10-Q/A 1 brhc10026209_10qa.htm 10-Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
Amendment No. 1

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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 June 23, 2021, there were issued and outstanding 481,619,621 shares of the registrant’s common stock, $0.001 par value.



EXPLANATORY NOTE

This Amendment No. 1 to the Form 10-Q (this “Amendment”) amends the Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. (the “Company”) for the quarterly period ended September 30, 2020 (the “Form 10-Q”), filed on November 23, 2020 with the Securities and Exchange Commission (the “SEC”). This Amendment restates the Company’s financial statements in order to correct an accounting error resulting in the underreporting the amount of warrant derivative liability. The error relates to the determination of the number of shares of common stock subject to a warrant issued by the Company in June 2020 as previously reported by the Company, which warrant contains certain anti-dilution adjustment provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrant, warrant liability associated with the company not having enough authorized shares at the time those anti-dilution provision were triggered  A summary of the accounting impact of these adjustments to the Company’s condensed consolidated unaudited financial statements as of and for the three and nine months ended September 30, 2020 is provided at “Note 20. Restatement of Financial Statements.” We have also added Note 22 which describes a non-compliance notification from a supplier, as well as reclassification of warrant liabilities to current.
 

Except as described in Notes 8, 11, 14, 20, 22, and the corresponding changes in Net Income and other changes as described above, no other changes have been made to the Company’s Interim Report on Form 10-Q for the three months ended September 30, 2020 (the “Original 10-Q”) except to update the latest number of outstanding shares on the cover page of this Form 10-Q/A. This Form 10-Q/A speaks as of the date of the Original Filing and does not reflect events that may have occurred after the date of the Original Filing or modify or update any disclosures that may have been affected by subsequent events.

In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is also including with this Amendment certifications of the Company’s Chief Executive Officer and Chief Financial Officer (attached as Exhibits 31.1, 31.2, 32.1, and 32.2) dated as the date of the Amendment.


SANUWAVE Health, Inc.
Table of Contents

 
PART I – FINANCIAL INFORMATION
Page
     
Item 1.
2
 
3
 
4
 
5
 
6
 
7
     
Item 2.
31
     
Item 3.
38
     
Item 4.
38
     
 
PART II – OTHER INFORMATION
 
     
Item 1.
40
     
Item 1A.
40
     
Item 2.
41
     
Item 3.
41
     
Item 4.
41
     
Item 5.
41
     
Item 6.
42
     
43

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: any expected benefits of the Celularity Inc. asset acquisition and its impact on the Company; the potential impact of the COVID-19 pandemic on our business, results of operations, liquidity, and operations, including the effect of governmental lockdowns, restrictions and new regulations on our operations and processes, including the execution of clinical trials; the Company’s future financial results, operating results, and projected costs; market acceptance of and demand for dermaPACE and our product candidates; success of future business development and acquisition activities; 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; the successful filing with the Secretary of State of Nevada of amendments to our Articles of Incorporation to effect the changes approved by our stockholders at our 2020 Annual Meeting; 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 for market opportunities, which may include strategic partnerships or licensing agreements, or raising capital through the conversion of outstanding warrants or issuances of securities; product liability claims; economic conditions that could 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, 2019, filed on March 30, 2020 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, 2019, filed on March 30, 2020.

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.

PART I — FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
September 30,
2020
   
December 31,
2019
 
   
(As Restated)
       
ASSETS
 
(Unaudited)
       
CURRENT ASSETS
           
Cash and cash equivalents
 
$
5,391,591
   
$
1,760,455
 
Accounts receivable, net of allowance for doubtful accounts of $32,558 in 2020 and $72,376 in 2019
   
1,395,815
     
75,543
 
Inventory
   
2,539,475
     
542,955
 
Prepaid expenses and other current assets
   
627,751
     
125,405
 
TOTAL CURRENT ASSETS
   
9,954,632
     
2,504,358
 
                 
PROPERTY AND EQUIPMENT, net
   
979,673
     
512,042
 
                 
RIGHT OF USE ASSETS, net
   
442,197
     
323,661
 
                 
OTHER INTANGIBLE ASSETS, net
   
7,259,795
     
-
 
                 
GOODWILL
   
14,198,799
     
-
 
                 
OTHER ASSETS
   
31,010
     
41,931
 
TOTAL ASSETS
 
$
32,866,106
   
$
3,381,992
 
                 
LIABILITIES
               
CURRENT LIABILITIES
               
Accounts payable
 
$
2,322,192
   
$
1,439,413
 
Accrued expenses
   
1,603,543
     
1,111,109
 
Accrued employee compensation
   
2,544,768
     
1,452,910
 
Warrant Liability
   
17,546,260
     
-
 
Convertible promissory notes payable
   
4,000,000
     
-
 
Convertible promissory notes, related parties
   
1,596,254
     
-
 
SBA loans
   
321,821
     
-
 
Accrued interest
   
354,062
     
-
 
Operating lease liability
   
251,372
     
173,270
 
Finance lease liability
   
187,416
     
121,634
 
Contract liabilities
   
65,037
     
66,577
 
Accrued interest, related parties
   
28,864
     
1,859,977
 
Notes payable, related parties, net
   
-
     
5,372,743
 
Short term notes payable
   
-
     
587,233
 
Line of credit, related parties
   
-
     
212,388
 
Advances from related parties
   
-
     
18,098
 
TOTAL CURRENT LIABILITIES
   
30,821,589
     
12,415,352
 
                 
NON-CURRENT LIABILITIES
               
Promissory note payable
   
10,448,039
     
-
 
SBA loans
   
142,514
     
-
 
Finance lease liability
   
284,588
     
271,240
 
Operating lease liability
   
222,815
     
185,777
 
Contract liabilities
   
45,519
     
573,224
 
TOTAL NON-CURRENT LIABILITIES
   
11,143,475
     
1,030,241
 
TOTAL LIABILITIES
   
41,965,064
     
13,445,593
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' DEFICIT
               
PREFERRED STOCK, par value $0.001, 5,000,000 shares authorized; 6,175 and 293 shares designated Series A and Series B, respectively
   
-
     
-
 

               
COMMON STOCK, par value $0.001, 600,000,000 (Note 18) shares authorized; 466,094,621 and 293,780,400 issued and
outstanding in 2020 and 2019, respectively
   
466,095
     
293,781
 
                 
ADDITIONAL PAID-IN CAPITAL
   
135,521,907
     
115,457,808
 
                 
ACCUMULATED DEFICIT
   
(145,025,761
)
   
(125,752,956
)
                 
ACCUMULATED OTHER COMPREHENSIVE LOSS
   
(61,199
)
   
(62,234
)
TOTAL STOCKHOLDERS' DEFICIT
   
(9,098,958
)
   
(10,063,601
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
32,866,106
   
$
3,381,992
 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)

   
Three Months Ended
September 30,
2020
   
Three Months Ended
September 30,
2019
   
Nine Months Ended
September 30,
2020
   
Nine Months Ended
September 30,
2019
 
   
(As Restated)
         
(As Restated)
       
                         
REVENUES
                       
Product
 
$
1,321,248
   
$
158,855
   
$
1,465,147
   
$
444,087
 
License fees
   
29,447
     
16,250
     
39,447
     
189,307
 
Other revenue
   
616,201
     
22,535
     
694,194
     
59,185
 
TOTAL REVENUES
   
1,966,896
     
197,640
     
2,198,788
     
692,579
 
                                 
COST OF REVENUES
                               
Product
   
533,629
     
91,179
     
637,369
     
334,749
 
Other
   
14,777
     
31,744
     
26,261
     
67,908
 
TOTAL COST OF REVENUES
   
548,406
     
122,923
     
663,630
     
402,657
 
                                 
GROSS MARGIN
   
1,418,490
     
74,717
     
1,535,158
     
289,922
 
                                 
OPERATING EXPENSES
                               
Research and development
   
432,155
     
299,903
     
983,816
     
867,825
 
Selling and marketing
   
1,373,476
     
335,472
     
2,414,477
     
901,031
 
General and administrative
   
5,054,508
     
1,802,659
     
9,529,218
     
4,746,519
 
Amortization
   
244,626
     
-
     
244,626
     
-
 
Depreciation
   
82,493
     
22,338
     
200,282
     
40,150
 
TOTAL OPERATING EXPENSES
   
7,187,258
     
2,460,372
     
13,372,419
     
6,555,525
 
                                 
OPERATING LOSS
   
(5,768,768
)
   
(2,385,655
)
   
(11,837,261
)
   
(6,265,603
)
                                 
OTHER INCOME (EXPENSE)
                               
Gain or (Loss) on warrant liability
   
(5,590,806
)
   
-
     
(5,590,806
)
   
227,669
 
Loss on extinguishment of debt
   
(503,234
)
   
-
     
(503,234
)
   
-
 
Interest expense
   
(690,659
)
   
(182,001
)
   
(878,331
)
   
(1,120,440
)
Interest expense, related party
   
(61,334
)
   
(175,522
)
   
(431,070
)
   
(508,193
)
Loss on foreign currency exchange
   
(23,836
)
   
(4,840
)
   
(32,103
)
   
(13,199
)
TOTAL OTHER INCOME (EXPENSE), NET
   
(6,869,869
)
   
(362,363
)
   
(7,435,544
)
   
(1,414,163
)
 
                               
NET LOSS
   
(12,638,637
)
   
(2,748,018
)
   
(19,272,805
)
   
(7,679,766
)
                                 
OTHER COMPREHENSIVE INCOME (LOSS)
                               
Foreign currency translation adjustments
   
2,792
     
(14,061
)
   
869
     
13,152
 
TOTAL COMPREHENSIVE LOSS
 
$
(12,635,845
)
 
$
(2,762,079
)
 
$
(19,271,936
)
 
$
(7,666,614
)
                                 
LOSS PER SHARE:
                               
Net loss - basic and diluted
 
$
(0.03
)
 
$
(0.01
)
 
$
(0.06
)
 
$
(0.04
)
 
                               
Weighted average shares outstanding - basic and diluted
   
384,502,450
     
211,423,362
     
326,405,397
     
181,088,995
 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)


 
Preferred Stock
   
Common Stock
                         
 
Number of
Shares
Issued and
Outstanding
   

Par Value
   
Number of
Shares
Issued and
Outstanding
   

Par Value
     
Additional Paid-
in Capital
       
Accumulated
Deficit
     
Accumulated
Other
Comprehensive
Loss
      
Total

                                                 
Balances as of Janaury 1, 2019
   
-
   
$
-
     
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 and
convertible notes payable
   
-
     
-
     
3,333,334
     
3,334
     
263,333
     
-
     
-
     
266,667
 
Reclassification of warrant liability to equity
due to adoption of ASU 2017-11
   
-
     
-
     
-
     
-
     
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
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
(2,734,431
)
   
-
     
(2,734,431
)
Cashless warrant exercises
   
-
     
-
     
2,997,375
     
2,997
     
13,003
     
-
     
-
     
16,000
 
Proceeds from warrant exercise
   
-
     
-
     
17,051,769
     
17,052
     
1,333,005
     
-
     
-
     
1,350,057
 
Other warrant exercise
   
-
     
-
     
5,804,167
     
5,804
     
451,697
                     
457,501
 
Conversion of short term notes and
convertible notes payable
   
-
     
-
     
2,475,000
     
2,475
     
177,525
     
-
     
-
     
180,000
 
Stock-based compensation
   
-
     
-
     
-
     
-
     
31,758
     
-
     
-
     
31,758
 
Warrants issued for consulting services
   
-
     
-
     
-
     
-
     
36,067
     
-
     
-
     
36,067
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
1,489
     
1,489
 
                                                                 
Balances as of June 30, 2019
   
-
   
$
-
     
188,650,891
   
$
188,651
   
$
103,774,485
   
$
(120,254,865
)
 
$
(63,777
)
 
$
(16,355,506
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
(2,748,018
)
   
-
     
(2,748,018
)
Cashless warrant exercises
   
-
     
-
     
1,710,674
     
1,711
     
18,289
     
-
     
-
     
20,000
 
Proceeds from warrant exercise
   
-
     
-
     
10,506,593
     
10,506
     
961,528
     
-
     
-
     
972,034
 
Other warrant exercise
   
-
     
-
     
40,355,006
     
40,355
     
4,014,500
     
-
     
-
     
4,054,855
 
Conversion of line of credit, related
parties to equity
   
-
     
-
     
4,545,455
     
4,545
     
495,455
     
-
     
-
     
500,000
 
Stock-based compensation
   
-
     
-
     
-
     
-
     
224,400
     
-
     
-
     
224,400
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
14,061
     
14,061
 
                                                                 
Balances as of September 30, 2019
   
-
   
$
-
     
245,768,619
   
$
245,768
   
$
109,488,657
   
$
(123,002,883
)
 
$
(49,716
)
 
$
(13,318,174
)
                                                                 
                                                                 
                                                           
As Restated
 
Balances as of Janaury 1, 2020
   
-
   
$
-
     
293,780,400
   
$
293,781
   
$
115,457,808
   
$
(125,752,956
)
 
$
(62,234
)
 
$
(10,063,601
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
(3,001,148
)
   
-
     
(3,001,148
)
Proceeds from warrant exercise
   
-
     
-
     
1,000,000
     
1,000
     
9,000
     
-
     
-
     
10,000
 
Shares issued for services
   
-
     
-
     
1,000,000
     
1,000
     
199,000
     
-
     
-
     
200,000
 
Stock-based compensation
   
-
     
-
     
-
     
-
     
21,900
     
-
     
-
     
21,900
 
Conversion of short term notes
   
-
     
-
     
1,820,461
     
1,820
     
262,164
     
-
     
-
     
263,984
 
Conversion of advances from related parties
   
-
     
-
     
62,811
     
63
     
2,035
     
-
     
-
     
2,098
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
4,826
     
4,826
 
                                                                 
Balances as of March 31, 2020
   
-
   
$
-
     
297,663,672
   
$
297,664
   
$
115,951,907
   
$
(128,754,104
)
 
$
(57,408
)
 
$
(12,561,941
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
(3,633,020
)
   
-
     
(3,633,020
)
Proceeds from PIPE
   
-
     
-
     
1,071,428
     
1,071
     
148,929
     
-
     
-
     
150,000
 
Proceeds from stock option exercise
   
-
     
-
     
225,000
     
225
     
44,025
     
-
     
-
     
44,250
 
Beneficial conversion feature on
convertible debt
   
-
     
-
     
-
     
-
     
560,682
     
-
     
-
     
560,682
 
Shares issued for services
   
-
     
-
     
2,200,000
     
2,200
     
515,300
     
-
     
-
     
517,500
 
Conversion of short term notes and settlements
   
-
     
-
     
759,328
     
759
     
89,986
     
-
     
-
     
90,745
 
Conversion of advances from related parties
   
-
     
-
     
200,000
     
200
     
15,800
     
-
     
-
     
16,000
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
(6,749
)
   
(6,749
)
                                                                 
Balances as of June 30, 2020
   
-
   
$
-
     
302,119,428
   
$
302,119
   
$
117,326,629
   
$
(132,387,124
)
 
$
(64,157
)
 
$
(14,822,533
)
Net loss    (As Restated)
   
-
     
-
     
-
     
-
     
-
     
(12,638,637
)
   
-
     
(12,638,637
)
Proceeds from PIPE (As Restated)
   
-
     
-
     
123,550,000
     
123,550
     
12,408,966
     
-
     
-
     
12,532,516
 
LGH Warrant Liability (As Restated)
                                   
(249,049
)
                   
(249,049
)
Series C Preferred Conversion
   
-
     
-
     
16,071,390
     
16,072
     
2,233,928
     
-
     
-
     
2,250,000
 
Series D Preferred Conversion
   
-
     
-
     
1,428,568
     
1,429
     
198,571
     
-
     
-
     
200,000
 
Shares issued for services
   
-
     
-
     
5,000,000
     
5,000
     
1,075,000
     
-
     
-
     
1,080,000
 
Inducement shares issued
                   
200,000
     
200
     
44,540
                     
44,740
 
Conversion of short term notes and settlements
   
-
     
-
     
2,250,000
     
2,250
     
207,750
     
-
     
-
     
210,000
 
Conversion of notes payable, related
parties to equity
   
-
     
-
     
15,475,235
     
15,475
     
2,275,572
     
-
     
-
     
2,291,047
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
2,958
     
2,958
 
                                                                 
Balances as of September
30, 2020     (As Restated)
   
-
   
$
-
     
466,094,621
   
$
466,095
   
$
135,521,907
   
$
(145,025,761
)
 
$
(61,199
)
 
$
(9,098,958
)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


  
Nine Months Ended
September 30,
2020
(As Restated)
   
Nine Months Ended
September 30,
2019
 
           
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(19,272,805
)
 
$
(7,679,766
)
Adjustments to reconcile net loss to net cash used by operating activities
               
Amortization of intangibles
   
244,626
     
-
 
Depreciation
   
200,282
     
40,150
 
Bad Debt Expense
   
(39,818
)
   
(18,835
)
Share-based payment
   
21,900
     
256,158
 
Shares issued for services
   
1,797,500
     
-
 
Shares issued for inducement shares
   
44,740
     
-
 
Loss on extinguishment of debt
   
503,234
     
-
 
Warrants issued for consulting services
   
-
     
36,067
 
Gain or (Loss) on warrant liability
   
5,590,806
     
(227,669
)
Amortization of debt issuance costs
   
214,431
     
-
 
Accrued interest
   
191,031
     
1,139,904
 
Interest payable, related parties
   
696,208
     
508,193
 
Amortization of operating leases
   
(3,396
)
   
(14,634
)
Waived proceeds from warrant exercise
   
-
     
36,000
 
Changes in operating assets and liabilities
               
Accounts receivable - trade
   
(1,280,454
)
   
197,301
 
Inventory
   
(136,555
)
   
66,884
 
Prepaid expenses
   
(502,346
)
   
(83,007
)
Due from related parties
   
-
     
1,228
 
Other assets
   
10,921
     
(13,567
)
Operating leases
   
-
     
9,513
 
Financing leases
   
1,980
         
Accounts payable
   
882,779
     
118,908
 
Accrued expenses
   
492,434
     
127,586
 
Accrued employee compensation
   
1,091,858
     
863,400
 
Contract liabilties
   
(529,245
)
   
(48,425
)
NET CASH USED BY OPERATING ACTIVITIES
   
(9,779,889
)
   
(4,684,611
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Acquisition of UltraMIST (Note 4)
   
(20,000,000
)
   
-
 
Purchases of property and equipment
   
(39,142
)
   
(28,990
)
NET CASH USED BY INVESTING ACTIVITIES
   
(20,039,142
)
   
(28,990
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from sale of convertible preferred stock
   
2,450,000
     
-
 
Proceeds from convertible promissory note
   
1,100,000
     
-
 
Proceeds from SBA loan
   
614,335
     
-
 
Proceeds from PIPE offering
   
21,456,468
     
-
 
Proceeds from senior promissory notes
   
13,346,547
         
Proceeds from stock option exercise
   
44,250
     
90,000
 
Proceeds from short term note
   
-
     
1,215,000
 
Proceeds from warrant exercise
   
10,000
     
1,378,142
 
Advances from related parties
   
-
     
2,055,414
 
Payments of debt
   
(5,457,663
)
       
Payments of principal on finance leases
   
(114,806
)
   
-
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
33,449,131
     
4,738,556
 
                 
EFFECT OF EXCHANGE RATES ON CASH
   
1,036
     
13,152
 
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
3,631,136
     
38,107
 
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
1,760,455
     
364,549
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
5,391,591
   
$
402,656
 
                 
NONCASH INVESTING AND FINANCING ACTIVITIES
               
                 
Acquisition of UltraMIST partially financed with convertible promissory note
 
$
4,000,000
     
-
 
Conversion of short term notes payable to equity
 
$
564,729
   
$
2,860,769
 
Other warrant exercise
   
-
   
$
924,649
 
 
               
Conversion of line of credit, related parties to equity
   
-
   
$
680,000
 
 
               
Conversion of advances from related party to equity
 
$
18,098
     
-
 
 
               
Additions to right of use assets from new finance lease liabilities
 
$
127,611
     
-
 
 
               
Beneficial conversion feature on convertible debt
 
$
560,682
     
-
 
 
               
Reclassification of warrant liability to equity
   
-
   
$
1,542,000
 
 
               
Accounts payable and Accrued employee compensation converted to equity
   
-
   
$
36,500
 
 
               
Conversion of convertible promissory notes to equity
   
-
   
$
1,918,254
 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

1.
Nature of the Business

SANUWAVE Health, Inc. and Subsidiaries (the “Company”) is focused on the research, development, and commercialization of its patented noninvasive and biological response activating medical systems for the repair and regeneration of skin, musculoskeletal tissue, and vascular structures. Through its recent acquisition of Celularity’s UltraMIST® assets, SANUWAVE now combines two highly complementary and market-cleared energy transfer technologies and two human tissue biologic products, which creates a platform of scale with an end-to-end product offering in the advanced wound care market.

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 (FDA) granted the Company’s request to classify the dermaPACE System as a Class II device via the de novo process. As a result of this decision, the Company was able to immediately market the product for the treatment of Diabetic Foot Ulcers (DFU) as described in the De Novo request, subject to the general control provisions of the FD&C Act and the special controls identified in this order.

On August 6, 2020 the Company entered into an Asset Purchase Agreement with Celularity Inc. (“Celularity”) pursuant to which the Company acquired Celularity’s UltraMIST assets, as more fully described in Note 4. The UltraMIST® System is a proprietary technology cleared by the FDA for the promotion of wound healing through wound cleansing and maintenance debridement combined with ultrasound energy deposited inside the wound that stimulated tissue regeneration.

In connection with the Asset Purchase Agreement, on August 6, 2020, the Company entered into a license and marketing agreement with Celularity pursuant to which Celularity granted to the Company a license to the Celularity wound care biologic products, Biovance® and Interfyl® (the “License Agreement”). The License Agreement provides the Company with an exclusive license to use, market, distribute and sell Biovance® in the “Field” and “Territory” (each as defined in the License Agreement), and a non-exclusive license to use, market, distribute and sell Interfyl® in the Field in the Territory. The License Agreement has an initial five year term, after which it automatically renews for additional one year periods, unless either party gives written notice at least 180 days prior to the expiration of the current term.

The Company’s portfolio of regenerative medicine products and product candidates activate tissue regeneration biological signaling and angiogenic responses, producing new vascularization and microcirculatory improvement combined with tissue growth which helps restore the body’s normal healing processes. The Company applies and researches its patented energy transfer technologies in wound healing, orthopedic/spine, plastic/cosmetic and cardiac/endovascular conditions. The Company is marketing its dermaPACE System for treatment usage in the United States and is able to generate revenue from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia, and Asia/Pacific. The Company generates revenue streams from dermaPACE treatments, product sales, licensing transactions and other activities.

In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. The primary impact of the COVID-19 pandemic has been seen in our dermaPACE System placements in the United States as our treatment is not widely recognized as an “essential” service. In addition, stay-at-home policies deployed to combat the spread of COVID-19 has greatly constrained visits to wound care centers, doctor’s offices and hospitals since late March 2020 and continuing as of this filing and have therefore delayed placements of new devices that were included in our revenue forecast. The future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. It is difficult at this time to predict the impact that COVID-19 will have on the Company’s business, financial position and operating results in future periods due to numerous uncertainties. The Company is closely monitoring the impact of the pandemic on all aspects of its business and operations including its recent acquired assets.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

1.
Nature of the Business (continued)

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America 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 U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The financial information as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2020.

The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. 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 March 30, 2020 (the “2019 Annual Report”).

2.
Going Concern

The Company does not currently generate significant recurring revenue and may require additional capital during 2020. As of September 30, 2020, the Company had cash and cash equivalents of $5,391,591. For the nine months ended September 30, 2020, the net cash used by operating activities was $9,779,889. The Company incurred a restated net loss of $19,272,805 for the nine months ended September 30, 2020. Such factors raise 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.

The continuation of the Company’s business is dependent upon raising additional capital 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 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 2019 Annual Report:

Principles of consolidation - The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

3
Summary of Significant Accounting Policies (continued)

Estimates – These condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of condensed consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These condensed consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein. Significant estimates include the recording of allowances for doubtful accounts, estimate of the net realizable value of inventory, the determination of the valuation allowances for deferred taxes the estimated fair value of stock-based compensation, debt discounts and warrants, and valuation of acquired assets related to the acquisition of UltraMIST (Note 4).

Fair value of financial instruments - The carrying values of accounts payable, and other short-term obligations approximate their fair values, principally because of the short-term maturities of these instruments.

The Company has adopted ASC 820-10, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The framework that is set forth in this standard is applicable to the fair value measurements where it is permitted or required under other accounting pronouncements.

The ASC 820-10 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets and liabilities;

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 - Unobservable inputs that are not corroborated by market data, therefore requiring the Company to develop its own assumptions.

The Company recognizes all derivatives on the balance sheet at fair value. The fair value of the warrant liability is determined based on a lattice solution, binomial approach pricing model, and includes the use of unobservable inputs such as the expected term, anticipated volatility and risk-free interest rate, and therefore is classified within level 3 of the fair value hierarchy. (See Note 14).

The Company’s notes payable approximate fair value because the terms are substantially similar to comparable debt in the marketplace.

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 September 30, 2020, inventory consists of goods of $2,273,436 and parts of $266,039 for a total inventory of $2,539,475. As of December 31, 2019, inventory consisted of goods of $357,264 and parts of $185,691 for a total inventory of $542,955.

Preferred stock – The Company evaluates Preferred Stock issuances for liability or equity classification in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity, and determines appropriate equity or liability accounting treatment. Additionally, the Company determines, if classified as equity, whether it would be recorded as permanent or temporary equity.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

3
Summary of Significant Accounting Policies (continued)

Sequencing policy – The Company has granted certain options and warrants which, upon settlement, may exceed the limit on the authorized number of shares of common stock. The Company follows a sequencing policy for which in the event partial reclassifications of contracts subject to ASC 815-40-25 is necessary, due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of earliest issuance date of potentially dilutive instruments with the earliest grants receiving first allocation of shares. On August 6, 2020, the Company issued shares of common stock, convertible debt and warrants exercisable into shares of common stock in connection with a private placement funding and Senior Notes. In the event that all outstanding convertible securities were converted into shares of common stock of the Company, the Company would exceed the total number of shares authorized for issuance in the Company’s Articles of Incorporation. The Company has applied its sequencing policy to and determined that all convertible securities are convertible into shares of common stock other than warrants to purchase 64,119,742 shares of common stock issued on August 6, 2020.  These warrants were valued at $8,656,165 at August 6, 2020 and recorded as a liability in the condensed consolidated balance sheet.

Convertible instruments and liabilities related to warrants issued –  The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with FASB ASC 815 “Derivatives and Hedging” (“ASC 815”). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options (“ECOs”) and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. Conversion options are recorded as a discount to the host instrument and are amortized as amortization of debt discount on the consolidated statements of operations over the life of the underlying instrument. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.  A binomial model was used to estimate the fair value of the ECOs of warrants that are classified as derivative liabilities on the consolidated balance sheets. The models include subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the actual volatility during the most recent historical period of time equal to the weighted average life of the instruments.

Recent Accounting Pronouncements

In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature and simplifies the guidance for determining whether a conversion feature is a derivative. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. In addition, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its condensed consolidated financial statements.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

4.
Asset Purchase Agreement

On August 6, 2020, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Celularity pursuant to which the Company acquired (the “Transaction”) Celularity’s UltraMIST assets (“UltraMIST”, or the “Assets”). The acquisition provides the Company with a robust product offering in the advanced wound care market and gives the Company an end-to-end advanced wound care product portfolio that addresses the entire care pathway. The aggregate consideration paid for the Assets was $24,000,000, which consisted of (i) a cash payment of $18,890,000, (ii) the issuance of a convertible promissory note to Celularity in the principal amount of $4,000,000 (the “Seller Note”), and (iii) a credit of $1,110,000 for the previous payment made by the Company to Celularity pursuant to that certain letter of intent between the Company and Celularity dated June 7, 2020.

In connection with the Asset Purchase Agreement, on August 6, 2020, the Company entered into a license and marketing agreement with Celularity pursuant to which Celularity granted to the Company a license to the Celularity wound care biologic products, Biovance® and Interfyl® (the “License Agreement”). The License Agreement provides the Company with an exclusive license to use, market, distribute and sell Biovance® in the “Field” and “Territory” (each as defined in the License Agreement), and a non-exclusive license to use, market, distribute and sell Interfyl® in the Field in the Territory. The License Agreement has an initial five year term, after which it automatically renews for additional one year periods, unless either party gives written notice at least 180 days prior to the expiration of the current term.

The Company evaluated whether the Transaction should be accounted for as an asset acquisition or a business combination and determined that the Transaction met the definition of a business per Accounting Standard Update (ASU) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The Company has treated the transaction as a business combination and applied the related accounting guidance as required, using the acquisition method and a fair value model.

The tables below present the fair value of the consideration exchanged and the preliminary estimates of the fair value of assets acquired of UltraMIST.  Due to the limited amount of time since the UltraMIST acquisition, the valuation of the acquired assets is preliminary and subject to change.  The Company is still evaluating the income tax effects of the transaction.

Purchase consideration
     
   
August 6, 2020
 
Cash paid at closing
 
$
18,890,000
 
Seller convertible note
   
4,000,000
 
Previous cash deposit pursuant to letter of intent
   
1,110,000
 
Total
 
$
24,000,000
 

Net assets acquired
 
Fair Value at
August 6,
2020
 
Inventory
 
$
1,859,965
 
Property, plant and equipment
   
436,815
 
Intangible assets (a)
   
14,443,425
 
Goodwill (b)
   
7,259,795
 
Total
 
$
24,000,000
 

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

4.
Asset Purchase Agreement (continued)

(a)
Intangible assets, as provided in the table below, are recorded at estimated fair value.  The estimated fair value of the acquired customer relationships is based on a variation of the income valuation approach and is determined using the multi-period excess earnings method. The estimated fair value of the acquired patent and trade names is based on a variation of the income valuation approach known as the relief from royalty method. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.


    
Estimated Fair Value
     
Estimated
Weighted
Average
Life
(Years)
  
Customer relationships - UltraMIST
 
$
3,820,000
     
7
 
Customer relationships - Biologics
   
7,618,100
     
7
 
Patent
   
2,311,825
     
19
 
Trade names
   
693,500
     
19
 
   
$
14,443,425
         

(b)
Goodwill represents the excess of the total purchase consideration over fair value of the assets recognized and represents the future economic benefits that we believe will result from combining the operations of Sanuwave and UltraMIST, including expected future synergies and operating efficiencies. Goodwill resulting from the Transaction has been assigned to the Company’s lone operating segment. None of the goodwill recognized is expected to be deductible for income tax purposes.

Acquisition and related costs

During the three and nine months ended September 30, 2020, acquisition costs of $995,353 and $1,084,994, respectively, were expensed as incurred and included in general and administrative expenses in the Condensed Consolidated Statement of Comprehensive Loss. Such costs include professional fees of advisors and integration and synergy costs related to the combination of UltraMIST and Sanuwave. Additionally, $1,653,453 of debt issuance costs related to the NWPSA Senior Debt described in Note 7 were capitalized as a reduction in the principal amount of a promissory note on the Condensed Consolidated Balance Sheet. These debt issuance costs are amortized to interest expense over the life of the NWPSA Senior Debt.

Unaudited actual and pro forma information

The following unaudited pro forma information has been prepared by combining the historical results of Sanuwave and historical results of UltraMIST. The unaudited pro forma combined financial data for all periods presented were adjusted to give effect to pro forma events that are directly attributable to the aforementioned transaction and are factually supportable. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.

The unaudited combined pro forma information is for informational purposes only and is not necessarily indicative of what the combined company's results actually would have been had the acquisition been completed as of the beginning of the periods as indicated. In addition, the unaudited pro forma information does not purport to project the future results of the combined company.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

4.
Asset Purchase Agreement (continued)

The acquired Assets were consolidated into our financial statements starting on the acquisition date. The total revenues and net loss of UltraMIST consolidated into our financial statements since the date of acquisition through September 30, 2020 were $1,206,847 and $1,509,943, respectively. The following financial information presents our results as if the Transaction had occurred on January 1, 2019:



Three Months Ended
   
Nine Months Ended
 
September 30, 2020
   
September 30, 2019
   
September 30, 2020
   
September 30, 2019
 
(restated)
         
(restated)
       
                         
Total revenue
 
$
2,770,646
   
$
2,325,640
   
$
5,973,538
   
$
6,810,404
 
Net loss
 
$
(12,549,181
)
 
$
(4,863,590
)
 
$
(23,869,495
)
 
$
(14,855,293
)

Significant adjustments to the pro forma information above include recognition of non-recurring direct incremental acquisition costs in the nine months ended September 30, 2019 and exclusion of those costs from all other periods presented; recognition of the Biovance® license fee pursuant to the License Agreement; increase in interest expense related to the NWPSA Senior Debt Notes described in Note 7, the Seller Note described in Note 8, the HealthTronics Note described in Note 8, and the Stolarski Note described in Note 10; increase in depreciation expense related to the fair value adjustment of acquired property and equipment; and amortization associated with an estimate of the acquired intangible assets.

5.
Accrued expenses

Accrued expenses consist of the following:

   
September
30,
2020
   
December
31,
2019
 
Accrued outside services
 
$
615,547
   
$
108,033
 
Accrued legal and professional fees
   
370,985
     
134,970
 
Accrued board of director’s fees
   
260,000
     
400,000
 
Accrued executive severance
   
167,500
     
154,000
 
Accrued travel
   
120,000
     
120,000
 
Accrued inventory
   
50,275
     
167,050
 
Accrued clinical study expenses
   
13,650
     
13,650
 
Accrued other
   
5,586
     
13,406
 
   
$
1,603,543
   
$
1,111,109
 

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

6.
Contract liabilities

As of September 30, 2020, the Company has contract assets and liabilities from contracts with customers (see Note 16).

Contract liabilities consist of the following:

   
September
30,
2020
   
December
31,
2019
 
Service agreement
 
$
77,538
   
$
133,510
 
License fees
   
-
     
500,000
 
Devices
   
22,500
     
-
 
Other
   
10,518
     
6,291
 
Total Contract liabilities
   
110,556
     
639,801
 
Non-Current
   
(45,519
)
   
(573,224
)
Total Current
 
$
65,037
   
$
66,577
 

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 contract liability balances as of September 30, 2020, the Company expects to satisfy its remaining performance obligations associated with $65,037 and $45,519 of contract liability balances within the next twelve months and following thirty-two months, respectively. Of the aggregate contract liability balances as of December 31, 2019, the Company expects to satisfy its remaining performance obligations associated with $66,577 and $573,224 of contract liability balances within the next twelve months and following thirty-eight months, respectively.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

7.
Senior promissory notes

On August 6, 2020, the Company entered into a Note and Warrant Purchase and Security Agreement (the “NWPSA”), with the noteholder party thereto and NH Expansion Credit Fund Holdings LP, as agent. As a result, the Company issued a $15,000,000 Secured Promissory Note (the “Senior Notes”) and Warrant exercisable into shares of the Company’s common stock (the “Warrant”) in exchange for cash to support operations, repay outstanding debt and close on the acquisition of the UltraMIST assets from Celularity, among other transactions. The Company received net proceeds from issuing the Notes and NH Warrant of $13,346,547. The NWPSA provides for (i) the sale and purchase of secured notes in an aggregate original principal amount of $15 million and (ii) the issuance of 13,091,160 warrants equal to 2.0% of the fully-diluted common stock of the Company as of the issue date. The warrant has an exercise price of $0.01 per share and a 10 year term (Note 11). The warrant agreement contains a put option. Upon payment in full of the Note, the holder has the ability to require the Company to purchase the warrants from the holder for cash. Accordingly, the warrant has been classified as a derivative liability. The holder has the option to exercise the put any time between the payment of the Note and the expiration of the warrants. The Note has a maturity date of September 30, 2025 and accrues interest at a rate that is the sum of: (a) the greater of the quarter end prime rate or 3% plus (b) 9%, due in quarterly arrears.  The Senior Notes are secured by substantially all assets of the Company including in the event of default placing bank accounts under a control agreement, copyrights, trademarks, patents, applications, registered and unregistered, licenses, designs, held or acquired after August 6, 2020 by the Company. The NWPSA contains several default conditions, including non-monetary default events including misrepresentations and material adverse changes. In the case of default, the agent has the right to declare the Senior Notes immediately due, not extend further credit, take actions to protect security (title changes), demand and take possession of the books, and is appointed an Attorney in Fact in certain conditions. Covenants include restrictions on dispositions, mergers or acquisitions, incurring indebtedness and minimum liquidity provisions. As of September 30, 2020, the Company was in compliance with all financial covenants under the NWPSA.

The Company recorded a current warrant liability of $3,050,240 for the fair value of the warrant. The outstanding balance of the Note at September 30, 2020 was $10,448,039 and accrued interest of $280,729. Further, as of September 30, 2020, the Company had unamortized debt issuance costs of $1,600,115.

8.
Convertible promissory notes (Restated)

On August 6, 2020, the Company entered into an asset purchase agreement with Celularity Inc., described in Note 4 pursuant to which the Company acquired Celularity’s UltraMIST assets. A portion of the aggregate consideration of $24,000,000 paid for the assets included the issuance of a promissory note to Celularity in the principal amount of $4,000,000. The Seller Note has a maturity date of August 6, 2021 and accrues interest at a rate equal to 12.0% per annum. In the event that the Seller Note has not been repaid prior to January 1, 2021, Celularity may elect to convert the outstanding principal amount plus any accrued but unpaid interest thereon into shares of the Company’s common stock, at a conversion price of $0.10 per share. As this conversion option is contingent on a future event, the conversion option has not been bifurcated from the host instrument as of September 30, 2020. The Seller Note is expressly subordinate to the NWPSA “Senior Debt” described in Note 7. The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty. As of September 30, 2020, $4,000,000 remained outstanding and had accrued interest of $73,333.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

8.
Convertible promissory notes (Restated) (continued)

On June 5, 2020, the Company entered into a Securities Purchase Agreement with investor LGH Investments LLC (the “Investor”) for (i) a Promissory Note (the “Convertible Promissory Note”) in the original principal amount of $1,210,000, convertible into shares of common stock, (ii) warrants entitling the Investor to acquire 1,075,000 shares of common stock (the “Warrants”) and (iii) 200,000 restricted common shares in the Company as an inducement grant (the “Inducement Shares”). Such note contained certain default provisions, as defined, resulting in net proceeds of $1,100,000. As part of the Securities Purchase Agreement, the Company established a reserve of shares of its authorized but unissued and unreserved common stock in the amount of 11,000,000 shares for purposes of exercise of the Warrant or conversion of the Convertible Promissory Note. The Convertible Promissory Note matures on February 5, 2021 and includes a one-time interest charge of 8% to be applied on the issuance date to the original principal amount. The Investor can convert the Convertible Promissory Note and interest at any time prior to maturity to the number of shares of common stock, equal to the amount obtained by dividing (i) the amount of the unpaid principal and interest on the note by (ii) $0.25. The Warrants have an exercise price of $0.35 per share and have a term of five years and recorded as a derivative liability (see Footnote 12). With respect to the Inducement Shares, in the event the Company’s share price has declined on the date on which the Investor seeks to have the restricted legend removed on such shares, the Company agrees to issue the Investor additional shares such that the aggregate value of the Inducement Shares equals the aggregate value of the Inducement Shares as of June 5, 2020. The Inducement Shares were issued on September 11, 2020 and included in common stock and additional paid in capital.
 
On August 6, 2020, the Company repaid all amounts owing to LGH Investments, LLC in the original principal amount of $1,210,000. As a result, all obligations of the Company under the convertible promissory note have been terminated. The Company recorded a loss on extinguishment of debt of approximately $503,234 during the three and nine months ended September 30, 2020. The Warrants issued to LGH Investments, as more fully described in Note 11, contain certain ratchet provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants. As a result of certain dilutive issuances of securities by the Company during the third quarter of 2020, the exercise price of the Warrants decreased to $0.01 per share and the number of shares subject to the Warrants increased to 35,000,000 shares as of September 30, 2020.  A Derivative Liability – Warrant was recorded for this decrease in exercise price with the offset to  loss on warrant liability.

9.
SBA Loans

On May 28, 2020, the Company received proceeds from a loan in the approximate amount of $460,000 (the “PPP Loan”) from Truist Bank, as lender, pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the “CARES Act”). The PPP Loan matures on May 28, 2022 and bears interest at a rate of 1% per annum. Commencing December 12, 2020, the Company is required to pay the lender equal monthly payments of principal and interest. The PPP Loan is evidenced by a promissory note dated May 28, 2020 (the “Note”), which contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties and covenants. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

9.
SBA Loans (continued)

All or a portion of the PPP Loan may be forgiven by the U.S. Small Business Administration (“SBA”) upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. The ultimate forgiveness of the PPP Loan is also predicated upon regulatory authorities concurring with management’s good faith assessment that the current economic uncertainty made the loan request necessary to support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company satisfied all eligibility requirements for the PPP Loan, the Company is later determined to have violated any applicable laws or regulations or it is otherwise determined that the Company was ineligible to receive the PPP Loan, the Company may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. Under the terms of the PPP Loan, the Company may be eligible for full or partial loan forgiveness in the third quarter of 2020. The Company plans to complete the application for loan forgiveness in the fourth quarter of 2020, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the PPP Loan. As of September 30, 2020, $321,821 is classified as current and $142,514 is classified as non-current.

On June 10, 2020, the Company secured a loan offered by the U.S. Small Business Administration (SBA) under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of COVID-19 pandemic on the Company’s business. The principal amount of this loan was $150,000 and interest accrued at the rate of 3.75% per annum. This loan was paid off in full on August 5, 2020 with proceeds from the NWPSA Senior Notes as part of the conditions of that agreement.

10.
Convertible notes payable, related parties and 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 it is a shareholder in the Company and has a security agreement with the Company to provide a first security interest in the assets of the Company. An Event of Default under the notes payable, related parties occurred on December 31, 2016 (“Default”). As a result of the Default, the notes payable, related parties accrued interest at the rate of 10% per annum since January 2, 2017 through August 5, 2020.

On August 6, 2020, the Company entered into a letter agreement (the “HealthTronics Agreement”) with HealthTronics, Inc. (“HealthTronics”), pursuant to which the Company paid off all outstanding debt due and owed to HealthTronics. Pursuant to the HealthTronics Agreement, as consideration for the extinguishment of the debt due and owed to HealthTronics, (i) the Company paid to HealthTronics an amount in cash equal to $4,000,000, (ii) HealthTronics exercised all of its outstanding Class K Warrants to purchase 7,200,000 shares of common stock, (iii) the Company issued to HealthTronics a convertible promissory note in the principal amount of $1,372,743, and (iv) the Company and HealthTronics entered into a Securities Purchase Agreement dated August 6, 2020 pursuant to which the Company issued to HealthTronics an aggregate of 8,275,235 shares of common stock and an accompanying Class E warrant to purchase up to an additional 8,275,235 shares of common stock. The warrant has an exercise price of $0.25 per share and a three year term.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
 
10.
Convertible notes payable, related parties and Notes payable, related parties (continued)

The convertible promissory note, with principal amount of $1,372,743, matures on August 6, 2021 and accrues interest at a rate equal to 12.0% per annum.  In the event that the Seller Note has not been repaid prior to January 1, 2021, Healthronics may elect to convert the outstanding principal amount plus any accrued but unpaid interest thereon into shares of the Company’s common stock, at a conversion price of $0.10 per share. As this conversion option is contingent, the conversion option has not been bifurcated from the host instrument as of September 30, 2020. The convertible promissory note is expressly subordinate to the NWPSA “Senior Notes” described in Note 8. The Company may prepay the outstanding principal balance, together with any accrued but unpaid interest without premium or penalty. As of September 30, 2020, $1,372,743 remained outstanding and had accrued interest of $24,822.

The notes payable, related parties were fully paid off as of September 30, 2020 due to the letter agreement described above and had an aggregate outstanding principal balance of $5,372,743 at December 31, 2019. The related accrued interest, related parties currently payable totaled $1,859,977 at December 31, 2019. Interest expense on notes payable, related parties totaled $61,334 and $175,522 for the three months ended September 30, 2020 and 2019, respectively and $431,070 and $508,193 for the nine months ended September 30, 2020 and 2019, respectively.

On August 6, 2020, the Company terminated that certain line of credit agreement with A. Michael Stolarski, a member of the Company’s board of directors, dated December 29, 2017 and as amended November 12, 2018, in the amount of $1,000,000 (the “Stolarski Line of Credit”). As consideration for the termination of the Stolarski Line of Credit, the Company issued to A. Michael Stolarski a convertible promissory note in the principal amount of $223,511 (the “Stolarski Note”). The Stolarski Note has a maturity date of August 6, 2021 and accrues interest at a rate equal to 12.0% per annum. In the event that the Stolarski Note has not been repaid prior to January 1, 2021, the holder may elect to convert the outstanding principal amount plus any accrued by unpaid interest thereon into shares of common stock at a conversion price of $0.10 per share.

11.
Warrant Liabilities (Restated)

On August 6, 2020, the Company, issued 132,816,250 warrants to investors and the placement agent in connection with a private placement offering (Note 14). Additionally, on that date, the Company issued 13,091,160 warrants to the holder of the Senior Notes (Note 7) and 8,275,235 warrants to settle certain outstanding debt (Note 10).

At the time of issuance of the warrants, if all outstanding convertible securities were converted into shares of common stock, the Company would have exceeded its available authorized shares of common stock of 600,000,000 shares. If all outstanding convertible securities were converted into shares of common stock, the Company would have 713,439,897 shares issued and outstanding.  As a result of the limits on the Company’s authorized shares, a portion of the Company’s obligations under the warrants have been determined to be a liability.

The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the public share offering. Management also determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480 “Distinguishing Liabilities from Equity”. In accordance with the accounting guidance, 111,210,902 of the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

11.
Warrant Liabilities (continued)

The fair value of the warrant liabilities was measured using the binomial model. Significant inputs into the model at the inception and reporting period measurement dates are as follows:

Private Placement Warrants

Binomial Assumptions

Issuance date (1)
August 6, 2020
 
Period ended
September 30, 2020
 
Exercise Price(1)
 
$
0.25
   
$
0.25
 
Warrant Expiration Date (1)
August 6, 2023
 
August 6, 2023
 
Stock Price (2)
 
$
0.24
   
$
0.22
 
Interest Rate (annual) (3)
   
0.13
%
   
0.16
%
Volatility (annual) (4)
   
91.49
%
   
88.96
%
Time to Maturity (Years)
   
3
     
3
 
Calculated fair value per share
 
$
0.135
   
$
0.119
 

(1)
Based on the terms provided in the warrant agreement to purchase common stock of the Company. dated August 6, 2020.

(2)
Based on the trading value of common stock of the Company. as of August 6, 2020 and each presented period ending date.

(3)
Interest rate for U.S. Treasury Bonds, as of August 6, 2020 and each presented period ending date, as published by the U.S. Federal Reserve.

(4)
Based on the historical daily volatility of  the Company as of August 6, 2020 and each presented period ending date.

NH Expansion Warrants:

Binomial Assumptions

Issuance date (1)
August 6, 2020
 
Period ended
September 30, 2020
 
Exercise Price(1)
 
$
0.01
   
$
0.01
 
Warrant Expiration Date (1)
August 6, 2030
 
August 6, 2030
 
Stock Price (2)
 
$
0.24
   
$
0.22
 
Interest Rate (annual) (3)
   
0.21
%
   
0.69
%
Volatility (annual) (4)
   
102.09
%
   
184.77
%
Time to Maturity (Years)
   
10
     
10
 
Calculated fair value per share
 
$
0.233
   
$
0.22
 

(1)
Based on the terms provided in the warrant agreement to purchase common stock of the Company dated August 6, 2020.

(2)
Based on the trading value of common stock of the Company as of August 6, 2020 and each presented period ending date.

(3)
Interest rate for U.S. Treasury Bonds, as of August 6, 2020 and each presented period ending date, as published by the U.S. Federal Reserve.

(4)
Based on the historical daily volatility of the Company as of August 6, 2020 and each presented period ending date.

On August 6, 2020, the Company consummated a series of transactions, involving the issuance of common stock and various equity-linked instruments, each of which constitutes a dilutive issuance in the LGH Warrant Agreement (see Note 8) which triggered the ratchet provision, with the effect of decreasing the warrant’s exercise price to $0.01. With the reduction of the warrant exercise price from the initial $0.35 to $0.01 per share, in order to maintain the $350,000 aggregate exercise amount in effect prior to the adjustment (1,000,000 warrant shares with an exercise price of $0.35), as required by the ratchet provision, the Company was required to increase the number of warrant shares to 35,000,000, thereby entitling LGH to purchase 35,000,000 shares of the Company’s common stock at $0.01 per share.

The Company determined that these warrants meet the definition of a derivative liability.  Pursuant to this conclusion, the warrant was recorded as derivative liability at inception, initially measured at its fair value, and subsequently remeasured at fair value at each reporting date, with changes in the fair value reported in earnings.
 
The derivative liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various assumptions about future activities and the Company’s stock prices and historical volatility as inputs.  The fair value of the derivative warrant liability was measured using the Black Scholes Merton (“BSM") option pricing model.  Given the plain vanilla nature of the Warrant terms, including the absence of any exercise contingencies, the BSM sufficiently captures the terms of the Warrant as inputs to the valuation and produces a value that is not materially different from a binomial/lattice model using the following assumptions:
 
LGH
                       
Binomial Assumptions
  
Issuance date (1)
5-Jun-20
   
Period ended
30-Jun-20
   
Ratchet Date (5)
6-Aug-20
   
Period ended
30-Sep-20
 
Exercise Price(1)
 
$
0.35
   
$
0.35
   
$
0.01
   
$
0.01
 
Warrant Expiration Date (1)
 
5-Jun-25
   
5-Jun-25
   
5-Jun-25
   
5-Jun-25
 
Stock Price (2)
 
$
0.27
   
$
0.2625
   
$
0.2437
   
$
0.22
 
Interest Rate (annual) (3)
   
0.29
%
   
0.29
%
   
0.20
%
   
0.26
%
Volatility (annual) (4)
   
107
%
   
107
%
   
103
%
   
101
%
Time to Maturity (Years)
   
5
     
4.93
     
4.83
     
4.68
 
Calculated fair value per share
 
$
0.25
   
$
0.25
   
$
0.24
   
$
0.21
 

(1)
Based on the terms provided in the warrant agreement to purchase common stock of the Company dated June 5, 2020.

(2)
Based on the trading value of common stock of the Company as of June 5, 2020 and each presented period ending date.

(3)
Interest rate for U.S. Treasury Bonds, as of June 5, 2020, and each presented period ending date, as published by the U.S. Federal Reserve.

(4)
Based on the historical daily volatility of the Company as of June 6, 2020, and each presented period ending date.

(5)
Based on the terms provided in the warrant agreement to purchase common stock at date of the ratchet trigger August 6, 2020.

The warrants outstanding and fair values at each of the respective valuation dates are summarized below:

Warrant Liability
 
Warrants
Outstanding
   
Fair Value
per Share
   
Fair Value
 
Fair Value at remeasurement date of June 30, 2020
   
1,000,000
     
0.249
   
$
249,049
 
Additional Warrants classified as Liabilities August 6, 2020
   
111,210,902
     
0.206
     
22,888,017
 
Fair Value at date of August 6, 2020
   
112,210,902
     
0.206
   
$
23,137,066
 
Gain or (Loss) on warrant liability
                    (5,590,806
)
Fair Value as of period ended September 30, 2020
    112,210,902
      0.156
      17,546,260


During the three and nine months ending September 30, 2020, the Company recorded a loss on changes in fair value of warrant liability of $ 5,590,806, respectively. During the three and nine months ending September 30, 2019, there were no warrant liabilities or corresponding changes in valuation.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

12.
Preferred Stock

On February 6, 2020, the Company entered into a Series C Preferred Stock Purchase Agreement (the “Series C Purchase Agreement”) with certain accredited investors for the sale by the Company in a private placement of an aggregate of 90 shares of the Company’s Series C Convertible Preferred Stock, par value $0.001 per share at a stated value equal to $25,000 per share (the “Series C Preferred Stock”), for an aggregate total purchase price of $2,250,000.

On January 31, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series C Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate 90 shares of our preferred stock as Series C Convertible Preferred Stock. On May 14, 2020, the Company entered into a Series D Preferred Stock Purchase Agreement (the “Series D Purchase Agreement”) with certain accredited investors for the sale by the Company in a private placement of an aggregate of eight shares of the Company’s Series D Convertible Preferred Stock, par value $0.001 per share at a stated value equal to $25,000 per share (the “Series D Preferred Stock”), for an aggregate total purchase price of $200,000. On May 14, 2020, the Company filed a Certificate of Designation of Preferences, Right and Limitations of Series D Convertible Preferred Stock of the Company with the Nevada Secretary of State which amended our Articles of Incorporation to designate eight shares of our preferred stock as Series D Convertible Preferred Stock.

Subject to the terms of the Certificates of Designation, each share of Series C Preferred Stock and Series D Preferred Stock is convertible into shares of common stock of the Company at a rate equal to the stated value of such share of Series C Preferred Stock and Series D Preferred Stock of $25,000, divided by the conversion price of $0.14 per share (subject to adjustment from time to time upon the occurrence of certain events as described in the Certificate of Designation). The Certificates of Designation became effective upon filing with the Secretary of State of the State of Nevada. If all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were converted into common stock at the original conversion rate, such shares would convert into an aggregate of 17,500,000 shares of common stock.

On July 23, 2020, in connection with the Company’s 2020 Annual Meeting of Stockholders, the Company’s stockholders approved, among other matters, an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 355,000,000 to 600,000,000.  On September 20, 2020, Series C and D holders converted their preferred shares into 17,499,958 shares of common stock.

13.
Equity transactions

Approval of reverse split of common stock

On July 23, 2020, in connection with the Company’s 2020 Annual Meeting of Stockholders, the Company’s stockholders approved the Company to amend the Company’s Articles of Incorporation to effect a reverse split of the Company’s outstanding common stock at a ratio of between 1-for-10 and 1-for-50, with the exact ratio to be determined by the board of directors of the Company in its sole discretion. As of the filing of this 10-Q report, the Company has not effected a reverse split of its stock.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

13.
Equity transactions (continued)

Warrant Exercises

During the nine months ended September 30, 2020, the Company issued 1,000,000 shares of common stock upon the exercise of 1,000,000 Class P Warrants to purchase shares of stock and an exercise price of $0.01 per share under the terms of the respective warrant agreement.

During the nine months ended September 30, 2020, the Company issued 7,200,000 shares of common stock to a related party upon the exercise of Class K Warrants upon the conversion of accrued interest related to a note payable, related party totaling $636,000, as described in Note 10.

Conversion of liabilities

During the nine months ended September 30, 2020, the Company issued 2,579,789 shares of common stock upon the conversion of short term notes payable in the principal and accrued interest amount of $354,729 with the receipt of notices of Class L warrant exercises, all pursuant to the terms of the short term notes payable.

During the nine months ended September 30, 2020, the Company issued 2,250,000 shares of common stock upon the conversion of short term notes payable in the principal and accrued interest amount of $210,000 pursuant to the terms of the short term notes payable.

During the nine months ended September 30, 2020, the Company issued 15,475,235 shares of common stock to a related party upon the conversion of accrued interest related to a note payable, related party totaling $2,291,047, as described in Note 10.

Conversion of advances from related parties

During the nine months ended September 30, 2020, the Company issued 262,811 shares of common stock upon the conversion of advances from related parties in the amount of $18,098 with the receipt of notice of Series A Warrant exercise to purchase shares of stock under the terms of the respective warrant agreement.

Consulting Agreement

In January 2020, the Company entered into a nine month consulting agreement for which the fee for the services was to be paid with common stock. The number of shares to be paid with common stock was 1,000,000 earned upon signing and an additional 1,000,000 upon agreement by both consultant and the Company no later than May 1, 2020. The Company issued 1,000,000 shares in March 2020 and 1,000,000 shares in April 2020. The fair value of the shares of $380,000 was recorded as a non-cash general and administrative expense during the nine months ended September 30, 2020.

The consulting agreement was extended to November 30, 2020 with an additional 2,000,000 common stock shares issued for services in August and September 2020. The fair value of the shares of $450,000 was recorded as a non-cash general and administrative expense during the nine months ended September 30, 2020.

The Company entered into a separate agreement for investor relations services for which the fee was paid with common stock. The Company issued 3,000,000 common stock shares with a fair value of $630,000 which was recorded as a non-cash general and administrative expense during the nine months ended September 30, 2020.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

13.
Equity transactions (continued)

PIPE Offering (Restated)

On December 11, 2019, the Company entered into a common stock Purchase Agreement with certain investors for the sale by the Company in a private placement of an aggregate of up to 21,071,143 shares of its common stock at a purchase price of $0.14 per share. During the nine months ended September 30, 2020, the Company issued 1,071,428 shares of common stock in conjunction with this offering and received $150,000 in cash proceeds.

On August 6, 2020, the Company entered into a Securities Purchase Agreement in connection with the acquisition of UltraMIST, as discussed in Note 4, and issued 123,550,000 shares of common stock and accompanying Class E Warrants to purchase up to an additional 123,550,000 shares of common stock to certain investors for an aggregate purchase price of $0.20 per share of common stock and accompanying Warrant. It also issued Class E Warrants to a third-party placement agent to purchase up to 9,266,250 shares of common stock on the same terms as the Warrants. The Warrants have an exercise price of $0.25 per share and a three year term.  The private placement generated net proceeds of $21,456,468. The shares of common stock issued in the private placement have a par value of $0.001, resulting in an increase to common stock of $123,550. Since at the date of issuance the Company did not have a sufficient number of authorized shares to satisfy the Warrants in the event that they were exercised (and all other outstanding convertible securities were converted into shares of common stock) which could cause the net cash settlement of the Warrants, the Company recorded a liability of $ 8,656,165 for the fair value of the Warrants that were in excess of the available authorized shares. The Company recorded the residual amount of $ 12,408,966 from the net proceeds to stockholders’ equity.

Inducement Shares

During the nine months ended September 30, 2020, the Company issued 200,000 shares of common stock related to the June 5, 2020, Securities Purchase Agreement with LGH Investments, LLC, as described in Note 10.

Stock Option Exercise

During the nine months ended September 30, 2020, the Company issued 225,000 shares of common stock upon the exercise of stock options resulting in net proceeds of $44,250.

Litigation Settlement

During the nine months ended September 30, 2020, the Company issued 200,000 shares of restricted common stock upon the settlement of outstanding litigation. The fair value of the shares of $50,000 was recorded as a non-cash general and administrative expense during the nine months ended September 30, 2020.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

14.
Warrants (Restated)

A summary of the warrant activity during the nine months ended September 30, 2020 is presented as follows:

Warrant class
 
Outstanding
as of
December
31, 2019
   
Issued
   
Exercised
   
Expired
   
Outstanding
as of
September
30,
2020
 
                               
Class E Warrants
   
-
     
141,091,485
     
-
     
-
     
141,091,485
 
Class K Warrants
   
7,200,000
     
-
     
(7,200,000
)
   
-
     
-
 
Class O Warrants
   
909,091
     
-
     
-
     
-
     
909,091
 
Class P Warrants
   
1,365,000
     
-
     
(1,000,000
)
   
(100,000
)
   
265,000
 
LGH Warrant
   
-
     
35,000,000
     
-
     
-
     
35,000,000
 
NH Warrant
   
-
     
13,091,160
     
-
     
-
     
13,091,160
 
     
9,474,091
     
189,182,645
     
(8,200,000
)
   
(100,000
)
   
190,356,736
 

A summary of the warrant exercise price per share and expiration date is presented as follows:

   
Exercise
price/share
 
Expiration date
Class E Warrants
 
$
0.25
 
August 2023
Class K Warrants
 
$
0.08
 
June 2025
Class K Warrants
 
$
0.11
 
August 2027
Class O Warrants
 
$
0.11
 
January 2022
Class P Warrants
 
$
0.20
 
June 2024
LGH Warrant
 
$
0.01
 
June 2025
NH Warrant
 
$
0.01
 
August 2030

The fair value of the common stock purchase warrants is estimated on the date of grant using the Black-Scholes option pricing model which approximates the binomial model using the following weighted average assumptions for the three and nine months ended September 30, 2020:

Weighted average contractual terms in years
   
1.3
 
Weighted average risk free interest rate
   
0.15
%
Weighted average volatility
   
92.76
%

15.
Commitments and contingencies

Operating Leases

The Company is a party to certain operating leases. The Company has entered into a lease agreement, as amended, for office space for office, research and development, quality control, production and warehouse space which expires on December 31, 2021. Under the terms of the lease, the Company pays monthly rent of $14,651, subject to a 3% adjustment on an annual basis.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

15.
Commitments and contingencies (continued)

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. The Company has lease agreements which require payments for lease and non-lease components and has elected to account for these as separate lease components. Non-leasing components are not included in the ROU asset.

Right of use assets and Lease liability – right of use consist of the following:

   
September
30,
2020
 
Right of use assets
 
$
442,197
 

   
September
30,
2020
 
Lease liability - right of use
     
Current portion
 
$
251,372
 
Long term portion
   
222,815
 
   
$
474,187
 

As of September 30, 2020, the maturities of the Company’s lease liability – right of use which have initial or remaining lease terms in excess of one year consist of the following:

Year ending December 31,
 
Amount
 
2020 (remainder)
 
$
71,918
 
2021
   
290,552
 
2022
   
96,195
 
2023
   
68,017
 
2024
   
8,028
 
2025
   
3,345
 
Total lease payments
   
538,055
 
Less: Present value adjustment
   
(63,868
)
Lease liability - right of use
 
$
474,187
 

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

15.
Commitments and contingencies (continued)

As of September 30, 2020, the Company’s operating lease had a weighted average remaining lease term of 2.5 years and a weighted average discount rate of 12%.

Rent expense for the three months ended September 30, 2020 and 2019 was $84,115 and $49,217, respectively, and for the nine months ended September 30, 2020 and 2019 was $201,991 and $148,172, respectively.

Financing Lease

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 based on the present value of lease payments over the lease term. The present value of the lease payment exceeds 90% of the sales price of the equipment, therefore this lease will be considered a financing lease is included in Property and equipment, net on our Condensed Consolidated Balance Sheets. Lease expense will be recognized as payment of financing lease, depreciation expense and interest expense.

Right of use assets and Lease liability – right of use consist of the following:

   
September
30,
2020
 
Right of use assets
 
$
462,405
 

   
September
30,
2020
 
Lease liability - right of use
     
Current portion
 
$
187,416
 
Long term portion
   
284,588
 
   
$
472,004
 

As of September 30, 2020, the maturities of the Company’s lease liability – right of use which have initial or remaining lease terms in excess of one year consist of the following:

Year ending December 31,
 
Amount
 
2020 (remainder)
 
$
58,648
 
2021
   
234,593
 
2022
   
199,793
 
2023
   
18,388
 
Total
 
$
511,422
 

As of September 30, 2020, the Company’s financing leases had a weighted average remaining lease term of 2.7 years based on annualized base payments expiring through 2023 and a weighted average discount rate of 12.6%.

As of September 30, 2020, the Company did not have additional operating or financing leases that have yet commenced.

SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020

15.
Commitments and contingencies (continued)

Litigation

From time to time, the Company is subject to 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. The Company believes that all pending claims, if adversely decided, would not have a material adverse effect on our business, financial position or results of operations.

16.
Revenue

The Company accounts for revenue in accordance with ASC 606.

Disaggregation of Revenue

The disaggregation of revenue is based on geographical region. The following table presents revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019:

   
Three Months Ended September 30,
2020
   
Three Months Ended September 30,
2019
 
   
United States
   
International
   
Total
   
United States
   
International
   
Total
 
Product
 
$
1,301,942
   
$
19,306
   
$
1,321,248
   
$
9,832
   
$
149,023
   
$
158,855
 
License fees
   
-
     
29,447
     
29,447
     
6,250
     
10,000
     
16,250
 
Other Revenue
   
7,811
     
608,390
     
616,201
     
25
     
22,510
     
22,535
 
   
$
1,309,753
   
$
657,143
   
$
1,966,896
   
$
16,107
   
$
181,533
   
$
197,640
 

   
Nine Months Ended September 30,
2020
   
Nine Months Ended September 30,
2019
 
   
United States
   
International
   
Total
   
United States
   
International
   
Total
 
Product
 
$
1,398,672
   
$
66,475
   
$
1,465,147
   
$
147,999
   
$
296,088
   
$
444,087
 
License fees
   
-
     
39,447
     
39,447
     
18,750
     
170,557
     
189,307
 
Other Revenue
   
7,486