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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board  >  SANUWAVE Health, Inc.    SNWV

SANUWAVE HEALTH, INC.

(SNWV)
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SANUWAVE HEALTH : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/14/2019 | 04:59pm EDT

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as of and for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the SEC on April 1, 2019.

Overview

We are a shock wave technology company using a patented system of noninvasive, high-energy, acoustic shock waves for regenerative medicine and other applications. Our initial focus is regenerative medicine - utilizing noninvasive, acoustic shock waves to produce a biological response resulting in the body healing itself through the repair and regeneration of tissue, musculoskeletal and vascular structures Our lead regenerative product in the United States is the dermaPACE® device, used for treating diabetic foot ulcers, which was subject to two double-blinded, randomized Phase III clinical studies and was cleared by the U.S. Food and Drug Administration ("FDA") on December 28, 2017.

Our portfolio of healthcare products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body's normal healing processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE®) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. In 2018, we started marketing our dermaPACE System for sale in the United States and will continue to generate revenue from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia and Asia/Pacific.

Our lead product candidate for the global wound care market, dermaPACE, has received FDA clearance for commercial use to treat diabetic foot ulcers in the United States and the CE Mark allowing for commercial use on acute and chronic defects of the skin and subcutaneous soft tissue. We believe we have demonstrated that our patented technology is safe and effective in stimulating healing in chronic conditions of the foot and the elbow through our United States FDA Class III PMA approved OssaTron® device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our orthoPACE®, OssaTron, and Evotron® devices in Europe and Asia.

We are focused on developing our Pulsed Acoustic Cellular Expression (PACE) technology to activate healing in:


?
wound conditions, including diabetic foot ulcers, venous and arterial ulcers,
pressure sores, burns and other skin eruption conditions;
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orthopedic applications, such as eliminating chronic pain in joints from trauma,
arthritis or tendons/ligaments inflammation, speeding the healing of fractures
(including nonunion or delayed-union conditions), improving bone density in
osteoporosis, fusing bones in the extremities and spine, and other potential
sports injury applications;
?
plastic/cosmetic applications such as cellulite smoothing, graft and transplant
acceptance, skin tightening, scarring and other potential aesthetic uses; and
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cardiac applications for removing plaque due to atherosclerosis improving heart
muscle performance.

In addition to healthcare uses, our high-energy, acoustic pressure shock waves, due to their powerful pressure gradients and localized cavitational effects, may have applications in secondary and tertiary oil exploitation, for cleaning industrial waters and food liquids and finally for maintenance of industrial installations by disrupting biofilms formation. Our business approach will be through licensing and/or partnership opportunities.

Clinical Trials and Marketing

The FDA granted approval of our Investigational Device Exemption (IDE) to conduct two double-blinded, randomized clinical trials utilizing our lead device product for the global wound care market, the dermaPACE device, in the treatment of diabetic foot ulcers.

The dermaPACE system was evaluated using two studies under IDE G070103. The studies were designed as prospective, randomized, double-blind, parallel-group, sham-controlled, multi-center 24-week studies at 39 centers. A total of 336 subjects were enrolled and treated with either dermaPACE plus conventional therapy or conventional therapy (a.k.a. standard of care) alone. Conventional therapy included, but was not limited to, debridement, saline-moistened gauze, and pressure reducing footwear. The objective of the studies was to compare the safety and efficacy of the dermaPACE device to sham-control application. The prospectively defined primary efficacy endpoint for the dermaPACE studies was the incidence of complete wound closure at 12 weeks post-initial application of the dermaPACE system (active or sham). Complete wound closure was defined as skin re-epithelialization without drainage or dressing requirements, confirmed over two consecutive visits within 12-weeks. If the wound was considered closed for the first time at the 12 week visit, then the next visit was used to confirm closure. Investigators continued to follow subjects and evaluate wound closure through 24 weeks.

The dermaPACE device completed its initial Phase III, IDE clinical trial in the United States for the treatment of diabetic foot ulcers in 2011 and a PMA application was filed with the FDA in July 2011. The patient enrollment for the second, supplemental clinical trial began in June 2013. We completed enrollment for the 130 patients in this second trial in November 2014 and suspended further enrollment at that time.

The only significant difference between the two studies was the number of applications of the dermaPACE device. Study one (DERM01; n=206) prescribed four (4) device applications/treatments over a two-week period, whereas, study two (DERM02; n=130) prescribed up to eight (8) device applications (4 within the first two weeks of randomization, and 1 treatment every two weeks thereafter up to a total of 8 treatments over a 10-week period). If the wound was determined closed by the PI during the treatment regimen, any further planned applications were not performed.

Between the two studies there were over 336 patients evaluated, with 172 patients treated with dermaPACE and 164 control group subjects with use of a non-functional device (sham). Both treatment groups received wound care consistent with the standard of care in addition to device application. Study subjects were enrolled using pre-determined inclusion/exclusion criteria in order to obtain a homogenous study population with chronic diabetes and a diabetic foot ulcer that has persisted a minimum of 30 days and its area is between 1cm2 and 16cm2, inclusive. Subjects were enrolled at Visit 1 and followed for a run-in period of two weeks. At two weeks (Visit 2 - Day 0), the first treatment was applied (either dermaPACE or Sham Control application). Applications with either dermaPACE or Sham Control were then made at Day 3 (Visit 3), Day 6 (Visit 4), and Day 9 (Visit 5) with the potential for 4 additional treatments in Study 2. Subject progress including wound size was then observed on a bi-weekly basis for up to 24 weeks at a total of 12 visits (Weeks 2-24; Visits 6-17).

A total of 336 patients were enrolled in the dermaPACE studies at 37 sites. The patients in the studies were followed for a total of 24 weeks. The studies' primary endpoint, wound closure, was defined as "successful" if the skin was 100% re-epithelialized at 12 weeks without drainage or dressing requirements confirmed at two consecutive study visits.

A summary of the key study findings were as follows:


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Patients treated with dermaPACE showed a strong positive trend in the primary endpoint of 100% wound closure. Treatment with dermaPACE increased the proportion of diabetic foot ulcers that closed within 12 weeks, although the rate of complete wound closure between dermaPACE and sham-control at 12 weeks in the intention-to-treat (ITT) population was not statistically significant at the 95% confidence level used throughout the study (p=0.320). There were 39 out of 172 (22.67%) dermaPACE subjects who achieved complete wound closure at 12 weeks compared with 30 out of 164 (18.29%) sham-control subjects.


                                      -20-


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In addition to the originally proposed 12-week efficacy analysis, and in
conjunction with the FDA agreement to analyze the efficacy analysis carried over
the full 24 weeks of the study, we conducted a series of secondary analyses of
the primary endpoint of complete wound closure at 12 weeks and at each
subsequent study visit out to 24 weeks. The primary efficacy endpoint of
complete wound closure reached statistical significance at 20 weeks in the ITT
population with 61 (35.47%) dermaPACE subjects achieving complete wound closure
compared with 40 (24.39%) of sham-control subjects (p=0.027). At the 24 week
endpoint, the rate of wound closure in the dermaPACE® cohort was 37.8% compared
to 26.2% for the control group, resulting in a p-value of 0.023.
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Within 6 weeks following the initial dermaPACE treatment, and consistently
throughout the 24-week period, dermaPACE significantly reduced the size of the
target ulcer compared with subjects randomized to receive sham-control (p<0.05).
?
The proportion of patients with wound closure indicate a statistically
significant difference between the dermaPACE and the control group in the
proportion of subjects with the target-ulcer not closed over the course of the
study (p-value=0.0346). Approximately 25% of dermaPACE® subjects reached wound
closure per the study definition by day 84 (week 12). The same percentage in the
control group (25%) did not reach wound closure until day 112 (week 16). These
data indicate that in addition to the proportion of subjects reaching wound
closure being higher in the dermaPACE® group, subjects are also reaching wound
closure at a faster rate when dermaPACE is applied.
?
dermaPACE demonstrated superior results in the prevention of wound expansion (?
10% increase in wound size), when compared to the control, over the course of
the study at 12 weeks (18.0% versus 31.1%; p=0.005, respectively).
?
At 12 and 24 weeks, the dermaPACE group had a higher percentage of subjects with
a 50% wound reduction compared to the control (p=0.0554 and p=0.0899,
respectively). Both time points demonstrate a trend towards statistical
significance.
?
The mean wound reduction for dermaPACE subjects at 24 weeks was 2.10cm2 compared
to 0.83cm2 in the control group. There was a statistically significant
difference between the wound area reductions of the two cohorts from the 6 week
follow-up visit through the end of the study.
?
Of the subjects who achieved complete wound closure at 12 weeks, the recurrence
rate at 24 weeks was only 7.7% in the dermaPACE group compared with 11.6% in the
sham-control group.
?
Importantly, there were no meaningful statistical differences in the adverse
event rates between the dermaPACE treated patients and the sham-control group.
There were no issues regarding the tolerability of the treatment which suggests
that a second course of treatment, if needed, is a clinically viable option.

We retained Musculoskeletal Clinical Regulatory Advisers, LLC (MCRA) in January 2015 to lead the Company's interactions and correspondence with the FDA for the dermaPACE, which have already commenced. MCRA has successfully worked with the FDA on numerous Premarket Approvals (PMAs) for various musculoskeletal, restorative and general surgical devices since 2006.

Working with MCRA, we submitted to FDA a de novo petition on July 23, 2016. Due to the strong safety profile of our device and the efficacy of the data showing statistical significance for wound closure for dermaPACE subjects at 20 weeks, we believe that the dermaPACE device should be considered for classification into Class II as there is no legally marketed predicate device and there is not an existing Class III classification regulation or one or more approved PMAs (which would have required a reclassification under Section 513(e) or (f)(3) of the FD&C Act). On December 28, 2017, the FDA determined that the criteria at section 513(a)(1)(A) of (B) of the FD&C Act were met and granted the de novo clearance classifying dermaPACE as Class II and available to be marketed immediately.

Finally, our dermaPACE device has received the European CE Mark approval to treat acute and chronic defects of the skin and subcutaneous soft tissue, such as in the treatment of pressure ulcers, diabetic foot ulcers, burns, and traumatic and surgical wounds. The dermaPACE is also licensed for sale in Canada, Australia, New Zealand and South Korea.

We are actively marketing the dermaPACE to the European Community, Canada and Asia/Pacific, utilizing distributors in select countries.

                                      -21-


Clinical Studies

A dosage study has been developed for launch in Poland to optimize dermaPACE system treatment dosage for producing a more rapid reduction in size of a diabetic foot ulcer ("DFU"). The focus will be on increasing the number of shock waves delivered per treatment, as a function of DFUs area. To determine the dosage necessary, three new distinctive regimens will be assessed during the study. This study started in April 2019 and is expected to be finalized late in the fourth quarter of 2019.

A post-market pilot study to evaluate the effects of high energy acoustic shock wave therapy on local skin perfusion and healing of DFUs will be conducted at two sites: one in New Jersey and one in California. The intent of this trial is to quantify the level of increased perfusion and oxygenation during and after treatment with the dermaPACE system. Enrollment and first patient treatment started in April 2019.

Financial Overview

Since our inception, we have incurred losses from operations each year. As of June 30, 2019, we had an accumulated deficit of $120,254,865. Although the size and timing of our future operating losses are subject to significant uncertainty, we anticipate that our operating losses will continue over the next few years as we incur expenses related to commercialization of our dermaPACE system for the treatment of diabetic foot ulcers in the United States. If we are able to successfully commercialize, market and distribute the dermaPACE system, we hope to partially or completely offset these losses in the future.

Our operating losses create substantial doubt about our ability to continue as a going concern. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing will provide the necessary funding for us to continue as a going concern for the next year. See "Liquidity and Capital Resources" for further information regarding our financial condition.

We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to be generated from, any of our products, due to the numerous risks and uncertainties associated with developing and marketing products, including the uncertainty of:


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the scope, rate of progress and cost of our clinical trials;
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future clinical trial results;
?
the cost and timing of regulatory approvals;
?
the establishment of successful marketing, sales and distribution channels and
partnerships, including our efforts to expand our marketing, sales and
distribution reach through joint ventures and other contractual arrangements;
?
the cost and timing associated with establishing reimbursement for our products;
?
the effects of competing technologies and market developments; and
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the industry demand and patient wellness behavior.

Any failure to complete the development of our product candidates in a timely manner, or any failure to successfully market and commercialize our product candidates, would have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with us and our business are set forth under the section entitled "Risk Factors - Risks Related to Our Business" in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019.



                                      -22-


Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.

On an ongoing basis, we evaluate our estimates and judgments, including those related to the recording of the allowances for doubtful accounts, estimated reserves for inventory, estimated useful life of property and equipment, the determination of the valuation allowance for deferred taxes, the estimated fair value of the warrant liability, and the estimated fair value of stock-based compensation. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The results of our operations for any historical period are not necessarily indicative of the results of our operations for any future period.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements filed with our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, we believe that the following accounting policies relating to revenue recognition, liabilities related to warrants issued, and stock-based compensation are significant and; therefore, they are important to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

Sales of medical devices, including related applicators and applicator kits, are recognized when shipped to the customer. Shipments under agreements with distributors are invoiced at a fixed price, are not subject to return, and payment for these shipments is not contingent on sales by the distributor. We recognize revenues on shipments to distributors in the same manner as with other customers. The initial warranty and extended warranty on the sale of medical devices will be deferred and recognized over time as the performance obligation is satisfied. Fees from services performed are recognized when the service is performed. License fee for refurbishment of applicators will be recognized at the time the customer is granted the license to refurbish the applicators. Revenue will be calculated using the transaction price that represents the most likely consideration to be received for the license times the number of licenses issued. Fees for upfront distribution license agreements will be recognized on a straight line basis based on the payment schedule in the contract.

Stock-based Compensation

The Stock Incentive Plan provides that stock options, and other equity interests or equity-based incentives, may be granted to key personnel, directors and advisors at the fair value of the common stock at the time the option is granted, which is approved by our board of directors. The maximum term of any option granted pursuant to the Stock Incentive Plan is ten years from the date of grant.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The expected terms of options granted represent the period of time that options granted are estimated to be outstanding and are derived from the contractual terms of the options granted. We amortize the fair value of each option over each option's vesting period.



                                      -23-


Results of Operations for the Three Months ended June 30, 2019 and 2018

Revenues and Cost of Revenues

Revenues for the three months ended June 30, 2019 were $316,976, compared to $453,210 for the same period in 2018, a decrease of $136,234, or 30%. Revenue resulted primarily from sales in Europe of our orthoPACE devices and related applicators and sales in the United States of our dermaPACE applicators. The decrease in revenue for 2019 is primarily due to a decrease in sales of new and refurbished applicators in Asia/Pacific and the European Community and lower upfront international distribution fees, as compared to the prior year. This is partially offset by higher device sales in the United States and Asia/Pacific.

Cost of revenues for the three months ended June 30, 2019 were $185,881, compared to $166,643 for the same period in 2018. Gross profit as a percentage of revenues was 41% for the three months ended June 30, 2019, compared to 63% for the same period in 2018. The decrease in gross profit as a percentage of revenues in 2019 was primarily due to increased sale of devices that have a lower margin and cost of new and refurbished dermaPACE applicators in the United States as a result of placements.

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2019 were $307,273, compared to $328,753 for the same period in 2018, a decrease of $21,480, or 7%. The decrease in research and development expenses in 2019, as compared to 2018, was due to a reclassification of employees and related costs from research and development to general and administrative in 2019. This is partially offset by an increase in contracting for temporary services and increased study expenses related to our new dosage study in Poland.

Selling and Marketing Expenses

Selling and marketing expenses for the three months ended June 30, 2019 were $407,477, compared to $158,695 for the same period in 2018, an increase of $248,782, or 157%. The increase in selling and marketing expenses in 2019, as compared to 2018, was due to an increase in hiring of trainers and salespeople and increased travel expenses for placement and training related to the commercialization of dermaPACE.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2019 were $1,426,405, as compared to $1,911,688 for the same period in 2018, a decrease of $485,283, or 25%. The decrease in general and administrative expenses in 2019, as compared to 2018, was due to a decrease in stock based compensation expense related to options issued in 2018, lease expense related to pay-off of lease agreement for devices in 2018 and lower investor relations costs. This is partially offset by an increase in salary, bonus and benefits related to new hires in 2018.

Depreciation

Depreciation for the three months ended June 30, 2019 was $9,455, compared to $6,008 for the same period in 2018, an increase of $3,447, or 57%. The increase was due to the higher depreciation related to increase in fixed assets.



                                      -24-


Other Income (Expense)

Other income (expense) was a net expense of $714,916 for the three months ended June 30, 2019 as compared to a net expense of $766,512 for the same period in 2018, a decrease of $51,596, or 7%, in the net expense. The decrease was primarily due to decreased interest expense, beneficial conversion discount and debt discount related to the convertible promissory notes issued in the fourth quarter of 2017 and first quarter of 2018. This is partially offset by financing charge in 2019 related to short term notes and 2019 included a non-cash gain for valuation adjustment on outstanding warrants of $195,310, as compared to $1,161,520 for the same period in 2018.

Net Loss

Net loss for the three months ended June 30, 2019 was $2,734,431, or ($0.02) per basic and diluted share, compared to a net loss of $2,888,259, or ($0.02) per basic and diluted share, for the same period in 2018, a decrease in the net loss of $153,828, or 5%.

Results of Operations for the Six Months ended June 30, 2019 and 2018

Revenues and Cost of Revenues

Revenues for the six months ended June 30, 2019 were $494,939, compared to $797,482 for the same period in 2018, a decrease of $302,543, or 38%. Revenue resulted primarily from sales in Europe of our orthoPACE devices and related applicators, sales in the United States of our dermaPACE applicators and upfront distribution fee from our Southeast Asia distribution agreement with Johnfk Medical Inc. ("FKS"). The decrease in revenue for 2019 is primarily due to a decrease in sales of orthoPACE devices in Asia/Pacific and the European Community and sales of dermaPACE devices in the United States, lower sales of new and refurbished applicators and reduced upfront distribution fee, as compared to the prior year.

Cost of revenues for the six months ended June 30, 2019 were $279,734, compared to $332,109 for the same period in 2018. Gross profit as a percentage of revenues was 43% for the six months ended June 30, 2019, compared to 58% for the same period in 2018. The decrease in gross profit as a percentage of revenues in 2019 was primarily due to cost of new and refurbished dermaPACE devices and applicators in the United States as a result of placements.

Research and Development Expenses

Research and development expenses for the six months ended June 30, 2019 were $567,922, compared to $678,197 for the same period in 2018, a decrease of $110,275, or 16%. The decrease in research and development expenses in 2019, as compared to 2018, was due to a reclassification of employees and related costs from research and development to general and administrative in 2019. This is partially offset by an increase in contracting for temporary services and increased study expenses related to our new dosage study in Poland.

Selling and Marketing Expenses

Selling and marketing expenses for the six months ended June 30, 2019 were $565,559, compared to $210,654 for the same period in 2018, an increase of $354,905, or 168%. The increase in sales and marketing expenses in 2019, as compared to 2018, was due to an increase in hiring of trainers and salespeople and increased travel expenses for placement and training related to the commercialization of dermaPACE.



                                      -25-


General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2019 were $2,943,860, as compared to $2,805,335 for the same period in 2018, an increase of $138,525, or 5%. The decrease in general and administrative expenses in 2019, as compared to 2018, was due to decrease in stock based compensation expense related to option issued in 2018, lease expense related to pay-off of lease agreement for devices in 2018 and lower investor relations costs. This is partially offset by an increase in salary, bonus and benefits related to new hires in 2018.

Depreciation

Depreciation for the six months ended June 30, 2019 was $17,812, compared to $11,024 for the same period in 2018, an increase of $6,788, or 62%. The increase was due to the higher depreciation related to increase in fixed assets.

Other Income (Expense)

Other income (expense) was a net expense of $1,051,800 for the six months ended June 30, 2019 as compared to a net expense of $5,501,907 for the same period in 2018, a decrease of $4,450,107, or 81%, in the net expense. The decrease was primarily due to decreased interest expense, beneficial conversion discount and debt discount related to the convertible promissory notes issued in the fourth quarter of 2017 and first quarter of 2018. In addition, the net expense in 2019 included a non-cash gain for valuation adjustment on outstanding warrants of $227,669, as compared to a non-cash loss for valuation adjustment on outstanding warrants of $1,812,162 in 2018.

Net Loss

Net loss for the six months ended June 30, 2019 was $4,931,748, or ($0.03) per basic and diluted share, compared to a net loss of $8,744,914, or ($0.06) per basic and diluted share, for the same period in 2018, a decrease in the net loss of $3,813,166, or 44%. The decrease in the net loss was primarily a result of a decrease in other income (expense), partially offset by an increase in our operating expenses as described above.

Liquidity and Capital Resources

We expect to devote substantial resources for the commercialization of the dermaPACE System and will continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. We incurred a net loss of $4,931,748 for the six months ended June 30, 2019 and $11,631,394 for the year ended December 31, 2018. These factors along with the events of default on the notes payable to HealthTronics, Inc., the Company's convertible promissory notes and the Company's short term notes payable create substantial doubt about the Company's ability to continue as a going concern for a period of at least twelve months from the financial issuance date.

Since inception in 2005, our operations have primarily been funded from the sale of capital stock and convertible debt securities.

We have entered into short term notes payable with twenty-four individuals between June 26, 2018 and April 10, 2019 in the total principal amount of $2,835,525 with an interest rate of 5% per annum. The principal and accrued interest are due and payable six months from the date of issuance or receipt of notice of warrant exercise. On December 26, 2018, the Company defaulted on the short term notes payable issued on June 26, 2018 and began accruing interest at the default interest rate of 10%. On January 2, 2019, the Company defaulted on the short term notes payable issued on July 2, 2018 and began accruing interest at the default interest rate of 10%. On January 30, 2019, the Company defaulted on the short term notes payable issued on July 30, 2018 and began accruing interest at the default interest rate of 10%. In May 2019, the Company defaulted on the short term notes payable issued during November 2018 and began accruing interest at the default rate of 10%. On June 30, 2019, the Company defaulted on the short term notes payable issued on December 31, 2018 and will begin accruing interest at the default interest rate of 10% in July 2019.



                                      -26-


The continuation of our business is dependent upon raising additional capital to fund operations. Management expects the cash used in operations for the Company will be approximately $275,000 to $350,000 per month for the remainder of 2019 asresources are devoted to the commercialization of the dermaPACE product including hiring of new employees, expansion of our international business and continued research and development of non-medical uses of our technology. Management's plans are to obtain additional capital in 2019 through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. In addition, there can be no assurances that our plans to obtain additional capital will be successful on the terms or timeline we expect, or at all. A $400,000 fee we anticipated receiving in April 2019 from FKS under the terms of a June 2018 agreement has not been received to date, and on June 4, 2019, we entered into an agreement with FKS and Holistic Wellness Alliance Pte. Ltd. ("HWA") pursuant to which we and FKS terminated the joint venture agreement, dated as of September 21, 2018, that established HWA as a joint venture between us and FKS. Pursuant to such agreement, FKS will pay us the outstanding amount of $63,275 for equipment delivered to FKS and a penalty fee of $50,000 for early termination of the joint venture agreement. We received a partial payment of $10,000 for the early termination of the joint venture agreement on July 18, 2019. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for us. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.

In addition, we may have potential liability for certain sales, offers or issuances of equity securities of the Company in possible violation of federal securities laws. Pursuant to a Registration Statement on Form S-1 (Registration No. 333-208676), declared effective on February 16, 2016 (the "2016 Registration Statement"), the Company sought to register: a primary offering of up to $4,000,000 units, the Common Stock included as part of the units, the warrants included as part of the units, and the Common Stock issuable upon exercise of such warrants; a primary offering of up to $400,000 placement agent warrants and the Common Stock issuable upon exercise of such placement agent warrants; and a secondary offering of 23,545,144 shares of Common Stock held by certain selling stockholders named in the 2016 Registration Statement. The SEC Staff's interpretations provide that, when an issuer is registering units composed of common stock, common stock purchase warrants, and the common stock underlying the warrants, the registration fee is based on the offer price of the units and the exercise price of the warrants. The registration fee paid did include the fee based on the offer price of the units, allocated to the unit line item in the fee table. Although the fee table in the 2016 Registration Statement included a line item for the Common Stock underlying the warrants, the Company did not include in that line item the fee payable based on the exercise price of $0.08 per share for such warrants, which amount should have been allocated to such line item based on the SEC Staff's interpretations. As a result, a portion of the securities intended to be registered by the 2016 Registration Statement was not registered. In addition, in a post-effective amendment to the 2016 Registration Statement filed on September 23, 2016, too many placement agent warrants were inadvertently deregistered. The post-effective amendment stated that the Company had issued $180,100, based on 2,251,250 Class L warrants issued with a $0.08 exercise price of warrants to the placement agent and therefore deregistered $219,900, based on 2,748,750 Class L warrants issued with a $0.08 exercise price of placement agent warrants from the $400,000, based on 5,000,000 Class L warrants issued with a $0.08 exercise price total offering amount included in the Registration Statement. The actual warrants issued to the placement agent totaled $240,133.36, based on 3,001,667 Class L warrants issued with a $0.08 exercise price, and only $159,867, based on 1,998,338 Class L warrants issued with a $0.08 exercise price should have been deregistered in such post-effective amendment. To the extent that we have not registered or failed to maintain an effective registration statement with respect to any of the transactions in securities described above and with respect to our ongoing offering of shares of Common Stock underlying the warrants, and a violation of Section 5 of the Securities Act did in fact occur or is occurring, eligible holders of our securities that participated in these offerings would have a right to rescind their transactions, and the Company may have to refund any amounts paid for the securities, which could have a materially adverse effect on the Company's financial condition. Eligible securityholders have not filed a claim against the Company alleging a violation of Section 5 of the Securities Act with respect to these transactions, but they could file a claim in the future. Furthermore, the ongoing offering of and issuance of shares of Common Stock underlying certain of our warrants from the 2016 Registration Statement may have been, and may continue to be, in violation of Section 5 of the Securities Act and the rules and regulations under the Securities Act, because we did not update the prospectus in the 2016 Registration Statement for a period of time after the 2016 Registration Statement was declared effective and because our reliance on Rule 457(p) under the Securities Act in an amendment to our Registration Statement on Form S-1 (Registration No. 333-213774) filed on September 23, 2016 effected a deregistration of the securities registered under the 2016 Registration Statement. Eligible securityholders have not filed a claim against the Company alleging a violation of Section 5 of the Securities Act, but they could file such a claim in the future. If a violation of Section 5 of the Securities Act did in fact occur or is occurring, eligible securityholders would have a right to rescind their transactions, and the Company may have to refund any amounts paid the securities, which could have a materially adverse effect on the Company's financial condition.



                                      -27-


We may also attempt to raise additional capital if there are favorable market conditions or other strategic considerations even if we have sufficient funds for planned operations. To the extent that we raise additional funds by issuance of equity securities, our shareholders will experience dilution and we may be required to use some or all of the net proceeds to repay our indebtedness, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones would harm our future capital position.

Cash and cash equivalents decreased by $210,103 for the six months ended June 30, 2019 and decreased by $59,470 for the six months ended June 30, 2018. For the six months ended June 30, 2019 and 2018, net cash used by operating activities was $3,386,634 and $1,598,202, respectively, primarily consisting of compensation costs, dermaPACE commercialization activities and general corporate operations. The increase of $1,788,432 in the use of cash for operating activities for the six months ended June 30, 2019, as compared to the same period for 2018, was primarily due to the increased accrued operating and payroll related expenses and increased inventory and prepaid expenses in 2019. Net cash used by investing activities for the six months ended June 30, 2019 and 2018, consisted of purchase of property and equipment of $25,839 and $13,612, respectively. Net cash provided by financing activities for the six months ended June 30, 2019 was $3,219,279, which consisted of $1,403,257 from the exercise of warrants, $1,231,000 from the issuance of short term notes payable and $585,022 from an advance from related parties. Net cash provided by financing activities for the six months ended June 30, 2018 was $1,563,313, which consisted of $144,000 net from advances from related parties, $38,528 from exercise of warrants, $1,159,785 from the issuance of convertible promissory notes, $85,000 from issuance of short term notes payable and $136,000 net from increase in line of credit, related party.

Segment and Geographic Information

We have determined that we have one operating segment. Our revenues are generated from sales in United States, Europe, Canada, Asia and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are located in the United States.

Contractual Obligations

Our major outstanding contractual obligations relate to our operating lease for our facility, purchase and supplier obligations for product component materials and equipment, and our notes payable, related parties. We have disclosed these obligations in our most recent Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on April 1, 2019.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.

Effects of Inflation

Due to the fact that our assets are, to an extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our consolidated financial condition and results of operations.



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© Edgar Online, source Glimpses

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Managers
NameTitle
Kevin A. Richardson Chairman & Chief Executive Officer
Peter A. Stegagno Vice President-Operations
Lisa E. Sundstrom CFO & Principal Accounting Officer
Iulian C. Cioanta Vice President-Research & Development
John Fritzen Nemelka Director
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