UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
☐
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)
 
Nevada
20-1176000
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3360 Martin Farm Road, Suite 100
Suwanee, GA
30024
(Address of principal executive offices)
(Zip Code)
 
(770) 419-7525
(Registrant's telephone number, including area code)
 
 
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.    ☒  Yes    ☐  No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).       ☒  Yes  ☐  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer   ☐
Accelerated filer   ☐
Non-accelerated filer   ☒
Smaller reporting company     ☒
 
Emerging growth company     ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  Yes ☒  No
 
Securities registered pursuant to Section 12(b) of the Exchange Act: None
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
  Common Stock, par value $0.001
  SNWV
OTCQB
 
As of May 16, 2019, there were issued and outstanding 177,063,147 shares of the registrant’s common stock, $0.001 par value.

 
 
  SANUWAVE Health, Inc.
 
Table of Contents
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Special Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. and its subsidiaries (“SANUWAVE” or the “Company”) contains forward-looking statements. All statements in this Quarterly Report on Form 10-Q, 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, and projected costs; market acceptance of and demand for dermaPACE and our product candidates; management’s plans and objectives for future operations; industry trends; regulatory actions that could adversely affect the price of or demand for our approved products; our intellectual property portfolio; our business, marketing and manufacturing capacity and strategy; estimates regarding our capital requirements, the anticipated timing of the need for additional funds, and our expectations regarding future capital-raising transactions, including through investments by strategic partners fo rmarket opportunities, which may include strategic partnerships or licensing agreements, or raising capital thorugh the conversion of outstanding warrants or issuances of securities; product liability claims; economic conditions that could adversely affect the level of demand for our products; timing of clinical studies and eventual FDA approval of our products; financial markets; the competitive environment; and our plans to remediate our material weaknesses in our disclosure controls and procedures and our internal control over financial reporting. 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 the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed on April 1, 2019 and in the Company’s Quarterly Reports on Form 10-Q. Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC 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. The following information should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed on April 1, 2019.
 
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” are to the consolidated business of the Company.
 
 
 
2
 
 
PART I — FINANCIAL INFORMATION
 
Item 1. FINANC I AL STATEMENTS
 
 
S ANUWAVE HEALTH, INC. AND SUBSIDIARIES
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 March 31,
 
 
 December 31,
 
 
 
2019
 
 
2018
 
ASSETS
 
(Unaudited)
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
  $ 98,946  
  $ 364,549  
Accounts receivable, net of allowance for doubtful accounts
       
       
of $24,400 in 2019 and $33,045 in 2018
    139,840  
    234,774  
Due from related parties
    2,699  
    1,228  
Inventory
    328,384  
    357,820  
Prepaid expenses and other current assets
    196,561  
    125,111  
TOTAL CURRENT ASSETS
    766,430  
    1,083,482  
 
       
       
PROPERTY AND EQUIPMENT, net
    91,452  
    77,755  
 
       
       
RIGHT OF USE ASSETS
    437,363  
    -  
 
       
       
OTHER ASSETS
    23,504  
    16,491  
TOTAL ASSETS
  $ 1,318,749  
  $ 1,177,728  
 
       
       
LIABILITIES
       
       
CURRENT LIABILITIES
       
       
Accounts payable
  $ 1,780,108  
  $ 1,592,643  
Accrued expenses
    753,394  
    689,280  
Accrued employee compensation
    577,220  
    340,413  
Contract liabilities
    129,264  
    131,797  
Lease liability - right of use 
    164,521
 
    -
 
Advances from related parties
    26,200  
    -  
Line of credit, related parties
    895,967  
    883,224  
Accrued interest, related parties
    1,391,469
 
    1,171,782  
Short term notes payable
    2,611,731
 
    1,883,163  
Convertible promissory notes, net
    2,756,427  
    2,652,377  
Notes payable, related parties, net
    5,372,743  
    5,372,743  
Warrant liability
    195,310
 
    1,769,669  
TOTAL CURRENT LIABILITIES
    16,654,354
 
    16,487,091  
 
       
       
NON-CURRENT LIABILITIES
       
       
Contract liabilities
    42,612  
    46,736  
Lease liability - right of use
    315,730
 
    -  
TOTAL NON-CURRENT LIABILITIES
    358,342
 
    46,736  
TOTAL LIABILITIES
    17,012,696  
    16,533,827  
 
       
       
COMMITMENTS AND CONTINGENCIES
       
       
 
       
       
STOCKHOLDERS' DEFICIT
       
       
PREFERRED STOCK, par value $0.001, 5,000,000
       
       
shares authorized; no shares issued and outstanding
    -  
    -  
 
       
       
PREFERRED STOCK, SERIES A CONVERTIBLE, par value $0.001,
       
       
6,175 designated; 6,175 shares issued and 0 shares outstanding
       
       
in 2018 and 2017
    -  
    -  
 
       
       
PREFERRED STOCK, SERIES B CONVERTIBLE, par value $0.001,
       
       
293 designated; 293 shares issued and 0 shares outstanding
       
       
in 2018 and 2017
    -  
    -  
 
       
       
COMMON STOCK, par value $0.001, 350,000,000 shares authorized;
       
       
160,322,580 and 155,665,138 issued and outstanding in 2019 and
       
       
2018, respectively
    160,323  
    155,665  
 
       
       
ADDITIONAL PAID-IN CAPITAL
    101,731,430  
    101,153,882  
 
       
       
ACCUMULATED DEFICIT
    (117,520,434 )
    (116,602,778 )
 
       
       
ACCUMULATED OTHER COMPREHENSIVE LOSS
    (65,266 )
    (62,868 )
TOTAL STOCKHOLDERS' DEFICIT
    (15,659,431 )
    (15,356,099 )
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 1,318,749  
  $ 1,177,728  
 
       
       
 
       
       
 
 The accompanying notes to condensed consolidated financial
 
 
 statements are an integral part of these statements.
 
 
 
3
 
 
 
S A NUWAVE HEALTH, INC. AND SUBSIDIARIES
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
 
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Three Months Ended
 
 
 Three Months Ended
 
 
 
 March 31,
 
 
 March 31,
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
REVENUES
 
 
 
 
 
 
Product
  $ 64,565  
  $ 238,568  
License fees
    106,250  
    84,116  
Other revenue
    7,148  
    21,588  
TOTAL REVENUES
    177,963  
    344,272  
 
       
       
COST OF REVENUES
       
       
Product
    65,112  
    125,594  
Other
    28,741  
    39,872  
TOTAL COST OF REVENUES
    93,853  
    165,466  
 
       
       
GROSS MARGIN
    84,110  
    178,806  
 
       
       
OPERATING EXPENSES
       
       
Research and development
    261,002  
    238,477  
Selling and marketing
    158,083
 
    51,959  
General and administrative
    1,517,101
 
    1,004,614  
Depreciation
    8,357  
    5,016  
TOTAL OPERATING EXPENSES
    1,944,542  
    1,300,066  
 
       
       
OPERATING LOSS
    (1,860,432 )
    (1,121,260 )
 
       
       
OTHER INCOME (EXPENSE)
       
       
Gain (loss) on warrant valuation adjustment
    32,359
 
    (2,973,682 )
Interest expense
    (148,261 )
    (1,555,756 )
Interest expense, related party
    (219,687 )
    (189,211 )
Loss on foreign currency exchange
    (1,296 )
    (16,746 )
TOTAL OTHER INCOME (EXPENSE), NET
    (336,885 )
    (4,735,395 )
 
       
       
NET LOSS
    (2,197,317 )
    (5,856,655 )
 
       
       
OTHER COMPREHENSIVE INCOME (LOSS)
       
       
Foreign currency translation adjustments
    (2,398 )
    935  
TOTAL COMPREHENSIVE LOSS
  $ (2,199,715 )
  $ (5,855,720 )
 
       
       
LOSS PER SHARE:
       
       
Net loss - basic and diluted
  $ (0.01 )
  $ (0.04 )
 
       
       
Weighted average shares outstanding - basic and diluted
    157,112,875  
    139,754,044  
 
       
       
 
 The accompanying notes to condensed consolidated financial
 
 
 statements are an integral part of these statements.
 
 
 
4
 
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
 
 
C O NDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
 
 
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
 
 
 
 
 
Number of
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
 
 
 
Shares
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
Issued and
 
 
 
 
 
Issued and
 
 
 
 
 
Additional Paid-
 
 
Accumulated
 
 
Comprehensive
 
 
 
 
 
 
Outstanding
 
 
Par Value
 
 
Outstanding
 
 
Par Value
 
 
in Capital
 
 
Deficit
 
 
Loss
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2017
    -  
  $ -  
    139,300,122  
  $ 139,300  
  $ 94,995,040  
  $ (104,971,384 )
  $ (43,783 )
  $ (9,880,827 )
Net loss
    -  
    -  
    -  
    -  
    -  
    (5,856,655 )
    -  
    (5,856,655 )
Cashless warrant exercises
    -  
    -  
    1,023,130  
    1,023  
    117,815  
    -  
    -  
    118,838  
Proceeds from warrant exercise
    -  
    -  
    175,666  
    176  
    13,352  
    -  
    -  
    13,528  
Shares issued for services
    -  
    -  
    551,632  
    552  
    78,448  
    -  
    -  
    79,000  
Warrants issued with convertible promissory notes
    -  
    -  
    -  
    -  
    808,458  
    -  
    -  
    808,458  
Beneficial conversion feature on convertible promissory notes
    -  
    -  
    -  
    -  
    709,827  
    -  
    -  
    709,827  
Warrants issued with promissory note
    -  
    -  
    -  
    -  
    36,104  
    -  
    -  
    36,104  
Beneficial conversion feature on promissory notes
    -  
    -  
    -  
    -  
    35,396  
    -  
    -  
    35,396  
Foreign currency translation adjustment
    -  
    -  
    -  
    -  
    -  
    -  
    935  
    935  
Balances as of March 31, 2018
    -  
  $ -  
    141,050,550  
  $ 141,051  
  $ 96,794,440  
  $ (110,828,039 )
  $ (42,848 )
  $ (13,935,396 )
 
       
       
       
       
       
       
       
       
 
       
       
       
       
       
       
       
       
Balances as of December 31, 2018
    -  
    -  
    155,665,138  
    155,665  
    101,153,882  
    (116,602,778 )
    (62,868 )
    (15,356,099 )
Net loss
    -  
    -  
    -  
    -  
    -  
    (2,197,317 )
    -  
    (2,197,317 )
Cashless warrant exercises
    -  
    -  
    704,108  
    704  
    (704 )
    -  
    -  
    -  
Proceeds from warrant exercise
    -  
    -  
    620,000  
    620  
    52,580  
    -  
    -  
    53,200  
Conversion of short term notes payable to equity
    -  
    -  
    3,333,334  
    3,334  
    263,333  
    -  
    -  
    266,667  
Reclassification of warrant liability to equity
    -  
    -  
    -  
    -  
    262,339  
    1,279,661  
    -  
    1,542,000  
Foreign currency translation adjustment
    -  
    -  
    -  
    -  
    -  
    -  
    (2,398 )
    (2,398 )
 
       
       
       
       
       
       
       
       
Balances as of March 31, 2019
    -  
  $ -  
    160,322,580  
  $ 160,323  
  $ 101,731,430  
  $ (117,520,434 )
  $ (65,266 )
  $ (15,693,947 )
 
       
       
       
       
       
       
       
       
 
 The accompanying notes to condensed consolidated financial
 
 
 statements are an integral part of these statements.
 
 
 
5
 
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
 
 
C ONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 Three Months Ended
 
 
 Three Months Ended
 
 
 
 March 31,
 
 
 March 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net loss
  $ (2,17,317 )
  $ (5,856,655 )
  Adjustments to reconcile loss from operations
       
       
    to net cash used by operating activities
       
       
Depreciation
    8,357  
    5,016  
Change in allowance for doubtful accounts
    (8,645 )
    (19,613 )
Loss (gain) on warrant valuation adjustment
    (32,359 )
    2,973,682  
Amortization of operating lease
    38,666  
    -  
Amortization of debt issuance costs
    -  
    1,473,872  
Amortization of debt discount
    -  
    37,984  
Stock issued for consulting services
    -  
    79,000  
Accrued interest
    147,028
 
    -  
Interest payable, related parties
    219,687
 
    80,613  
Changes in operating assets and liabilities
       
       
     Accounts receivable - trade
    103,579  
    20,449  
     Inventory
    29,436  
    (32,734 )
     Prepaid expenses
    (71,450 )
    (110,672 )
     Contract assets
    -  
    (55,700 )
     Due from related parties
    (1,471 )
    -  
     Other assets
    (7,013 )
    (3,336 )
     Accounts payable
    187,465  
    (553,763 )
     Accrued expenses
    64,114  
    (64,744 )
     Accrued employee compensation
    236,807  
    68,822  
     Operating leases
    4,222  
    -  
     Contract liabilties
    (6,657 )
    109,214  
NET CASH USED BY OPERATING ACTIVITIES
    (1,285,551 )
    (1,848,565 )
 
       
       
CASH FLOWS FROM INVESTING ACTIVITIES
       
       
Purchases of property and equipment
    (22,054 )
    (7,720 )
NET CASH USED BY INVESTING ACTIVITIES
    (22,054 )
    (7,720 )
 
       
       
CASH FLOWS FROM FINANCING ACTIVITIES
       
       
Proceeds from short term note
    965,000  
    -  
Proceeds from warrant exercise
    53,200  
    13,528  
Advances from related parties
    26,200  
    12,000  
Proceeds from convertible promissory notes, net
    -  
    1,159,785  
Proceeds from note payable, product
    -  
    96,708  
Payments on note payable, product
    -  
    (2,650 )
NET CASH PROVIDED BY FINANCING ACTIVITIES
    1,044,400  
    1,279,371  
 
       
       
EFFECT OF EXCHANGE RATES ON CASH
    (2,398 )
    935  
 
       
       
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (265,603 )
    (575,979 )
 
       
       
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    364,549  
    730,184  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 98,946  
  $ 154,205  
 
       
       
 
       
       
NON-CASH INVESTING AND FINANCING ACTIVITIES
       
       
 
       
       
Conversion of short term notes payable
  $ 266,667  
  $ -  
 
       
       
 
       
       
Reclassification of warrant liability to equity
  $ 262,339  
  $ -  
 
       
       
 
       
       
Advances payable converted to convertible promissory notes
  $ -  
  $ 310,000  
 
       
       
 
       
       
Accounts payable converted to convertible promissory notes
  $ -  
  $ 120,000  
 
       
       
 
       
       
Beneficial conversion feature on convertible debt
  $ -  
  $ 745,223  
 
       
       
 
       
       
Warrants issued with debt
  $ -  
  $ 844,562  
 
       
       
 
       
       
 
 The accompanying notes to condensed consolidated financial
 
 
 statements are an integral part of these statements.
 
 
 
6
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
N OTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
1.  Nature of the Business
 
SANUWAVE Health, Inc. and subsidiaries (the “Company”) is a shock wave technology company using a patented system of noninvasive, high-energy, acoustic shock waves for regenerative medicine and other applications. The Company’s initial focus is regenerative medicine – utilizing noninvasive, acoustic shock waves to produce a biological response resulting in the body healing itself through the repair and regeneration of tissue, musculoskeletal and vascular structures. The Company’s lead regenerative product in the United States is the dermaPACE ® device, used for treating diabetic foot ulcers, which was subject to two double-blinded, randomized Phase III clinical studies. On December 28, 2017, the U.S. Food and Drug Administration (the “FDA”) notified the Company to permit the marketing of the dermaPACE System for the treatment of diabetic foot ulcers in the United States.
 
The Company’s portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. The Company intends to apply its Pulsed Acoustic Cellular Expression (PACE ® ) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. In 2019, the Company has been marketing the dermaPACE System for sale in the United States and the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia and Asia/Pacific. The Company generates revenues streams from product sales, licensing transactions and other activities.
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X.  Accordingly, these condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. The financial information as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2019.
 
The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s Form 10-K filed with the Securities and Exchange Commission on April 1, 2019 ("the 2018 Annual Report").
 
2. Going Concern
 
The Company does not currently generate significant recurring revenue and will require additional capital during 2019. As of March 31, 2019, the Company had an accumulated deficit of $117,520,434 and cash and cash equivalents of $98,946 . For the three months ended March 31, 2019 and 2018, the net cash used by operating activities was $1,285,551 and $1,848,565, respectively. The Company incurred a net loss of $2,197,317 for the three months ended March 31, 2019. The operating losses and the events of default on the Company’s short term notes payable (see Note 7), the Company’s convertible promissory notes and the notes payable, related parties (see Note 8) indicate substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the filing of this report.
 
 
 
7
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
2. Going Concern (continued)
 
The continuation of the Company’s business is dependent upon raising additional capital during the final three quarters of  2019 to fund operations. Management’s plans are to obtain additional capital through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, the issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing shareholders. Although no assurances can be given, management of the Company believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for the Company to continue as a going concern. If these efforts are unsuccessful, the Company may be forced to seek relief through a filing under the U.S. Bankruptcy Code. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
3 .            
Summary of Significant Accounting Policies
 
The significant accounting policies followed by the Company are summarized below and should be read in conjunction with the 2018 Annual Report:
 
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 U.S. GAAP. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These 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, estimate of the net realizable value of inventory, estimated reserves for inventory, valuation of derivatives, the determination of the valuation allowances for deferred taxes, estimated fair value of stock-based compensation, and estimated fair value of warrants.
 
Reclassifications – Certain accounts in the prior period consolidated financial statements have been reclassified for comparison purposes to conform to the presentation of the current period consolidated financial statements. These reclassifications had no effect on the previously reported net loss.
 
Inventory - Inventory consists of finished medical equipment and parts and is stated at the lower of cost, which is valued using the first in, first out (“FIFO”) method, or net 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.  As of March 31, 2019, inventory consists of goods of $242,032 and parts of $195,814, net of reserve of $109,462 for total inventory of $328,384.
 
 
 
8
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
3 .            
Summary of Significant Accounting Policies (continued)
 
Recently Issued or Adopted Accounting Standards
 
                In February 2016, the Financial Accounting Standards Board (“ FASB ”) issued Accounting Standards Update (“ ASU ”) 2016-02, Leases (Topic 842). Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as “ASC 842”. The Company, using the modified retrospective approach with a cumulative-effect adjustment, recognized a right to use ("ROU") asset at the beginning of the period of adoption (January 1, 2019). Therefore, the Company recognized and measured operating leases on the condensed consolidated balance sheet without revising comparative period information or disclosure. The Company elected the package of practical expedients permitted under the transition guidance within the standard, which eliminates the reassessment of past leases, classification and initial direct costs and treats short term leases of less than a year outside of a ROU asset. The Company has no financing leases. The adoption did not materially impact the Company’s Condensed Consolidated Statements of Operations or Cash Flows. Refer to Note 11 , Commitments and Contingencies, for additional disclosures required by ASC 842. The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date (except we used the practical expedients and recorded the outstanding operating lease at January 1, 2019) based on the present value of lease payments over the lease term. As the Company’s lease did not provide an implicit interest rate, the Company used the equivalent borrowing rate for a secured financing with the term of that equal to the remaining life of the lease at inception. The lease terms used to calculate the ROU asset and related lease liability did not include options to extend or termination of the lease; there are none and there is no reasonable certainty that the Company would extend the lease at expiration. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense; there were no finance leases at this time which would be recognized as depreciation expense and interest expense. The Company has lease agreements which require payments for lease and non-lease components and has elected to account for these as a separate lease components. Non-leasing components are not included in the ROU asset.
 
In May 2017, the FASB issued ASU No. 2017-09,  Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting , which clarifies what constitutes a modification of a share-based payment award.  The ASU is intended to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award.  ASU 2017-09 is effective for public entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years.  The adoption of ASU 2017-09 did have a material impact on the Company's financial condition or results of operations.
 
 
9
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
3 .            
Summary of Significant Accounting Policies (continued)
 
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ASU addresses the complexity and reporting burden associated with the accounting for freestanding and embedded instruments with down round features as liabilities subject to fair value measurement. Part II of this ASU addresses the difficulty of navigating Topic 480. Part I of this ASU will be effective for fiscal years beginning after December 15, 2018. Early adoption is permitted for an entity in an interim or annual period. The Company has elected to apply ASU 2017-11 using a modified-retrospective approach by means of a cumulative-effect adjustment to its financial statements as of the beginning of the first fiscal year for which the account standard applies (or January 1, 2019), as allowed under ASU 2017-11. Since the adoption of ASU 2017-11 would have classified the warrants effected as equity at inception, the cumulative-effect adjustment should (i) record the issuance date value of the warrants as if they had been equity classified at the issuance date, (ii) reverse the effects of changes in the fair value of the warrants that had been recorded in the statement of comprehensive loss of each period, and (iii) eliminate the derivative liabilities form the balance sheet. The Company calculated (i) at $262,339 and recorded an increase to additional paid-in capital, (ii) at $1,279,661 and recorded an increase to retained earnings and (iii) at $1,542,000 and decreased the warrant liability.
 
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting . This ASU simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. As a result, share-based payments issued to nonemployees related to the acquisition of goods and services will be accounted for similarly to the accounting for share-based payments to employees, with certain exceptions. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal years. Early adoption is permitted if financial statements have not yet been issued. The adoption of ASU 2018-07 had no impact on the Company’s financial statements.
 
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (“ASU 2018-09”). These amendments provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815- 10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.
 
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its impact on its consolidated financial statements.
 
 
10
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
4.            
Accrued expenses
 
Accrued expenses consist of the following:
 
 
 
 March 31,
 
 
 December 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Accrued board of directors' fees
  $ 250,000  
  $ 200,000  
Accrued outside services
    148,576  
    115,118  
Accrued executive severance
    140,500  
    136,000  
Accrued related party advances
    102,370  
    101,137  
Accrued travel
    58,993  
    58,993  
Deferred rent
  -
    44,623  
Accrued legal fees
    38,098  
    -  
Accrued clinical study expenses
    13,650  
    13,650  
Accrued computer equipment
    -  
    8,752  
Accrued other
    1,207  
    11,007  
 
  $ 753,394
  $ 689,280  
 
5.            
Contract liabilities
 
As of March 31, 2019, the Company has contract assets and liabilities from contracts with customers (see Note 12).
 
Contract liabilities consist of the following:
 
 
 
 March 31,
 
 
 December 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Deposit on product
  $ 82,950  
  $ 92,950  
Service agreement
    53,787  
    57,365  
Other
    35,139  
    28,218  
     Total Contract liabilities
    171,876  
    178,533  
Non-Current
    (42,612 )
    (46,736 )
     Total Current
  $ 129,264  
  $ 131,797  
 
The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the satisfaction of performance obligations, the Company records a contract liability (deferred revenue) until the performance obligations are satisfied. Of the aggregate $171,876 of contract liability balances as of March 31, 2019, the Company expects to satisfy its remaining performance obligations associated with $129,264 and $42,612 of contract liability balances within the next twelve months and following twelve months, respectively. Of the aggregate $178,533 of contract liability balances as of December 31, 2018, the Company expects to satisfy its remaining performance obligations associated with $131,797 and $46,736 of contract liability balances within the next twelve months and following twelve months, respectively.
 
 
11
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
6.            
Advances from related parties
 
During the three months ended March 31, 2019, the Company has received $26,200 for warrant exercises. Due to the timing of receipt of cash and issuance of the Company’s common stock the funds have been recorded as advances from related parties and will be properly recorded as equity when the common stock is issued.
 
7.            
Short term notes payable
 
During the three months ended March 31, 2019, the Company entered into short term notes payable in the total principal amount of $965,000 with an interest rate of 5% per annum. The total principal and accrued interest of short term notes payable was $2,611,731 as of March 31, 2019 and are due and payable six months from the date of issuance of the respective notes.
 
On December 26, 2018, the Company defaulted on the short term notes payable issued on June 26, 2018 and began accruing interest at the default interest rate of 10%. On January 2, 2019, the Company defaulted on the short term notes payable issued on July 2, 2018 and began accruing interest at the default interest rate of 10%. On January 30, 2019, the Company defaulted on the short term notes payable issued on July 30, 2018 and began accruing interest at the default interest rate of 10%.
 
8.            
Notes payable, related parties
 
The notes payable, related parties as amended were issued in conjunction with the Company’s purchase of the orthopedic division of HealthTronics, Inc. The notes payable, related parties bear interest at 8% per annum, as amended. All remaining unpaid accrued interest and principal was due on December 31, 2018, as amended. HealthTronics, Inc. is a related party because they are a shareholder in the Company and have a security agreement with the Company detailed below.
 
The Company is a party to a security agreement with HealthTronics, Inc. to provide a first security interest in the assets of the Company.   During any period when an Event of Default occurs, the applicable interest rate shall increase by 2% per annum. Events of Default under the notes payable, related parties have occurred and are continuing on account of the failure of SANUWAVE, Inc., a Delaware corporation, a wholly owned subsidiary of the Company and the borrower under the notes payable, related parties, to make the required payments of interest which were due on December 31, 2016, March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, June 30, 2018, September 30, 2018, December 31, 2018 and March 31, 2019 (collectively, the “Defaults”). As a result of the Defaults, the notes payable, related parties have been accruing interest at the rate of 10% per annum since January 2, 2017 and continue to accrue interest at such rate. The Company will be required to make mandatory prepayments of principal on the notes payable, related parties equal to 20% of the proceeds received by the Company through the issuance or sale of any equity securities in cash or through the licensing of the Company’s patents or other intellectual property rights.
 
The notes payable, related parties had an aggregate outstanding principal balance of $5,372,743 at March 31, 2019 and December 31, 2018.
 
Accrued interest, related parties currently payable totaled $1,391,469 at March 31, 2019 and $1,171,782 at December 31, 2018. Interest expense on notes payable, related parties totaled $219,687 and $189,211 for the three months ended March 31, 2019 and 2018, respectively.
 
9.            
Equity transactions
 
Warrant Exercise
 
During the three months ended March 31, 2019, the Company issued 620,000 shares of Common Stock upon the exercise of 620,000 Class L Warrants and Class O Warrants to purchase shares of stock under the terms of the respective warrant agreements.
 
 
12
 
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
9.            
Equity transactions (continued)
 
Cashless Warrant Exercise
 
During the three months ended March 31, 2019, the Company issued 704,108 shares of Common Stock upon the cashless exercise of 1,313,258 Class N Warrants and Class L Warrants to purchase shares of stock under the terms of the respective warrant agreements.
 
Conversion of short term notes payable to equity
 
During the three months ended March 31, 2019, the Company issued 3,333,334 shares of Common Stock upon the conversion of short term note payable in the principal amount of $266,667 with the receipt of notice of Class L warrant exercise of 3,333,334 Class L Warrants under the terms of the short term note payable.
 
10.            
Warrants
 
A summary of the warrant activity during the three months ended March 31, 2019, is presented as follows:
 
 
 
 Outstanding
 
 
 
 
 
 
 
 
 
 
 
 Outstanding
 
 
 
 as of
 
 
 
 
 
 
 
 
 
 
 
 as of
 
 
 
 December 31,
 
 
 
 
 
 
 
 
 
 
 
 March 31,
 
Warrant class
 
2018
 
 
 Issued
 
 
 Exercised
 
 
 Expired
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class K Warrants
    7,200,000  
    -  
    -  
    -  
    7,200,000  
Class L Warrants
    57,258,339  
    -  
    (4,100,001 )
    -  
    53,158,338  
Class N Warrants
    30,451,815  
    -  
    (1,046,591 )
    -  
    29,405,224  
Class O Warrants
    7,929,091  
    -  
    (120,000 )
    -  
    7,809,091  
Series A Warrants
    1,155,682  
    -  
    -  
    -  
    1,155,682  
 
    103,994,927  
    -  
    (5,266,592 )
    -  
    98,728,335  
 
A summary of the warrant exercise price per share and expiration date is presented as follows:
 
 
 
 Exercise
 
 Expiration
 
 
 price per share
 
 date
 
 
 
 
 
Class K Warrants
  $ 0.08  
June 2025
Class K Warrants
  $ 0.11  
August 2027
Class L Warrants
  $ 0.08  
 May 2019
Class N Warrants
  $ 0.11  
 June 2019
Class O Warrants
  $ 0.11  
 June 2019
Series A Warrants
  $ 0.03  
 May 2019
 
The exercise price of the Class K Warrants and the Series A Warrants are subject to a “down-round” anti-dilution adjustment if the Company issues or is deemed to have issued certain securities at a price lower than the then applicable exercise price of the warrants.  Accordingly, the Company has classified such warrants as derivative liabilities. The Class K Warrants may be exercised on a physical settlement or on a cashless basis.  The Series A Warrants may be exercised on a physical settlement basis if a registration statement underlying the warrants is effective.  If a registration statement is not effective (or the prospectus contained therein is not available for use) for the resale by the holder of the Series A Warrants, then the holder may exercise the warrants on a cashless basis.
 
 
13
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
10.            
Warrants (continued)
 
The Class K Warrants and the Series A Warrants are derivative financial instruments. The estimated fair value of the Class K Warrants at the date of grant was $36,989 and recorded as debt discount, which is accreted to interest expense through the maturity date of the related notes payable, related parties. The estimated fair values of the Series A Warrants and the Series B Warrants at the date of grant were $557,733 for the warrants issued in conjunction with the 2014 Private Placement and $47,974 for the warrants issued in conjunction with the 18% Convertible Promissory Notes. The fair value of the Series A Warrants and Series B Warrants were recorded as equity issuance costs in 2014, a reduction of additional paid-in capital. The Series B Warrants expired unexercised in March 2015.
 
The estimated fair values were determined using a binomial option pricing model based on various assumptions.  The Company’s derivative liabilities have been classified as Level 3 instruments and are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities.  Various factors are considered in the pricing models the Company uses to value the warrants, including the Company's current common stock price, the remaining life of the warrants of 0.085  years, the volatility of the Company's common stock price of 102%, and the risk-free interest rate of 2.43%.  In addition, as of the valuation dates, management assessed the probabilities of future financing and other re-pricing events in the binominal valuation models.
 
A summary of the changes in the warrant liability during the three months ended March 31, 2019, is presented as follows:
 
 
 
 Class K
 
 
 Series A
 
 
 
 
 
 
Warrants
 
 
Warrants
 
 
 Total
 
 
 
 
 
 
 
 
 
 
 
Warrant liability as of December 31, 2018
  $ 1,542,000  
  $ 227,669  
  $ 1,769,669  
Issued
    -  
    -  
    -  
Exercised
    -  
    -  
    -  
Change in fair value
    -  
    (32,359 )
    (32,359 )
Reclassification due to adoption of ASU 2017-11 (see Note 3)
    (1,542,000 )
    -  
    (1,542,000 )
Warrant liability as of March 31, 2019
  $ -  
  $ 195,310
 
  $ 195,310
 
 
 
 
14
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
11.            
Commitments and contingencies
 
Operating Leases
 
The Company is a party to certain operating leases. In August 2016, we entered into a lease agreement for 7,500 square feet of office space for office, research and development, quality control, production and warehouse space which expires on December 31, 2021. On February 1, 2018, we entered into an amendment to the lease agreement for an additional 380 square feet of office space for storage which expires on December 31, 2021. On January 2, 2019, we entered into a second amendment to the lease agreement for an additional 2,297 square feet of office space for office space which expires on December 31, 2021. Under the terms of the lease, we pay monthly rent of $14,651, subject to a 3% adjustment on an annual basis.
 
Right of use assets and Lease liability - right of use consist of the following:
 
 
 
March 31, 
 

 
 2019
 
Right of use assets
  $ 437,363  

       
Lease liability - right of use
       
     Current portion
  $ 164,521
 
     Long term portion
    315,730
 
Total Lease liability - right of use 
  $ 480,251
 
 
Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2019 was $4,222 and were included in Net cash used in operating activities in it condensed consolidated statement of cash flows. Upon adoption of ASC 842 on January 1, 2019, the Company increased non-cash balances of right of use assets and lease liability – right of use by $476,029 and $520,652, respectively.
 
As of March 31, 2019, the maturities of the Company's Lease liability - right of use consist of the following:
 
Year ending December 31,
 
 Amount
 
2019 (remainder)
  $ 140,173  
2020
    191,713  
2021
    197,462  
   Total lease payments
    529,348
 
Less:  Present value adjustment 
    (49,097 )
Total Lease liability - right of use
  $ 480,251
 
 
As required, the following disclosure is provided for periods prior to adoption. Minimum future lease payments that have initial or remaining lease terms in excess of one year consist of the following:
 
Year ending December 31,
 
 Amount
 
2019 (remainder)
  $ 140,173  
2020
    191,713  
2021
    197,462  
Total
  $ 529,348  
 
Rent expense for the three months ended March 31, 2019 and 2018 was $52,838 and $35,882, respectively.
 
As of March 31, 2019, the Company had no leases that were classified as a financing lease. As of March 31, 2019, the Company did not have additional operating or financing leases that have not yet commenced.
 
Litigation
 
The Company is a defendant in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts and intellectual property matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. We believe that all pending claims, if adversely decided, would not have a material adverse effect on our business, financial position or results of operations.


 

15
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
12.            
Revenue
 
Disaggregation of Revenue
 
The disaggregation of revenue is based on geographical region. The following table presents revenue from contracts with customers for the three months ended March 31, 2019 and 2018:
 
 
 
 Three months ended March 31, 2019
 
 
 Three months ended March 31, 2018
 
 
 
United States
 
 
International
 
 
Total
 
 
United States
 
 
International
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
  $ 17,678  
  $ 46,887  
  $ 64,565  
  $ 116,447  
  $ 122,121  
  $ 238,568  
License fees
    6,250  
    100,000  
    106,250  
    6,250  
    77,866  
    84,116  
Other Revenue
    -  
    7,148  
    7,148  
    -  
    21,588  
    21,588  
 
  $ 23,928  
  $ 154,035  
  $ 177,963  
  $ 122,697  
  $ 221,575  
  $ 344,272  
 
 
 
16
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
12.     
Revenue (continued)
 
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. Three distributors accounted for 58%, 11% and 10% of revenues for the three months ended March 31, 2019 and 39%, 5% and 0% of accounts receivable at March 31, 2019. Four distributors accounted for 4%, 27%, 18% and 34% of revenues for the three months ended March 31, 2018. Three distributors and partners accounted for 24%, 60% and 7% of accounts receivable at December 31, 2018.
 
13.      
Related party transactions
 
During the three months ended March 31, 2019 and 2018, the Company recorded $17,678 and $116,447, respectively, in revenue from an entity owned by A. Michael Stolarski, a member of the Company’s board of directors and an existing shareholder of the Company. Contract liabilities includes a balance at March 31, 2019 and 2018, of $138,887 and $48,553, respectively and the Accrued expenses balance includes a balance at March 31, 2019 and 2018, of $0 and $10,000, respectively from this related party.
 
14.    
Stock-based compensation
 
The Company recognized as compensation cost for all outstanding stock options granted to employees, directors and advisors, $0 for each of the three months ended March 31, 2019 and 2018.
 
The range of exercise prices for options was $0.04 to $2.00 for options outstanding at March 31, 2019 and December 31, 2018, respectively. The aggregate intrinsic value for all vested and exercisable options was $1,456,116 and $2,085,866 at March 31, 2019 and December 31, 2018, respectively.
 
The weighted average remaining contractual term for outstanding exercisable stock options was 7.15 and 7.4 years as of March 31, 2019 and December 31, 2018, respectively.
 
15.     
Earnings (loss) per share
 
Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.  Diluted net loss per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusive would be anti-dilutive and consist of the following:
 
 
 
 March 31,
 
 
 March 31,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Options
    31,703,385  
    21,593,385  
Warrants
    98,728,335  
    110,581,275  
Convertible promissory notes
    25,058,432  
    -  
 
    155,490,152  
    132,174,660  
 
 
 
17
 
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
 
16.            
Subsequent events
 
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
 
Warrant Exercise
 
Subsequent to March 31, 2019, the Company issued 13,693,435 shares of Common Stock upon the exercise of 13,693,435 Series A Warrants, Class L Warrants and Class O Warrants to purchase shares of stock under the terms of the respective warrant agreements.
 
Cashless Warrant Exercise
 
Subsequent to March 31, 2019, the Company issued 234,632 shares of Common Stock upon the cashless exercise of 251,356 Series A Warrants to purchase shares of stock under the terms of the warrant agreement.
 
Warrant Exercise – Line of credit, related parties
 
Subsequent to March 31, 2019, the Company issued 2,475,000 shares of Common Stock upon the exercise of 2,250,000 Class L Warrants converting funds from line of credit, related parties to purchase shares of stock under the terms of the warrant agreement.
 
Warrant Exercise – Short term notes payable
 
Subsequent to March 31, 2019, the Company issued 137,500 shares of Common Stock upon the exercise of 125,000 Series A Warrants converting funds from short term notes payable to purchase shares of stock under the terms of the warrant agreement.
 
Non-Cash Warrant Exercise
 
Subsequent to March 31, 2019, the Company issued 200,000 shares of Common Stock upon the exercise of 200,000 Class L Warrants to purchase shares of stock under the terms of the warrant agreement. The cash for this exercise was wired to an incorrect bank account due to the cyber security breach at the Company. The Company issued the shares of stock to the investor in lieu of the funds being received.
 
Accrued related party advances
 
On May 13, 2019, the Company repaid in full the outstanding balance with interest of $102,918 to Shri Parikh, the President of the Company.
 
Short term notes payable
 
Subsequent to March 31, 2019, the Company entered into short term notes payable with individuals in the total principal amount of $250,000 with an interest rate of 5% per annum. The principal and accrued interest are due and payable six months from the date of issuance or receipt of notice of warrant exercise.
 
Advances from related parties
 
Subsequent to March 31, 2019, the Company collected $345,696 for the exercise of Series A Warrants and Class L Warrants. The shares of Common Stock for the exercise of the Series A Warrants and Class L Warrants will be issued by the transfer agent upon receipt of authorized documentation.
 
 
18
 
 
I tem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as of and for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the SEC on April 1, 2019.
 
Overview
 
We are a shock wave technology company using a patented system of noninvasive, high-energy, acoustic shock waves for regenerative medicine and other applications. Our initial focus is regenerative medicine – utilizing noninvasive, acoustic shock waves to produce a biological response resulting in the body healing itself through the repair and regeneration of tissue, musculoskeletal and vascular structures Our lead regenerative product in the United States is the dermaPACE ® device, used for treating diabetic foot ulcers, which was subject to two double-blinded, randomized Phase III clinical studies and was cleared by the U.S. Food and Drug Administration ("FDA") on December 28, 2017.
 
Our portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE ® ) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. In 2018, we started marketing our dermaPACE System for sale in the United States and will continue to generate revenue from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia and Asia/Pacific.
 
Our lead product candidate for the global wound care market, dermaPACE, has received FDA clearance for commercial use to treat diabetic foot ulcers in the United States and the CE Mark allowing for commercial use on acute and chronic defects of the skin and subcutaneous soft tissue. We believe we have demonstrated that our patented technology is safe and effective in stimulating healing in chronic conditions of the foot and the elbow through our United States FDA Class III PMA approved OssaTron ® device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our orthoPACE ® , OssaTron, and Evotron ® devices in Europe and Asia.
 
We are focused on developing our Pulsed Acoustic Cellular Expression (PACE) technology to activate healing in:
 
●  
wound conditions, including diabetic foot ulcers, venous and arterial ulcers, pressure sores, burns and other skin eruption conditions;
●  
orthopedic applications, such as eliminating chronic pain in joints from trauma, arthritis or tendons/ligaments inflammation, speeding the healing of fractures (including nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones in the extremities and spine, and other potential sports injury applications;
●  
plastic/cosmetic applications such as cellulite smoothing, graft and transplant acceptance, skin tightening, scarring and other potential aesthetic uses; and
●  
cardiac applications for removing plaque due to atherosclerosis improving heart muscle performance.
 
In addition to healthcare uses, our high-energy, acoustic pressure shock waves, due to their powerful pressure gradients and localized cavitational effects, may have applications in secondary and tertiary oil exploitation, for cleaning industrial waters and food liquids and finally for maintenance of industrial installations by disrupting biofilms formation. Our business approach will be through licensing and/or partnership opportunities.
 
 
 
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Clinical Trials and Marketing
 
The FDA granted approval of our Investigational Device Exemption (IDE) to conduct two double-blinded, randomized clinical trials utilizing our lead device product for the global wound care market, the dermaPACE device, in the treatment of diabetic foot ulcers.
 
The dermaPACE system was evaluated using two studies under IDE G070103. The studies were designed as prospective, randomized, double-blind, parallel-group, sham-controlled, multi-center 24-week studies at 39 centers. A total of 336 subjects were enrolled and treated with either dermaPACE plus conventional therapy or conventional therapy (a.k.a. standard of care) alone. Conventional therapy included, but was not limited to, debridement, saline-moistened gauze, and pressure reducing footwear. The objective of the studies was to compare the safety and efficacy of the dermaPACE device to sham-control application. The prospectively defined primary efficacy endpoint for the dermaPACE studies was the incidence of complete wound closure at 12 weeks post-initial application of the dermaPACE system (active or sham). Complete wound closure was defined as skin re-epithelialization without drainage or dressing requirements, confirmed over two consecutive visits within 12-weeks. If the wound was considered closed for the first time at the 12 week visit, then the next visit was used to confirm closure. Investigators continued to follow subjects and evaluate wound closure through 24 weeks.
 
The dermaPACE device completed its initial Phase III, IDE clinical trial in the United States for the treatment of diabetic foot ulcers in 2011 and a PMA application was filed with the FDA in July 2011. The patient enrollment for the second, supplemental clinical trial began in June 2013. We completed enrollment for the 130 patients in this second trial in November 2014 and suspended further enrollment at that time.
 
The only significant difference between the two studies was the number of applications of the dermaPACE device. Study one (DERM01; n=206) prescribed four (4) device applications/treatments over a two-week period, whereas, study two (DERM02; n=130) prescribed up to eight (8) device applications (4 within the first two weeks of randomization, and 1 treatment every two weeks thereafter up to a total of 8 treatments over a 10-week period). If the wound was determined closed by the PI during the treatment regimen, any further planned applications were not performed.
 
Between the two studies there were over 336 patients evaluated, with 172 patients treated with dermaPACE and 164 control group subjects with use of a non-functional device (sham). Both treatment groups received wound care consistent with the standard of care in addition to device application. Study subjects were enrolled using pre-determined inclusion/exclusion criteria in order to obtain a homogenous study population with chronic diabetes and a diabetic foot ulcer that has persisted a minimum of 30 days and its area is between 1cm 2 and 16cm 2 , inclusive. Subjects were enrolled at Visit 1 and followed for a run-in period of two weeks. At two weeks (Visit 2 – Day 0), the first treatment was applied (either dermaPACE or Sham Control application). Applications with either dermaPACE or Sham Control were then made at Day 3 (Visit 3), Day 6 (Visit 4), and Day 9 (Visit 5) with the potential for 4 additional treatments in Study 2. Subject progress including wound size was then observed on a bi-weekly basis for up to 24 weeks at a total of 12 visits (Weeks 2-24; Visits 6-17).
 
A total of 336 patients were enrolled in the dermaPACE studies at 37 sites. The patients in the studies were followed for a total of 24 weeks. The studies’ primary endpoint, wound closure, was defined as “successful” if the skin was 100% re-epithelialized at 12 weeks without drainage or dressing requirements confirmed at two consecutive study visits.
 
A summary of the key study findings were as follows:
 
● 
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, although the rate of complete wound closure between dermaPACE and sham-control at 12 weeks in the intention-to-treat (ITT) population was not statistically significant at the 95% confidence level used throughout the study (p=0.320). There were 39 out of 172 (22.67%) dermaPACE subjects who achieved complete wound closure at 12 weeks compared with 30 out of 164 (18.29%) sham-control subjects.
● 
In addition to the originally proposed 12-week efficacy analysis, and in conjunction with the FDA agreement to analyze the efficacy analysis carried over the full 24 weeks of the study, we conducted a series of secondary analyses of the primary endpoint of complete wound closure at 12 weeks and at each subsequent study visit out to 24 weeks. The primary efficacy endpoint of complete wound closure reached statistical significance at 20 weeks in the ITT population with 61 (35.47%) dermaPACE subjects achieving complete wound closure compared with 40 (24.39%) of sham-control subjects (p=0.027). At the 24 week endpoint, the rate of wound closure in the dermaPACE® cohort was 37.8% compared to 26.2% for the control group, resulting in a p-value of 0.023.
 
 
20
 
 
 
● 
Within 6 weeks following the initial dermaPACE treatment, and consistently throughout the 24-week period, dermaPACE significantly reduced the size of the target ulcer compared with subjects randomized to receive sham-control (p<0.05).
● 
The proportion of patients with wound closure indicate a statistically significant difference between the dermaPACE and the control group in the proportion of subjects with the target-ulcer not closed over the course of the study (p-value=0.0346). Approximately 25% of dermaPACE® subjects reached wound closure per the study definition by day 84 (week 12). The same percentage in the control group (25%) did not reach wound closure until day 112 (week 16). These data indicate that in addition to the proportion of subjects reaching wound closure being higher in the dermaPACE® group, subjects are also reaching wound closure at a faster rate when dermaPACE is applied.
● 
dermaPACE demonstrated superior results in the prevention of wound expansion (≥ 10% increase in wound size), when compared to the control, over the course of the study at 12 weeks (18.0% versus 31.1%; p=0.005, respectively).
● 
At 12 and 24 weeks, the dermaPACE group had a higher percentage of subjects with a 50% wound reduction compared to the control (p=0.0554 and p=0.0899, respectively). Both time points demonstrate a trend towards statistical significance.
● 
The mean wound reduction for dermaPACE subjects at 24 weeks was 2.10cm2 compared to 0.83cm2 in the control group. There was a statistically significant difference between the wound area reductions of the two cohorts from the 6 week follow-up visit through the end of the study.
● 
Of the subjects who achieved complete wound closure at 12 weeks, the recurrence rate at 24 weeks was only 7.7% in the dermaPACE group compared with 11.6% in the sham-control group.
● 
Importantly, there were no meaningful statistical differences in the adverse event rates between the dermaPACE treated patients and the sham-control group. There were no issues regarding the tolerability of the treatment which suggests that a second course of treatment, if needed, is a clinically viable option. 
 
We retained Musculoskeletal Clinical Regulatory Advisers, LLC (MCRA) in January 2015 to lead the Company’s interactions and correspondence with the FDA for the dermaPACE, which have already commenced. MCRA has successfully worked with the FDA on numerous Premarket Approvals (PMAs) for various musculoskeletal, restorative and general surgical devices since 2006.
 
Working with MCRA, we submitted to FDA a de novo petition on July 23, 2016. Due to the strong safety profile of our device and the efficacy of the data showing statistical significance for wound closure for dermaPACE subjects at 20 weeks, we believe that the dermaPACE device should be considered for classification into Class II as there is no legally marketed predicate device and there is not an existing Class III classification regulation or one or more approved PMAs (which would have required a reclassification under Section 513(e) or (f)(3) of the FD&C Act). On December 28, 2017, the FDA determined that the criteria at section 513(a)(1)(A) of (B) of the FD&C Act were met and granted the de novo clearance classifying dermaPACE as Class II and available to be marketed immediately.
 
Finally, 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. The dermaPACE is also licensed for sale in Canada, Australia, New Zealand and South Korea.
 
We are actively marketing the dermaPACE to the European Community, Canada and Asia/Pacific, utilizing distributors in select countries.
 
Clinical Studies
 
A dosage study has been developed for launch in Poland to optimize dermaPACE system treatment dosage for producing a more rapid reduction in size of a diabetic foot ulcer (“DFU”).  The focus will be on increasing the number of shock waves delivered per treatment, as a function of DFUs area.  To determine the dosage necessary, three new distinctive regimens will be assessed during the study.  This study started in April 2019 and is expected to be finalized late in the third quarter of 2019.
 
A post-market pilot study to evaluate the effects of high energy acoustic shock wave therapy on local skin perfusion and healing of DFUs will be conducted at two sites: one in New Jersey and one in California. The intent of this trial is to quantify the level of increased perfusion and oxygenation during and after treatment with the dermaPACE system. Enrollment and first patient treatment started in April 2019.
 
 
 
21
 
 
Financial Overview
 
Since our inception, we have incurred losses from operations each year. As of March 31, 2019, we had an accumulated deficit of $117,520,434. Although the size and timing of our future operating losses are subject to significant uncertainty, we anticipate that our operating losses will continue over the next few years as we incur expenses related to commercialization of our dermaPACE system for the treatment of diabetic foot ulcers in the United States. If we are able to successfully commercialize, market and distribute the dermaPACE system, we hope to partially or completely offset these losses in the future.
 
Our operating losses create substantial doubt about our ability to continue as a going concern. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing will provide the necessary funding for us to continue as a going concern for the next year. See “Liquidity and Capital Resources” for further information regarding our financial condition.
 
We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to be generated from, any of our products, due to the numerous risks and uncertainties associated with developing and marketing products, including the uncertainty of:
 
● 
the scope, rate of progress and cost of our clinical trials;
● 
future clinical trial results;
● 
the cost and timing of regulatory approvals;
● 
the establishment of successful marketing, sales and distribution channels and partnerships, including our efforts to expand our marketing, sales and distribution reach through joint ventures and other contractual arrangements;
● 
the cost and timing associated with establishing reimbursement for our products;
● 
the effects of competing technologies and market developments; and
● 
the industry demand and patient wellness behavior.
 
Any failure to complete the development of our product candidates in a timely manner, or any failure to successfully market and commercialize our product candidates, would have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with us and our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019.
 
Critical Accounting Policies and Estimates
     
The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
 
On an ongoing basis, we evaluate our estimates and judgments, including those related to the recording of the allowances for doubtful accounts, estimated reserves for inventory, estimated useful life of property and equipment, the determination of the valuation allowance for deferred taxes, the estimated fair value of the warrant liability, and the estimated fair value of stock-based compensation. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The results of our operations for any historical period are not necessarily indicative of the results of our operations for any future period.
     
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements filed with our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, we believe that the following accounting policies relating to revenue recognition, liabilities related to warrants issued, and stock-based compensation are significant and; therefore, they are important to aid you in fully understanding and evaluating our reported financial results.
 
 
22
 
 
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. We recognize revenues on shipments to distributors in the same manner as with other customers. The initial warranty and extended warranty on the sale of medical devices will be deferred and recognized over time as the performance obligation is satisfied. Fees from services performed are recognized when the service is performed. License fee for refurbishment of applicators will be recognized at the time the customer is granted the license to refurbish the applicators. Revenue will be calculated using the transaction price that represents the most likely consideration to be received for the license times the number of licenses issued. Fees for upfront distribution license agreements will be recognized on a straight line basis based on the payment schedule in the contract.
 
Liabilities Related to Warrants Issued
 
We record certain common stock warrants we issued at fair value and recognize the change in the fair value of such warrants as a gain or loss, which we report in the Other Income (Expense) section in our Consolidated Statements of Comprehensive Loss. We report these warrants at fair value and they are classified as liabilities because they contain certain down-round provisions allowing for reduction of their exercise price. We estimate the fair value of these warrants using a binomial options pricing model.
 
Stock-based Compensation
     
The Stock Incentive Plan provides that stock options, and other equity interests or equity-based incentives, may be granted to key personnel, directors and advisors at the fair value of the common stock at the time the option is granted, which is approved by our board of directors. The maximum term of any option granted pursuant to the Stock Incentive Plan is ten years from the date of grant.
 
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.
 
Results of Operations for the Three Months ended March 31, 2019 and 2018
 
Revenues and Cost of Revenues
 
Revenues for the three months ended March 31, 2019 were $177,963, compared to $344,272 for the same period in 2018, a decrease of $166,309, or 48%. Revenue resulted primarily from sales in Europe of our orthoPACE devices and related applicators, sales in the United States of our dermaPACE applicators and upfront distribution fee from our Southeast Asia distribution agreement with Johnfk Medical Inc. ("FKS"). The decrease in revenue for 2019 is primarily due to a decrease in sales of orthoPACE devices in Asia/Pacific and the European Community, as compared to the prior year, as well as lower sales of new applicators.
 
Cost of revenues for the three months ended March 31, 2019 were $93,853, compared to $165,466 for the same period in 2018. Gross profit as a percentage of revenues was 47% for the three months ended March 31, 2019, compared to 52% for the same period in 2018. The decrease in gross profit as a percentage of revenues in 2019 was primarily due to cost of new and refurbished dermaPACE applicators in the United States as a result of placements. This was partially offset by increased revenue for refurbishment license and upfront distribution fee which have little or no related cost, as compared to 2018.
 
 
23
 
 
Research and Development Expenses
 
Research and development expenses for the three months ended March 31, 2019 were $261,002, compared to $238,477 for the same period in 2018, an increase of $22,525, or 9%. The increase in research and development expenses in 2019, as compared to 2018, was due to an increase in contracting for temporary services and increased study expenses related to our new dosage study in Poland.
 
Selling and Marketing Expenses
 
Selling and marketing expenses for the three months ended March 31, 2019 were $158,083, compared to $51,959 for the same period in 2018, an increase of $106,124, or 204%. The increase in sales and marketing expenses in 2019, as compared to 2018, was due to an increase in hiring of trainers and salespeople and increased travel expenses for placement and training related to the commercialization of dermaPACE.
 
General and Administrative Expenses
 
General and administrative expenses for the three months ended March 31, 2019 were $1,517,101, as compared to $1,004,614 for the same period in 2018, an increase of $512,487, or 51%. The increase in general and administrative expenses in 2019, as compared to 2018, was due to an increase in salary, bonus and benefits related to new hires in 2018, increased legal costs of associated with SEC filings and patent issuance and maintenance, increased consulting expenses of related to our insurance reimbursement strategy for the commercialization of dermaPACE and one-time expense related to email spoofing cyber security breach.
 
Depreciation
 
Depreciation for the three months ended March 31, 2019 was $8,357, compared to $5,016 for the same period in 2018, an increase of $3,341, or 67%. The increase was due to the higher depreciation related to increase in fixed assets.
 
Other Income (Expense)
 
Other income (expense) was a net expense of $336,885 for the three months ended March 31, 2019 as compared to a net expense of $4,735,395 for the same period in 2018, a decrease of $4,398,510, or 93%, in the net expense. The decrease was primarily due to decreased interest expense, beneficial conversion discount and debt discount related to the convertible promissory notes issued in the fourth quarter of 2017 and first quarter of 2018. In addition, the net expense in 2019 included a non-cash gain for valuation adjustment on outstanding warrants of $32,359, as compared to a non-cash loss for valuation adjustment on outstanding warrants of $2,973,682 in 2018.
 
Net Loss
 
Net loss for the three months ended March 31, 2019 was $2,197,317, or ($0.01) per basic and diluted share, compared to a net loss of $5,856,655, or ($0.04) per basic and diluted share, for the same period in 2018, a decrease in the net loss of $3,659,338, or 62%. The decrease in the net loss was primarily a result of a decrease in other income (expense), partially offset by an increase in our operating expenses as described above.
 
Liquidity and Capital Resources
 
We expect to devote substantial resources for the commercialization of the dermaPACE System and will continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. We incurred a net loss of $2,197,317 for the three months ended March 31, 2019 and $11,631,394 for the year ended December 31, 2018. These factors along with the events of default on the notes payable to HealthTronics, Inc., the Company’s convertible promissory notes and the Company’s short term notes payable create substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the financial issuance date.
 
Since inception in 2005, our operations have primarily been funded from the sale of capital stock and convertible debt securities.
 
We have entered into short term notes payable with twenty-four individuals between June 26, 2018 and March 13, 2019 in the total principal amount of $2,835,525 with an interest rate of 5% per annum. The principal and accrued interest are due and payable six months from the date of issuance or receipt of notice of warrant exercise. On December 26, 2018, the Company defaulted on the short term notes payable issued on June 26, 2018 and began accruing interest at the default interest rate of 10%. On January 2, 2019, the Company defaulted on the short term notes payable issued on July 2, 2018 and began accruing interest at the default interest rate of 10%. On January 30, 2019, the Company defaulted on the short term notes payable issued on July 30, 2018 and began accruing interest at the default interest rate of 10%.
 
 
 
24
 
 
The continuation of our business is dependent upon raising additional capital in the final three quarters of 2019 to fund operations. Management expects the cash used in operations for the Company will be approximately $225,000 to $300,000 per month for the first half of 2019 and $275,000 to $350,000 per month for the second half of 2019 as resources are devoted to the commercialization of the dermaPACE product including hiring of new employees, expansion of our international business and continued research and development of non-medical uses of our technology. Management’s plans are to obtain additional capital in 2019 through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. In addition, there can be no assurances that our plans to obtain additional capital will be successful on the terms or timeline we expect, or at all. A $400,000 fee we anticipated receiving in April 2019 from FKS under the terms of a June 2018 agreement has not been received to date, and we are in negotiations with such counterparty with repsect to payments and operations under such agreement. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for us. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.
 
 In addition, we may have potential liability for certain sales, offers or issuances of equity securities of the Company in possible violation of federal securities laws. Pursuant to a Registration Statement on Form S-1 (Registration No. 333-208676), declared effective on February 16, 2016 (the “2016 Registration Statement”), the Company sought to register: a primary offering of up to $4,000,000 units, the Common Stock included as part of the units, the warrants included as part of the units, and the Common Stock issuable upon exercise of such warrants; a primary offering of up to $400,000 placement agent warrants and the Common Stock issuable upon exercise of such placement agent warrants; and a secondary offering of 23,545,144 shares of Common Stock held by certain selling stockholders named in the 2016 Registration Statement. The SEC Staff’s interpretations provide that, when an issuer is registering units composed of common stock, common stock purchase warrants, and the common stock underlying the warrants, the registration fee is based on the offer price of the units and the exercise price of the warrants. The registration fee paid did include the fee based on the offer price of the units, allocated to the unit line item in the fee table. Although the fee table in the 2016 Registration Statement included a line item for the Common Stock underlying the warrants, the Company did not include in that line item the fee payable based on the exercise price of $0.08 per share for such warrants, which amount should have been allocated to such line item based on the SEC Staff’s interpretations. As a result, a portion of the securities intended to be registered by the 2016 Registration Statement was not registered. In addition, in a post-effective amendment to the 2016 Registration Statement filed on September 23, 2016, too many placement agent warrants were inadvertently deregistered. The post-effective amendment stated that the Company had issued $180,100, based on 2,251,250 Class L warrants issued with a $0.08 exercise price of warrants to the placement agent and therefore deregistered $219,900, based on 2,748,750 Class L warrants issued with a $0.08 exercise price of placement agent warrants from the $400,000, based on 5,000,000 Class L warrants issued with a $0.08 exercise price total offering amount included in the Registration Statement. The actual warrants issued to the placement agent totaled $240,133.36, based on 3,001,667 Class L warrants issued with a $0.08 exercise price, and only $159,867, based on 1,998,338 Class L warrants issued with a $0.08 exercise price should have been deregistered in such post-effective amendment. To the extent that we have not registered or failed to maintain an effective registration statement with respect to any of the transactions in securities described above and with respect to our ongoing offering of shares of Common Stock underlying the warrants, and a violation of Section 5 of the Securities Act did in fact occur or is occurring, eligible holders of our securities that participated in these offerings would have a right to rescind their transactions, and the Company may have to refund any amounts paid for the securities, which could have a materially adverse effect on the Company’s financial condition. Eligible securityholders have not filed a claim against the Company alleging a violation of Section 5 of the Securities Act with respect to these transactions, but they could file a claim in the future. Furthermore, the ongoing offering of and issuance of shares of Common Stock underlying certain of our warrants from the 2016 Registration Statement may have been, and may continue to be, in violation of Section 5 of the Securities Act and the rules and regulations under the Securities Act, because we did not update the prospectus in the 2016 Registration Statement for a period of time after the 2016 Registration Statement was declared effective and because our reliance on Rule 457(p) under the Securities Act in an amendment to our Registration Statement on Form S-1 (Registration No. 333-213774) filed on September 23, 2016 effected a deregistration of the securities registered under the 2016 Registration Statement. Eligible securityholders have not filed a claim against the Company alleging a violation of Section 5 of the Securities Act, but they could file such a claim in the future. If a violation of Section 5 of the Securities Act did in fact occur or is occurring, eligible securityholders would have a right to rescind their transactions, and the Company may have to refund any amounts paid the securities, which could have a materially adverse effect on the Company’s financial condition.
 
 
 
25
 
 
We may also attempt to raise additional capital if there are favorable market conditions or other strategic considerations even if we have sufficient funds for planned operations. To the extent that we raise additional funds by issuance of equity securities, our shareholders will experience dilution and we may be required to use some or all of the net proceeds to repay our indebtedness, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones would harm our future capital position.
 
Cash and cash equivalents decreased by $265,603 for the three months ended March 31, 2019 and decreased by $575,979 for the three months ended March 31, 2018. For the three months ended March 31, 2019 and 2018, net cash used by operating activities was $1,285,551 and $1,848,565, respectively, primarily consisting of compensation costs, research and development activities and general corporate operations. The decrease of $563,014 in the use of cash for operating activities for the three months ended March 31, 2019, as compared to the same period for 2018, was primarily due to the increased accrued operating and payroll related expenses and increased receivables in 2019. Net cash used by investing activities for the three months ended March 31, 2019 and 2018, consisted of purchase of property and equipment of $22,054 and $7,720, respectively. Net cash provided by financing activities for the three months ended March 31, 2019 was $1,044,400, which consisted of $319,867 from the exercise of warrants, $698,333 from the issuance of short term notes payable and $26,200 from an advance from related parties. Net cash provided by financing activities for the three months ended March 31, 2018 was $1,279,371, which consisted of $12,000 from advances from related parties, $13,528 from exercise of warrants, $1,159,785 from the issuance of convertible promissory notes and $94,058 from issuance of note payable, product.
 
Segment and Geographic Information
 
We have determined that we have one operating segment. Our revenues are generated from sales in United States, Europe, Canada, Asia and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are located in the United States.
 
Contractual Obligations
 
Our major outstanding contractual obligations relate to our operating lease for our facility, purchase and supplier obligations for product component materials and equipment, and our notes payable, related parties. We have disclosed these obligations in our most recent Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on April 1, 2019.
 
Off-Balance Sheet Arrangements
     
Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.
 
Effects of Inflation
     
Due to the fact that our assets are, to an extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our consolidated financial condition and results of operations.
 
I tem 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not required under Regulation S-K for “smaller reporting companies”.
 
I tem 4. 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 and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2019. 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 March 31, 2019. Our disclosure controls and procedures were not effective because of the “material weakness” described below under “Management’s Annual Report on Internal Control over Financial Reporting.”
 
 
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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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. 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 U.S. GAAP.
 
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 and accounting officer), evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. 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 (2013).
 
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 three material weaknesses in our internal control over financial reporting process. The first material weakness is due to the lack of internal expertise and resources to analyze and properly apply generally accepted accounting principles to complex and non-routine transactions such as complex financial instruments and derivatives and complex sales distribution agreements. The second material weakness is due to the lack of internal resources to analyze and properly apply generally accepted accounting principles to accounting for equity components of service agreements with select vendors. The third material weakness relates to our information technology infrastructure. This material weakness is due to cybersecurity breaches from email spoofing. As a result, management concluded that our internal control over reporting was not effective as of March 31, 2019.
 
Management’s Plan to Remediate Material Weaknesses
 
Management has developed a remediation plan to address the material weaknesses related to its processes and procedures surrounding the accounting for complex financial instruments and derivatives, accounting for complex sales distribution agreements, accounting for equity component of service agreements and ensuring that generally accepted accounting principle disclosures are complete and accurate. The remediation plan consists of, among other things, engaging a third party financial reporting consulting firm to assist the Company in its financial reporting compliance and redesigning the procedures to enhance the identification, capture, review, approval and recording of terms and components of complex financial instruments and derivatives, complex sales distribution agreements, and any equity components of service agreements as well as identify necessary disclosures. Management has engaged a third party consultant, who is a technical accounting professional, to assist us in the interpretation and application of new and complex accounting guidance. Management will continue to review and make necessary changes to the overall design of our internal control environment. These measures are intended both to address the identified material weaknesses and to enhance our overall internal control environment.
 
Management will develop a remediation plan to address the material weakness related to its information technology infrastructure. The remediation plan will include, but not be limited to cybersecurity training for all employees and redesign of procedures that cyber security breaches may impact.
 
Changes in Internal Control over Financial Reporting
 
There have been 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. Management is in the process of designing updated changes to its controls as discussed above in “Management’s Plan to Remediate Material Weaknesses.”
 
There has been a change in our internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Effective January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). ASC 842 requires management to make significant judgments and estimates. As a result, we implemented changes to our internal controls related to lease evaluation for the three months ended March 31, 2019. These changes updated accounting policies affected by ASC 842 as well as redesigned internal controls over financial reporting related to ASC 842 implementation. Additionally, management has expanded data gathering procedures to comply with the additional disclosure requirements and ongoing contract review requirements.  On April 1, 2019, an accounting manager was added to the staff and this additional resource will be utilized to supplement our existing finance and accounting staff.
 
 
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P ART II — OTHER INFORMATION
 
I tem 1. LEGAL PROCEEDINGS.
 
For a description of our material legal proceedings, see “Litigation” in Note 14—“Commitments and Contingencies” in the notes to our condensed consolidated financial statements, which is incorporated herein by reference.
 
I tem 1A. RISK FACTORS.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required under this item.
 
I tem 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .
 Not applicable.
 
I tem 3. DEFAULTS UPON SENIOR SECURITIES .
 Not applicable.
 
I tem 4. MINE SAFETY DISCLOSURES .
Not applicable.
 
I tem 5. OTHER INFORMATION .
 Not applicable.
 
I tem 6.      EXHIBITS
 
Exhibit No.           
Description
 
31.1 *  
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer.
 
31.2 *  
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
 
32.1 **  
Section 1350 Certification of the Principal Executive Officer.
 
32.2 **  
Section 1350 Certification of the Chief Financial Officer.
 
101.INS*†  
XBRL Instance.
 
101.SCH*†  
XBRL Taxonomy Extension Schema.
 
101.CAL*†  
XBRL Taxonomy Extension Calculation.
 
101.DEF*†  
XBRL Taxonomy Extension Definition.
 
101.LAB*†  
XBRL Taxonomy Extension Labels.
 
101.PRE*†  
XBRL Taxonomy Extension Presentation.
 
______________________________________________________________
* Filed herewith.
** Furnished herewith.
† XBRL-related documents are not deemed filed for purposes of section 11 of the Securities Act of 1933, as amended, section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject the liabilities of these sections, and are not part of any registration statement to which they relate.
 
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S I GNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
SANUWAVE HEALTH, INC.
 
 
 
 
 
Dated:   May 20, 2019
By:  
/s/ Kevin A. Richardson, II
 
 
Name: 
Kevin A. Richardson, II
 
 
Title: 
Chief Executive Officer
 
 
                  
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/ Kevin A. Richardson, II
Name: Kevin A. Richardson, II
 
Chief Executive Officer and Chairman of the Board of Directors
 (principal executive officer)
 
May 20, 2019
 
 
 
 
 
By: /s/ Lisa E. Sundstrom
Name: Lisa E. Sundstrom
 
 
Chief Financial Officer (principal financial and accounting officer)
 
May 20, 2019
 
 
 
 
 
 
 
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