discontinued operations.” As of October 1, 2009,
management determined that the Ossatron device fixed assets and inventory were not likely to
be sold within the next twelve months. Therefore, the Ossatron device fixed assets and
related parts inventory was reclassed to continuing operations and depreciation on the
Ossatron device fixed assets was restarted at October 1, 2009.
As of December 31, 2010 management determined that the potential market for selling the
used Ossatron mobile service devices was not probable due to the age of the devices and
changes in the international electrical standards for which the devices are no longer
compliant. Currently, management has no plans to utilize these devices in the United States.
The Company recorded additional depreciation expense of $201,153 to fully depreciate the
Ossatron devices and recorded an adjustment of $169,581 to fully reserve for the related
parts inventory for those devices.
F-16
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (8) |
|
Assets held for sale (continued) |
Assets held for sale consist of the following at December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Ossatron devices |
|
$ |
4,837,165 |
|
|
$ |
4,837,165 |
|
Accumulated depreciation |
|
|
(4,837,165 |
) |
|
|
(4,082,474 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
|
— |
|
|
|
754,691 |
|
|
|
|
|
|
|
|
Inventory Ossatron device parts |
|
|
226,081 |
|
|
|
210,169 |
|
Provision for losses and obsolescence |
|
|
(226,081 |
) |
|
|
(41,904 |
) |
|
|
|
|
|
|
|
Net inventory |
|
|
— |
|
|
|
168,265 |
|
|
|
|
|
|
|
|
Total assets held for sale |
|
$ |
— |
|
|
$ |
922,956 |
|
|
|
|
|
|
|
|
The aggregate depreciation charged to operations was $754,691 and $170,280 for the
years ended December 31, 2010 and 2009, respectively.
Accrued expenses consist of the following at December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Accrued legal professional fees |
|
$ |
64,531 |
|
|
$ |
249,418 |
|
Accrued clinical site payments |
|
|
82,500 |
|
|
|
192,023 |
|
Accrued audit and tax preparation |
|
|
89,173 |
|
|
|
77,771 |
|
Accrued other |
|
|
20,000 |
|
|
|
109,817 |
|
|
|
|
|
|
|
|
|
|
$ |
256,204 |
|
|
$ |
629,029 |
|
|
|
|
|
|
|
|
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 carryforward) which do not
relate to a financial statement asset or liability, the classification is based on the
expected reversal date of the temporary difference.
F-17
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (10) |
|
Income taxes (continued) |
The income tax provision (benefit) consists of the following at December 31, 2010 and
2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Current: |
|
|
|
|
|
|
|
|
Federal (1) |
|
$ |
(244,479 |
) |
|
$ |
— |
|
State |
|
|
— |
|
|
|
— |
|
Foreign |
|
|
4,510 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(239,969 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
(4,255,157 |
) |
|
|
(2,193,248 |
) |
State |
|
|
(467,516 |
) |
|
|
(240,974 |
) |
Foreign |
|
|
59,520 |
|
|
|
61,056 |
|
Change in valuation allowance |
|
|
4,663,153 |
|
|
|
2,373,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(239,969 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Tax benefit derived from the United States government’s Qualifying Therapeutic
Discovery Project program. The tax grant received in 2010 was for development
activity in 2010 and 2009. |
The income tax provision (benefit) amounts differ from the amounts computed by applying
the United States federal statutory income tax rate of 35% to pretax income (loss) as a
result of the following for the years ended December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) at statutory rate |
|
$ |
(5,306,844 |
) |
|
$ |
(2,153,564 |
) |
Increase (reduction) in income taxes resulting from: |
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit |
|
|
(414,692 |
) |
|
|
(168,286 |
) |
Non-deductible loss on extinguishment of debt |
|
|
942,864 |
|
|
|
— |
|
Change in valuation allowance — United States |
|
|
4,722,673 |
|
|
|
2,301,850 |
|
Federal tax grant |
|
|
(244,479 |
) |
|
|
— |
|
Other |
|
|
60,509 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(239,969 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
F-18
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (10) |
|
Income taxes (continued) |
The tax effects of temporary differences that give rise to the deferred tax assets
(liabilities) at December 31, 2010 and 2009, are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
$ |
15,457,127 |
|
|
$ |
12,359,566 |
|
Net operating loss carryforward — foreign |
|
|
161,463 |
|
|
|
220,983 |
|
Excess of tax basis over book value of
property and equipment |
|
|
100,375 |
|
|
|
— |
|
Excess of tax basis over book value
of intangible assets |
|
|
409,657 |
|
|
|
405,628 |
|
Stock-based compensation |
|
|
2,150,096 |
|
|
|
1,003,827 |
|
Accrued bonus |
|
|
413,488 |
|
|
|
188,678 |
|
Captialized equity costs |
|
|
75,471 |
|
|
|
75,471 |
|
Inventory reserve |
|
|
58,000 |
|
|
|
— |
|
Valuation allowance — United States |
|
|
(18,664,214 |
) |
|
|
(13,941,541 |
) |
Valuation allowance — foreign |
|
|
(161,463 |
) |
|
|
(220,983 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
— |
|
|
|
91,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Excess of book value over tax basis
of property and equipment |
|
|
— |
|
|
|
91,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes, net |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
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.
F-19
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (10) |
|
Income taxes (continued) |
The federal net operating loss carryforwards at December 31, 2010 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 |
|
|
8,208,591 |
|
|
|
|
|
Total |
|
$ |
40,896,849 |
|
|
|
|
|
| (11) |
|
Earnings (loss) per share |
The following table sets forth the denominator for the computation of basic and diluted
earnings per share pursuant to ASC 260 for the years ended December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(14,922,441 |
) |
|
$ |
(7,983,585 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
— |
|
|
$ |
1,830,545 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(14,922,441 |
) |
|
$ |
(6,153,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share -
weighted average shares outstanding during
the year |
|
|
12,924,872 |
|
|
|
11,405,490 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Notes payable, related parties |
|
|
— |
|
|
|
— |
|
Warrants |
|
|
— |
|
|
|
— |
|
Stock options |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per
share — adjusted weighted average shares
and assumed conversions |
|
|
12,924,872 |
|
|
|
11,405,490 |
|
|
|
|
|
|
|
|
F-20
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (11) |
|
Earnings (loss) per share (continued) |
As a result of the net loss for the years ended December 31, 2010 and 2009,
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 13,110,928 shares and 6,950,584 shares at December 31, 2010 and 2009, respectively.
| (12) |
|
Notes payable, related parties |
The notes payable consists of the following at December 31, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Notes payable, unsecured, bearing interest at
6% to HealthTronics, Inc., a
shareholder of the Company.
The notes were issued in conjunction with the Company’s
purchase of the orthopedic division of HealthTronics, Inc.
on August 1, 2005. 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 $82,977 at December 31, 2010. There was no
current interest payable at December 31, 2009.
Accrued interest not payable until August 1, 2015
totaled $1,372,743 and $1,215,253 at December 31, 2010
and 2009, respectively. |
|
$ |
5,372,743 |
|
|
$ |
5,215,253 |
|
|
|
|
|
|
|
|
|
|
Notes payable, unsecured, bearing interest
at 15%
to Prides Capital Fund I, LP and NightWatch Capital
Partners II, LP, shareholders of the Company. Quarterly
interest through December 31, 2010, is accrued and added
to the principal balance. Unpaid accrued interest and
principal is due September 30, 2011. Accrued interest
totaled $1,047,290 and $472,728 at December 31, 2010
and 2009, respectively. All or any portion of the unpaid
principal can be converted into common stock with a
conversion price of $2.92 per share. |
|
|
4,247,290 |
|
|
|
3,672,728 |
|
|
|
|
|
|
|
|
Total |
|
|
9,620,033 |
|
|
|
8,887,981 |
|
Less current portion |
|
|
(4,247,290 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Non-current portion |
|
$ |
5,372,743 |
|
|
$ |
8,887,981 |
|
|
|
|
|
|
|
|
F-21
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (12) |
|
Notes payable, related parties (continued) |
The notes payable to Prides Capital Fund I, LP and NightWatch Capital Partners II, LP
contain a contingent put reflected in the contractual rights of default. Upon the
occurrence of any default, as defined in the note agreements, the entire unpaid principal
and accrued interest on the note will become automatically due and payable. Under FASB
Codification ASC 815, the risks of equity are inconsistent with the risks of the debt host
and, therefore, embedded put derivative such as these require bifurcation and separate
classification at fair value when material. The value of the contingent put was determined
to be deminimus in value and, as such, was considered immaterial. The Company will continue
to assess this element of the notes and, if material, the Company will record the contingent
put as a derivative liability and charge against income changes in fair value at each
reporting period.
Maturities on notes payable are as follows:
| |
|
|
|
|
| Years ending December 31, |
|
Amount |
|
|
|
|
|
|
2011 |
|
$ |
4,247,290 |
|
2012 |
|
|
— |
|
2013 |
|
|
— |
|
2014 |
|
|
— |
|
2015 |
|
|
5,372,743 |
|
|
|
|
|
Total |
|
$ |
9,620,033 |
|
|
|
|
|
Interest expense on notes payable, related parties totaled $964,553 and $756,166
for the years ended December 31, 2010 and 2009, respectively.
During the year ended December 31, 2010, the Company issued ten promissory notes
totaling $2,450,000. On October 12, 2010, in conjunction with an offering of securities
(the “Offering”) of the Company pursuant to an exemption from registration under the
Securities Act of 1933, as amended (the “Act”), the Company amended the terms of the ten
outstanding promissory notes such that the unpaid principal and interest on each note was
exchanged into the number of Units (as described below) equal to (i) the unpaid principal
and interest on each such note, divided by (ii) 2. In accordance with ASC 470, “Debt”, the
Company recorded a loss from extinguishment of debt of $2,693,896 which was the difference
between the estimated fair value of the Units on the date of exchange of $5,211,556 as
compared to the carrying value of the promissory notes of $2,517,660.
F-22
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (13) |
|
Promissory notes (continued) |
Each “Unit” in the Offering consists of: (i) one share of common stock, par value
$0.001 per share (the “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, expires 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. The unpaid principal and interest on the notes totaled $2,517,660, and this
sum was exchanged into a total of 1,258,830 Units which consisted of 1,258,830 shares of
Common Stock, 1,258,830 Class D Warrants and 1,258,830 Options.
The chairman of the board of directors of the Company exchanged promissory notes
totaling $1,790,504 and the brother of a member of the board of directors of the Company
exchanged promissory notes totaling $522,504 in the Offering.
On September 30, 2010, in conjunction with an offering of securities of the Company
under the Act, the Company issued 150,000 Units to certain “accredited investors,” as that
term is defined in the Securities and Exchange Commission’s (the “SEC”) Rule 501 under the
Act, for an aggregate total purchase price of $300,000. On October 1, 2010, November 19,
2010, and December 7, 2010 in conjunction with offerings of securities of the Company under
the Act, the Company issued 250,000, 142,500 and 382,500 Units to “accredited investors” for
$500,000, $285,000 and $765,000, respectively. Each Unit was sold to the new investors at a
purchase price of $2.00 per Unit. As a result of the offerings, the Company sold 925,000
Units which consisted of 925,000 shares of Common Stock, 925,000 Class D Warrants and
925,000 Options.
The brother of a member of the board of directors purchased 175,000 Units in the
offerings for a total purchase price of $350,000.
As of December 31, 2010, the Option holders exercised 101,163 Options for total gross
proceeds of $202,326 to the Company. In connection with the exercise of the Options, the
Company issued 101,163 shares of Common Stock and 101,163 Class D Warrants. There were
2,082,667 Options that remained unexercised at December 31, 2010 (See Subsequent Event —
Note 22).
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, 2010 and 2009.
F-23
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
A summary of the warrant activity as of December 31, 2010 and 2009, and the changes
during the years ended December 31, 2010 and 2009, is presented as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Class A |
|
|
Class B |
|
|
Class C |
|
|
Class D |
|
| |
|
Warrants |
|
|
Warrants |
|
|
Warrants |
|
|
Warrants |
|
Outstanding as of
December 31, 2008 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Issued |
|
|
1,106,627 |
|
|
|
1,106,627 |
|
|
|
1,500,000 |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cancelled |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2009 |
|
|
1,106,627 |
|
|
|
1,106,627 |
|
|
|
1,500,000 |
|
|
|
— |
|
Issued |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,284,993 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cancelled |
|
|
— |
|
|
|
— |
|
|
|
(1,500,000 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2010 |
|
|
1,106,627 |
|
|
|
1,106,627 |
|
|
|
— |
|
|
|
2,284,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Class A and Class B warrants expire five years from date of issuance and the Class
C and Class D warrants expire two years from date of issuance. The Class A and Class C
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.
| (17) |
|
Commitments and contingencies |
The Company leases office and warehouse space. Rent expense for the years ended
December 31, 2010 and 2009, was $397,615 and $533,464, respectively. Minimum future lease
payments under non-cancellable operating leases consist of the following:
| |
|
|
|
|
| Years ending December 31, |
|
Amount |
|
|
|
|
|
|
2011 |
|
$ |
339,985 |
|
2012 |
|
|
281,836 |
|
|
|
|
|
Total |
|
$ |
621,821 |
|
|
|
|
|
F-24
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (17) |
|
Commitments and contingencies (continued) |
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, 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.
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.
The Company sponsors a 401k plan that covers all employees who meet the eligibility
requirements. The Company matches 50% of employee contributions up to 6% of their
compensation. The Company contributed $69,693 and $66,403 to the plan for the years ended
December 31, 2010 and 2009, respectively.
| (19) |
|
Stock-based compensation |
During 2006, SANUWAVE, Inc. approved the 2006 Stock Incentive Plan and certain
Non-statutory Stock Option Agreements with key employees. The Non-statutory Stock Option
Agreements have terms substantially the same as the 2006 Stock Incentive Plan. 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 “Amended Plan”). The Amended Plan permits
grants of awards to selected employees and directors 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 Amended Plan is
currently administered by the board of directors of the Company. The Amended 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 Amended
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. The Amended Plan reserves 5,000,000 shares of common stock for grant.
On November 1, 2010, the Company granted 912,000 options to employees and directors at
an exercise price of $2.00 per share. Using the Black-Scholes option pricing model,
management has determined that the options granted in November 2010 had a weighted average
fair value per share of $1.92 resulting in total compensation of $1,748,858. Compensation
cost will be recognized over the requisite service period.
On January 29, 2010, the Company granted 107,500 options to employees and directors at
an exercise price of $4.05 per share. Using the Black-Scholes option pricing model,
management has determined that the options granted in January 2010 had a weighted
average fair value per share of $2.51 resulting in total compensation cost of $269,398.
Compensation cost will be recognized over the requisite service period.
F-25
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (19) |
|
Stock-based compensation (continued) |
Using the Black-Scholes option pricing model, management has determined that the
options and restricted stock granted during the years ended December 31, 2010 and 2009 have
a weighted average fair value per share of $1.98 in 2010 and $1.73 in 2009, resulting in a
total compensation cost to be recognized over the vesting period of $2,018,256 and
$2,464,655, respectively. For the years ended December 31, 2010 and 2009, the Company
recognized $3,037,634 and $1,078,128, respectively, as compensation cost and recorded a
related deferred tax benefit of $1,146,269 and $406,838, respectively.
The remaining $879,193 of compensation cost will be recognized over the next four years
as follows:
| |
|
|
|
|
| |
|
Compensation |
|
| Years ending December 31, |
|
Cost |
|
|
|
|
|
|
2011 |
|
$ |
577,089 |
|
2012 |
|
|
195,160 |
|
2013 |
|
|
101,396 |
|
2014 |
|
|
5,548 |
|
|
|
|
|
Total |
|
$ |
879,193 |
|
|
|
|
|
The assumptions used and the calculated fair value of options is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Expected life in years |
|
|
5.5 |
|
|
|
6.0 |
|
Risk free interest rate |
|
|
1.36 |
% |
|
|
2.41 |
% |
Weighted average volatility |
|
|
65.00 |
% |
|
|
65.00 |
% |
Expected dividend yield (1) |
|
|
— |
|
|
|
— |
|
| |
|
|
| (1) |
|
The Company has not paid dividends on its common stock and does not expect to pay dividends on
its common stock in the near future. |
F-26
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (19) |
|
Stock-based compensation (continued) |
A summary of option activity as of December 31, 2010 and 2009, and the changes during
the years ended December 31, 2010 and 2009, is presented as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
| |
|
Options |
|
|
Price |
|
Outstanding as of December 31, 2008 |
|
|
1,867,613 |
|
|
$ |
3.50 |
|
Granted |
|
|
360,977 |
|
|
$ |
4.19 |
|
Exercised |
|
|
— |
|
|
$ |
— |
|
Forfeited or expired |
|
|
(249,044 |
) |
|
$ |
2.92 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
1,979,546 |
|
|
$ |
3.70 |
|
Granted |
|
|
1,019,500 |
|
|
$ |
2.22 |
|
Exercised |
|
|
— |
|
|
$ |
— |
|
Forfeited or expired |
|
|
(6,250 |
) |
|
$ |
3.15 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010 |
|
|
2,992,796 |
|
|
$ |
3.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
2,108,803 |
|
|
$ |
2.57 |
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of the outstanding stock options at
December 31, 2010 was $3,809,211. The aggregate intrinsic value of
the exercisable outstanding stock options at December 31, 2010 was
$3,584,965.
The
weighted average remaining contractual term for outstanding and exercisable stock
options is 7.1 years as of December 31, 2010, and 6.4 years as of December 31, 2009.
A
summary of the Company’s nonvested options as of December 31, 2010, and
changes during the year ended December 31, 2010, is presented as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Grant Date |
|
| |
|
Options |
|
|
|
Fair Value |
|
Outstanding as of December 31, 2009 |
|
|
851,849 |
|
|
$ |
1.46 |
|
Granted |
|
|
1,019,500 |
|
|
$ |
1.98 |
|
Vested |
|
|
(981,106 |
) |
|
$ |
1.86 |
|
Forfeited or expired |
|
|
(6,250 |
) |
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010 |
|
|
883,993 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
F-27
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (19) |
|
Stock-based compensation (continued) |
A summary of the Company’s restricted stock as of December 31, 2010 and 2009, and
changes during the years ended December 31, 2010 and 2009, is presented as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
Restricted |
|
|
|
Grant Date |
|
| |
|
Stock |
|
|
|
Fair Value |
|
Outstanding as of December 31, 2008 |
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
403,030 |
|
|
$ |
2.92 |
|
Vested |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
403,030 |
|
|
$ |
2.92 |
|
Granted |
|
|
— |
|
|
$ |
— |
|
Vested |
|
|
— |
|
|
$ |
— |
|
Forfeited or expired |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010 |
|
|
403,030 |
|
|
$ |
2.92 |
|
|
|
|
|
|
|
|
|
| (20) |
|
Segment and geographic information |
Subsequent to discontinuing the Ossatron mobile service business and selling the
veterinary business line (Note 4), the Company has only one line of business. The Company’s
revenues are generated from sales in Europe.
| (21) |
|
Restatement of 2008 results |
In April 2008, the Company granted, as adjusted for the Merger, 1,043,990 options to
employees at an exercise price of $2.92 per share. Using the Black-Scholes option pricing
model, the options granted in April 2008 had a weighted average fair value per share of
$1.42, resulting in total compensation cost over the vesting period of the options of
$1,481,207.
The Company determined during the audit for the year ended December 31, 2010, that the
non-cash stock compensation expense was incorrectly recorded in the financial statements for
the year ended December 31, 2008. The 2008 non-cash stock compensation expense had been
calculated based on a four-year straight-line vesting schedule instead of taking into
account that many of the stock options issued in 2008, in accordance with their terms, were
50% vested at the date of grant. As such, the non-cash stock compensation expense recorded
in general and administrative expenses in the consolidated statement of operations and
comprehensive loss for the year ended December 31, 2008 was understated by $687,309.
This is a non-cash item which resulted in an understatement at December 31, 2008 of
additional paid-in capital of $687,309 and an understatement of retained deficit of
$687,309. There was no impact on the net cash used by operating activities of $7,009,402 as
reported in the consolidated statement of cash flows for the year ended December 31, 2008.
F-28
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (21) |
|
Restatement of 2008 results (continued) |
There was no impact on the consolidated financial statements for the year ended
December 31, 2009 other than to increase the beginning of the year balance of additional
paid-in capital by $687,309 and the beginning of the year balance of retained deficit by
$687,309.
The impact of the adjustment on the consolidated statement of operations and
comprehensive loss for the year ended December 31, 2008 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As Originally |
|
|
|
|
|
|
As |
|
| |
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,045,858 |
|
|
$ |
— |
|
|
$ |
1,045,858 |
|
Cost of revenues |
|
|
352,723 |
|
|
|
— |
|
|
|
352,723 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
693,135 |
|
|
|
— |
|
|
|
693,135 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
3,675,631 |
|
|
|
— |
|
|
|
3,675,631 |
|
General and administrative |
|
|
7,801,416 |
|
|
|
687,309 |
|
|
|
8,488,725 |
|
Depreciation |
|
|
276,724 |
|
|
|
— |
|
|
|
276,724 |
|
Amortization |
|
|
306,756 |
|
|
|
— |
|
|
|
306,756 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
12,060,527 |
|
|
|
687,309 |
|
|
|
12,747,836 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(11,367,392 |
) |
|
|
(687,309 |
) |
|
|
(12,054,701 |
) |
Total other income (expense) |
|
|
(359,371 |
) |
|
|
— |
|
|
|
(359,371 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations before income taxes |
|
|
(11,726,763 |
) |
|
|
(687,309 |
) |
|
|
(12,414,072 |
) |
Income tax benefit |
|
|
333,718 |
|
|
|
— |
|
|
|
333,718 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(11,393,045 |
) |
|
|
(687,309 |
) |
|
|
(12,080,354 |
) |
Income from discontinued operations |
|
|
1,984,127 |
|
|
|
— |
|
|
|
1,984,127 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(9,408,918 |
) |
|
|
(687,309 |
) |
|
|
(10,096,227 |
) |
Other comprehensive loss |
|
|
(270,655 |
) |
|
|
— |
|
|
|
(270,655 |
) |
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(9,679,573 |
) |
|
$ |
(687,309 |
) |
|
$ |
(10,366,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations — basic |
|
$ |
(1.03 |
) |
|
|
|
|
|
$ |
(1.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations — diluted |
|
$ |
(1.03 |
) |
|
|
|
|
|
$ |
(1.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations — basic |
|
$ |
0.18 |
|
|
|
|
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations — diluted |
|
$ |
0.18 |
|
|
|
|
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss — basic |
|
$ |
(0.85 |
) |
|
|
|
|
|
$ |
(0.92 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss — diluted |
|
$ |
(0.85 |
) |
|
|
|
|
|
$ |
(0.92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
|
|
11,009,657 |
|
|
|
|
|
|
|
11,009,657 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted |
|
|
11,009,657 |
|
|
|
|
|
|
|
11,009,657 |
|
|
|
|
|
|
|
|
|
|
|
|
F-29
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
| (21) |
|
Restatement of 2008 results (continued) |
The impact of the adjustment on the consolidated balance sheet at December 31, 2008 is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As Originally |
|
|
|
|
|
|
As |
|
| |
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,499,017 |
|
|
$ |
— |
|
|
$ |
6,499,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
9,096,858 |
|
|
$ |
— |
|
|
$ |
9,096,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
2,833 |
|
|
|
— |
|
|
|
2,833 |
|
Common stock |
|
|
89 |
|
|
|
— |
|
|
|
89 |
|
Additional paid-in capital |
|
|
30,103,124 |
|
|
|
687,309 |
|
|
|
30,790,433 |
|
Accumulated other comprehensive loss |
|
|
(196,646 |
) |
|
|
— |
|
|
|
(196,646 |
) |
Retained deficit |
|
|
(32,507,241 |
) |
|
|
(687,309 |
) |
|
|
(33,194,550 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (deficit) |
|
|
(2,597,841 |
) |
|
|
— |
|
|
|
(2,597,841 |
) |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficit) |
|
$ |
6,499,017 |
|
|
$ |
— |
|
|
$ |
6,499,017 |
|
|
|
|
|
|
|
|
|
|
|
The impact of the adjustment on the consolidated balance sheet at December 31, 2009 is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As Originally |
|
|
|
|
|
|
As |
|
| |
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,867,085 |
|
|
$ |
— |
|
|
$ |
5,867,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
11,751,399 |
|
|
$ |
— |
|
|
$ |
11,751,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock |
|
|
12,510 |
|
|
|
— |
|
|
|
12,510 |
|
Additional paid-in capital |
|
|
32,741,593 |
|
|
|
687,309 |
|
|
|
33,428,902 |
|
Accumulated other comprehensive income |
|
|
21,864 |
|
|
|
— |
|
|
|
21,864 |
|
Retained deficit |
|
|
(38,660,281 |
) |
|
|
(687,309 |
) |
|
|
(39,347,590 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (deficit) |
|
|
(5,884,314 |
) |
|
|
— |
|
|
|
(5,884,314 |
) |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficit) |
|
$ |
5,867,085 |
|
|
$ |
— |
|
|
$ |
5,867,085 |
|
|
|
|
|
|
|
|
|
|
|
F-30
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009
The Company has evaluated subsequent events through the date of issuance of the
consolidated financial statements.
Between January 1 and January 31, 2011, the Option holders (see Note 14) exercised
1,950,167 Options for total gross proceeds of $3,900,334 to the Company. In connection with
the exercise of Options, the Company issued 1,950,167 shares of Common Stock and 1,950,167
Class D Warrants. The 132,500 Options that remained unexercised at January 31, 2011 expired
by their terms.
The chairman of the board of directors of the Company exercised 545,252 Options and the
brother of a member of the board of directors of the Company exercised 686,252 Options in
connection with this transaction.
F-31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned hereunto duly
authorized.
| |
|
|
|
|
|
|
|
|
| |
|
SANUWAVE HEALTH, INC. |
|
|
|
|
|
|
|
|
|
|
|
| |
|
By: |
|
/s/ Christopher M. Cashman |
|
|
| |
|
|
|
|
|
|
|
|
|
|
Name:
|
|
Christopher M. Cashman |
|
|
|
|
|
|
Title:
|
|
President and CEO |
|
|
Dated: March 28, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated:
| |
|
|
|
|
|
|
|
|
| Signatures |
|
Capacity |
|
Date |
|
|
|
|
|
|
|
|
|
| By: |
|
/s/ Christopher M. Cashman |
|
Chief Executive Officer and President; Director |
|
March 28, 2011 |
| |
|
|
|
|
|
|
|
|
Name:
|
|
Christopher M. Cashman
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
| By: |
|
/s/ Barry J. Jenkins |
|
Chief Financial Officer |
|
March 28, 2011 |
| |
|
|
|
|
|
|
|
|
Name:
|
|
Barry J. Jenkins
|
|
(Principal Financial and
Accounting Officer) |
|
|
|
|
|
|
|
|
|
|
|
| By: |
|
/s/ Kevin A. Richardson, II |
|
Director |
|
March 28, 2011 |
| |
|
|
|
|
|
|
|
|
Name:
|
|
Kevin A. Richardson, II |
|
|
|
|
|
|
|
|
|
|
|
|
|
| By: |
|
/s/ John F. Nemelka |
|
Director |
|
March 28, 2011 |
| |
|
|
|
|
|
|
|
|
Name:
|
|
John F. Nemelka |
|
|
|
|
|
|
|
|
|
|
|
|
|
| By: |
|
/s/ Thomas H. Robinson |
|
Director |
|
March 28, 2011 |
| |
|
|
|
|
|
|
|
|
Name:
|
|
Thomas H. Robinson |
|
|
|
|
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit No. |
|
Description |
| |
|
|
|
|
| |
2.1 |
|
|
Agreement and Plan of Merger, dated as of September 25, 2009, by and between Rub Music
Enterprises, Inc., RME Delaware Merger Sub, Inc. and SANUWAVE, Inc. (Incorporated by reference
to Form 8-K filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
3.1 |
|
|
Articles of Incorporation (Incorporated by reference to the Form 10-SB filed with the SEC on
December 18, 2007). |
| |
|
|
|
|
| |
3.2 |
|
|
Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to
Appendix A to the Definitive Schedule 14C filed with the SEC on October 16, 2009). |
| |
|
|
|
|
| |
3.3 |
|
|
Bylaws (Incorporated by reference to the Form 10-SB filed with the SEC on December 18, 2007). |
| |
|
|
|
|
| |
4.1 |
|
|
Form of Class A Warrant Agreement (Incorporated by reference to Form 8-K filed with the SEC
on September 30, 2009). |
| |
|
|
|
|
| |
4.2 |
|
|
Form of Class B Warrant Agreement (Incorporated by reference to Form 8-K filed with the SEC
on September 30, 2009). |
| |
|
|
|
|
| |
4.3 |
|
|
Form of Amended and Restated Class C Warrant Agreement (Incorporated by reference to Form 8-K
filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
4.4 |
|
|
Form of Amended Senior Note issued by SANUWAVE, Inc. to Prides Capital Fund I, L.P. and
NightWatch Capital Partners II, L.P. (Incorporated by reference to Form 8-K filed with the SEC
on September 30, 2009). |
| |
|
|
|
|
| |
4.5 |
|
|
Form of Promissory Note, dated August 1, 2005, issued by SANUWAVE, Inc. to HealthTronics,
Inc. (Incorporated by reference to Form 8-K filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
4.6 |
|
|
Promissory Note, dated March 1, 2010, issued by SANUWAVE Health, Inc. to David N. Nemelka.
(Incorporated by reference to Form 8-K filed with the SEC on March 5, 2010). |
| |
|
|
|
|
| |
4.7 |
|
|
Promissory Note, dated March 1, 2010, issued by SANUWAVE Health, Inc. to Kevin and Margaret
Richardson. (Incorporated by reference to Form 8-K filed with the SEC on March 5, 2010). |
| |
|
|
|
|
| |
4.8 |
|
|
Promissory Note, dated March 31, 2010, issued by SANUWAVE Health, Inc. to David N. Nemelka.
(Incorporated by reference to Form 8-K filed with the SEC on April 1, 2010). |
| |
|
|
|
|
| |
4.9 |
|
|
Promissory Note, dated March 31, 2010, issued by SANUWAVE Health, Inc. to Kevin and Margaret
Richardson. (Incorporated by reference to Form 8-K filed with the SEC on April 1, 2010). |
| |
|
|
|
|
| |
4.10 |
|
|
Promissory Note, dated May 12, 2010, issued by SANUWAVE Health, Inc. to Kevin and Margaret
Richardson. (Incorporated by reference to Form 8-K filed with the SEC on May 17, 2010). |
| |
|
|
|
|
| |
4.11 |
|
|
Promissory Note, dated June 4, 2010, issued by SANUWAVE Health, Inc. to Durk V. Irwin.
(Incorporated by reference to Form 8-K filed with the SEC on June 9, 2010). |
| |
|
|
|
|
| |
4.12 |
|
|
Promissory Note, dated June 4, 2010, issued by SANUWAVE Health, Inc. to Todd R. Pedersen.
(Incorporated by reference to Form 8-K filed with the SEC on June 9, 2010). |
| |
|
|
|
|
| |
4.13 |
|
|
Promissory Note, dated July 13, 2010, issued by SANUWAVE Health, Inc. to Kevin and Margaret
Richardson. (Incorporated by reference to Form 8-K filed with the SEC on July 16, 2010). |
| |
|
|
|
|
| Exhibit No. |
|
Description |
| |
|
|
|
|
| |
4.14 |
|
|
Promissory Note, dated August 12, 2010, issued by SANUWAVE Health, Inc. to Kevin and Margaret
Richardson. (Incorporated by reference to Form 8-K filed with the SEC on August 17, 2010). |
| |
|
|
|
|
| |
4.15 |
|
|
Promissory Note, dated August 30, 2010, issued by SANUWAVE Health, Inc. to Kevin and Margaret
Richardson. (Incorporated by reference to Form 8-K filed with the SEC on September 1, 2010). |
| |
|
|
|
|
| |
10.1 |
|
|
Employment Agreement, dated December 19, 2005, by and between SANUWAVE, Inc. and Christopher
M. Cashman. (Management compensation plan or arrangement) (Incorporated by reference to Form
8-K filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
10.2 |
|
|
First Amendment to Employment Agreement, dated September 15, 2009, by and between SANUWAVE,
Inc. and Christopher M. Cashman. (Management compensation plan or arrangement) (Incorporated
by reference to Form 8-K filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
10.3 |
|
|
Amendment to Nonstatutory Stock Option Award and Nonstatutory Supplemental Agreements, dated
September 15, 2009, by and between SANUWAVE, Inc. and Christopher M. Cashman. (Management
compensation plan or arrangement) (Incorporated by reference to Form 8-K filed with the SEC on
September 30, 2009). |
| |
|
|
|
|
| |
10.4 |
|
|
Employment Agreement, dated April 10, 2006, by and between SANUWAVE, Inc. and Barry J.
Jenkins. (Management compensation plan or arrangement) (Incorporated by reference to Form 8-K
filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
10.5 |
|
|
Amendment to Nonstatutory Stock Option Award and Nonstatutory Supplemental Agreements, dated
September 15, 2009, by and between SANUWAVE, Inc. and Barry J. Jenkins. (Management
compensation plan or arrangement) (Incorporated by reference to Form 8-K filed with the SEC on
September 30, 2009). |
| |
|
|
|
|
| |
10.6 |
|
|
Management Stockholders Agreement, dated as of December 19, 2005, among SANUWAVE, Inc.,
Prides Capital Fund I, L.P. and certain shareholders of SANUWAVE, Inc. (Incorporated by
reference to Form 8-K filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
10.7 |
|
|
Amendment to Management Stockholders Agreement, dated as of October 24, 2006, among SANUWAVE,
Inc., Prides Capital Fund I, L.P. and certain shareholders of SANUWAVE, Inc. (Incorporated by
reference to Form 8-K filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
10.8 |
|
|
Second Amendment to Management Stockholders Agreement, dated as of September 25, 2009, among
SANUWAVE, Inc., Prides Capital Fund I, L.P. and certain shareholders of SANUWAVE, Inc.
(Incorporated by reference to Form 8-K filed with the SEC on September 30, 2009). |
| |
|
|
|
|
| |
10.9 |
|
|
Form of Promissory Note Amendment. (Incorporated by reference to Form 8-K filed with the SEC
on October 14, 2010). |
| |
|
|
|
|
| |
10.10 |
|
|
Form of Subscription Agreement. (Incorporated by reference to Form 8-K filed with the SEC
on October 14, 2010). |
| |
|
|
|
|
| |
10.11 |
|
|
Amended and Restated 2006 Stock Option Incentive Plan of SANUWAVE Health, Inc.
(Incorporated by reference to Form 8-K filed with the SEC on November 3, 2010). |
| |
|
|
|
|
| |
21.1 |
* |
|
List of subsidiaries. |
| |
|
|
|
|
| |
31.1 |
* |
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer. |
| |
|
|
|
|
| |
31.2 |
* |
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer. |
| |
|
|
|
|
| |
32.1 |
* |
|
Section 1350 Certification of the Chief Executive Officer. |
| |
|
|
|
|
| |
32.2 |
* |
|
Section 1350 Certification of the Chief Financial Officer. |