The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements regarding our business
development plans, clinical trials, regulatory reviews, timing, strategies,
expectations, anticipated expenses levels, projected profits, business prospects
and positioning with respect to market, demographic and pricing trends, business
outlook, technology spending and various other matters (including contingent
liabilities and obligations and changes in accounting policies, standards and
interpretations) and express our current intentions, beliefs, expectations,
strategies or predictions. These forward-looking statements are based on a
number of assumptions and currently available information and are subject to a
number of risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those set forth under the sections titled "Cautionary
Note Regarding Forward-Looking Statements" and "Risk Factors" and elsewhere in
this Annual Report on Form 10-K. The following discussion should be read in
conjunction with our consolidated financial statements and related notes thereto
included elsewhere in this Annual Report on Form 10-K.
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. On December 28, 2017, the U.S. 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, we entered into an asset purchase agreement (the "Asset
Purchase Agreement" or "Acquistion") with Celularity Inc. ("Celularity")
pursuant to which we acquired Celularity's UltraMIST assets ("UltraMIST" or the
"Assets"). The UltraMIST® System provides through a fluid mist a low-frequency,
non-contact, and pain free ultrasound energy deep inside the wound bed that
promotes healing from within. The ultrasound acoustic waves promote healing by
reducing inflammation and bacteria in the wound bed, while also increasing the
growth of new blood vessels to the area. The UltraMIST® System treatment must
be administered by a healthcare professional. This proprietary technology has
been cleared by the U.S. Food and Drug Administration (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, we 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. In May 2021, the Company received
notification that it is not in compliance with the Biovance portion of the
License Agreement with Celularity. See further discussion in Note 24,
Subsequent Events.
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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. The Company is marketing its dermaPACE® System for treatment
usage 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. The Company generates revenue streams from
product sales, licensing transactions dermaPACE® treatments, and other
activities, and with its recent acquisition of the UltraMIST® assets, SANUWAVE
now combines two highly complementary and market-cleared energy transfer
technologies used in the dermaPACE® and UltraMIST® Systems and two human tissue
biologic products (Biovance® and Interfyl®), which creates a platform of scale
with an end-to-end product offering in the advanced wound care market.
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 Premarket Approvals ("PMAs") approved OssaTron® device, and
in the stimulation of bone and chronic tendonitis regeneration in the
musculoskeletal environment through the utilization of our OssaTron, Evotron®,
and orthoPACE® devices in Europe and Asia.
We are focused on developing our Pulsed Acoustic Cellular Expression (PACE)
technology to activate healing in:
• wound conditions, including diabetic foot ulcers, venous and arterial ulcers,
pressure sores, burns and other skin eruption conditions;
• orthopedic applications, such as eliminating chronic pain in joints from
trauma, arthritis or tendons/ligaments inflammation, speeding the healing of
fractures (including nonunion or delayed-union conditions), improving bone
density in osteoporosis, fusing bones in the extremities and spine, and other
potential sports injury applications;
• plastic/cosmetic applications such as cellulite smoothing, graft and transplant
acceptance, skin tightening, scarring and other potential aesthetic uses; and
• cardiac applications for removing plaque due to atherosclerosis improving heart
muscle performance.
In addition to healthcare uses, our high-energy, acoustic pressure shock waves,
due to their powerful pressure gradients and localized cavitational effects, may
have applications in secondary and tertiary oil exploitation, for cleaning
industrial waters, for sterilizing food liquids and finally for maintenance of
industrial installations by disrupting biofilms formation. Our business approach
will be through licensing and/or partnership opportunities.
The worldwide spread of the COVID-19 virus is expected to result in a global
slowdown of economic activity which is likely to decrease demand for a broad
variety of products, including from our customers, while also disrupting supply
channels and marketing activities for an unknown period of time until the
disease is contained. Also, the pandemic may cause continued or additional
actions by hospitals and clinics such as limiting elective procedures and
treatments and limiting clinical trial activities and data monitoring. We
expect all of these factors to have a negative impact on our sales and our
results of operations, the size and duration of which we are currently unable to
predict. The Company is closely monitoring the impact of the pandemic on all
aspects of its business and operations. We have received funds for disaster
relief loans through the SBA to help minimize the impact on our business.
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Clinical Trials and Marketing
The FDA granted approval of our Investigational Device Exemption (IDE) to
conduct two double-blinded, randomized clinical trials utilizing our lead device
product for the global wound care market, the dermaPACE® device, in the
treatment of diabetic foot ulcers. 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.
Also, 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, Brazil, Mexico, and South Korea.
We are actively marketing the dermaPACE® to the European Community, Canada,
Brazil, Mexico, and Asia/Pacific, utilizing distributors in select countries.
Financial Overview
Since inception in 2005, our operations have primarily been funded from the sale
of capital stock, notes payable, and convertible debt securities. 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 $30.9 million and $10.4 million for the years ended
December 31, 2020 and 2019, respectively. These factors and the events of
default on the 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 statement issuance date.
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 may 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.
The continuation of our business is dependent upon raising additional capital to
fund operations. Management's plans are to obtain additional capital in 2021
and 2022 through investments by strategic partners for market opportunities,
which may include strategic partnerships or licensing arrangements, or raise
capital through the conversion of outstanding warrants, the issuance of common
or preferred stock, securities convertible into common stock, or secured or
unsecured debt. These possibilities, to the extent available, may be on terms
that result in significant dilution to 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. 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.
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Since our inception, we have incurred losses from operations each year. As of
December 31, 2020, we had an accumulated deficit of $156,689,989. 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, then we hope to partially or completely offset these losses in the
future. Although no assurances can be given, we believe that potential
additional issuances of equity, debt or other potential financing, as discussed
above, may provide the necessary funding for us to continue as a going concern
for the next year.
We cannot reasonably estimate the nature, timing and costs of the efforts
necessary to complete the development and approval of, or the period in which
material net cash flows are expected to be generated from, any of our products,
due to the numerous risks and uncertainties associated with developing and
marketing products, including the uncertainty of:
• the scope, rate of progress and cost of our clinical trials;
• future clinical trial results;
• the cost and timing of regulatory approvals;
• the establishment of successful marketing, sales and distribution channels and
partnerships, including our efforts to expand our marketing, sales and
distribution reach through joint ventures and other contractual arrangements;
• the cost and timing associated with establishing reimbursement for our
products;
• the effects of competing technologies and market developments; and
• the industry demand and patient wellness behavior.
Any failure to complete the development of our product candidates in a timely
manner, or any failure to successfully market and commercialize our product
candidates, would have a material adverse effect on our operations, financial
position and liquidity. A discussion of the risks and uncertainties associated
with us and our business are set forth under the section entitled "Risk Factors
- Risks Related to Our Business".
The worldwide spread of the COVID-19 virus is expected to result in a global
slowdown of economic activity which is likely to decrease demand for a broad
variety of products, including from our customers, while also disrupting supply
channels and marketing activities for an unknown period of time until the
disease is contained. Also, the pandemic may cause continued or additional
actions by hospitals and clinics such as limiting elective procedures and
treatments and limiting clinical trial activities and data monitoring. We
expect all of these factors to have a negative impact on our sales and our
results of operations, the size and duration of which we are currently unable to
predict.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. The
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those
related to the recording of the allowances for doubtful accounts, net realizable
value of inventory, useful lives of long-lived assets, fair value of goodwill
and other intangible assets, the determination of the valuation allowance for
deferred taxes, the estimated fair value of the warrant 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 3 to
our consolidated financial statements filed with this Annual Report on Form
10-K, we believe that the following accounting policies relating to revenue
recognition, research and development costs, inventory valuation, liabilities
related to warrants issued, stock-based compensation and income taxes are
significant and; therefore, they are important to aid you in fully understanding
and evaluating our reported financial results.
Revenue Recognition
Refer to Notes 3 and 10 to the accompanying consolidated financial statements.
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.
In accordance with ASC 718, Compensation - Stock Compensation, the fair value of
each option award is estimated on the date of grant using the Black-Scholes
option pricing model. The expected terms of options granted represent the period
of time that options granted are estimated to be outstanding and are derived
from the contractual terms of the options granted. We amortize the fair value
of each option over each option's vesting period.
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Results of Operations for the Years ended December 31, 2020 and 2019
Revenues and Cost of Revenues
Revenues for the year ended December 31, 2020 were $4,057,471, compared to
$1,028,730 for the same period in 2019, an increase of $3,028,741 or 294%.
Revenue resulted primarily from sales in Europe and Asia/Pacific of our
orthoPACE devices and related applicators and sales in the United States and
Asia/Pacific of our dermaPACE® devices and related applicators as well as
UltraMist product sales after the August 6, 2021 Acquisition. The primary
driver for the revenue increase were sales of UltraMist product totaling
$3,682,121 between August 6, 2020 and December 31, 2020.
Cost of revenues for the year ended December 31, 2020 were $1,162,021, compared
to $538,923 for the same period in 2019. The increase in cost of revenues was
primarily driven by sales of the UltraMist product subsequent to the August 6,
2020 Acquisition. Gross profit as a percentage of revenues was 71% for the year
ended December 31, 2020, compared to 48% for the same period in 2019. The
increase in gross profit as a percentage of revenues in 2020 was primarily due
the change in the sales mix toward higher margin UltraMist products.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2020 were
$1,245,507, compared to $1,181,892 for the same period in 2019, an increase of
$63,615, or 5%. The increase in research and development expenses in 2020, as
compared to 2019, was due to contracting expenses for temporary services,
increased services related to the dosage study in Poland and increased expenses
related to electrical testing for the device as well as the acquisition of
additional of employee to support the Ultramist products.
Selling and Marketing Expenses
Selling and marketing expenses for the year ended December 31, 2020 were
$5,159,740 as compared to $1,590,957 for the same period in 2019, an increase of
$3,568,783, or 224%. The year-over-year increase in sales and marketing expenses
in 2020 was due primarily to the August 6, 2020 Acquisition transaction and the
additional sales and marketing payroll, travel, tradeshow and training costs
associated with the acquired UltraMist business as well as increased costs
related to the to the commercialization of dermaPACE®.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2020 were
$13,723,888 as compared to $6,440,093 for the same period in 2019, an increase
of $7,283,795, or 113%. The increase in 2020 as compared to 2019, was primarily
due to acquisition-related transaction expenses, share-based compensation for
services, higher lease and payroll-related to costs subsequent to the August 6,
2020 Acquisition, as well as increased consulting and IT costs associated with
the integration of the Acquisition.
Impairment of Intangible Assets
During the fourth quarter of 2020, the Company determined that the intangible
asset for customer relationships related to the biological products was impaired
due to significant shortfalls in sales of the products during that period
compared with the sales projections used to determine the fair value the
intangible asset as of the August 6, 2020 acquisition date. The Company does not
expect sales of biological products to sufficiently recover. At December 31,
2020. the Company recorded a $7,185,120 Impairment charge for this intangible
asset.
Depreciation and Amortization Expenses
Depreciation and amortization operating expenses were $781,002 for the year
ended December 31, 2021 versus $71,213 for the same period of 2019. The
year-over-year increase was due to $713,021 of intangible amortization expense
recorded in 2020 in conjunction with the August 6, 2020 Acquisition.
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Other Income (Expense)
Other income (expense) was a net expense of $5,737,226 for the year ended
December 31, 2020, as compared to a net expense of $1,635,491 for the same
period in 2019, a net expense increase of $4,101,735. The change was driven by
increased expense for the change in the fair value of derivative liability of
$3,420,289, increased interest expense of $704,850 and loss on extinguishment of
debt of $565,374, partially offset by $600,000 partnership fee in 2020. The
increased interest expense was the result of higher levels of debt outstanding
during 2020 compared with 2019 and the change in fair value of the derivative
liability relates to warrants issued during 2020.
Net Loss
Net loss for the year ended December 31, 2020 was $30.9 million, or ($0.08) per
basic and diluted share, compared to a net loss of $10.4 million, or ($0.05) per
basic and diluted share, for the same period in 2019. The increase in the net
loss was primarily a result of higher 2021 operating and other expenses,
partially offset by increases in revenues/gross margin as noted 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 next generation
of our technology as well as the non-medical uses of the PACE technology, both
of which will require additional capital resources. We incurred a net loss of
$30.9 million and $10.4 million for the years ended December 31, 2020 and 2019,
respectively. These factors and the events of default on the 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.
Historically, our operations have primarily been funded from the sale of capital
stock, notes payable, and convertible debt securities.
The continuation of our business is dependent upon raising additional capital to
fund operations. Cash used in operations for the Company were approximately
$500,000 to $1,000,000 per month for the first half of 2021 and management
anticipates cash used for operations of up to$100,000 per month for the second
half of 2021 and plan to break even in the first half of 2022 as resources are
devoted to the commercialization of the dermaPACE and UltraMist product
including hiring of new employees, expansion of our international business and
continued research and development of next generation of our technology as well
as non-medical uses of our technology.
Management's plans are to obtain additional capital in 2021 and 2022 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. 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.
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Through sales of a combination of equity and debt instruments, the Company has
raised a total of $2.3 million in securities transactions closing on April 20,
2021, May 15, 2021 and September 7, 2021. See further discussion in Note 24,
Subsequent Events.
Master Equipment Lease
On January 26, 2018, the Company entered into a Master Equipment Lease with NFS
Leasing Inc. ("NFS") to provide financing for equipment purchases to enable the
Company to begin placing the dermaPACE® System in the marketplace. This
agreement provides for a lease line of up to $1,000,000 with a term of 36
months, and grants NFS a security interest in the Company's accounts receivable,
tangible and intangible personal property and cash and deposit accounts of the
Company. In 2019 and 2020, the Company entered into additional equipment leases
under the Master Equipment Lease and they are included in property, plant and
equipment as a right of use asset with a related finance lease liability in our
consolidated balance sheets.
Series C convertible preferred stock certificate of designation
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. Although we have no other shares of preferred stock
currently outstanding and no present intention to issue any additional shares of
preferred stock or to create any additional series of preferred stock, we may
issue such shares in the future.
Convertible notes payable
On August 6, 2020, the Company entered into a letter agreement (the
"HealthTronics Agreement") with HealthTronics pursuant to which the Company paid
off all outstanding debt due and owed to HealthTronics, including the notes
payable. Pursuant to the HealthTronics Agreement, as consideration for the
extinguishment of the debt due 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 note
payable in the 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.
The convertible promissory note, with principal amount of $1,372,743, matured on
August 6, 2021 and has not been repaid. The Company's failure to pay the
outstanding principal balance when due constituted an event of default under the
terms of the convertible note payable and, accordingly, it began accruing
interest of 2% in addition to the 12% initial rate as of the date of the
default.
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In the event that the Seller Note has not been repaid prior to January 1, 2021,
HealthTronics 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 December 31, 2020. The convertible promissory note is expressly
subordinate to the NWPSA "Senior Secured Notes" described in Note 12. The
Company may prepay the outstanding principal balance, together with any accrued
but unpaid interest without premium or penalty.
SBA loans
On May 28, 2020, the Company received proceeds from a loan in the amount of
$464,335 (the "PPP Loan") from Truist Bank, as lender, pursuant to the Paycheck
Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic
Security Act (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.
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 completed the
application for loan forgiveness during the third quarter of 2021, however, no
assurance is provided that the Company will obtain forgiveness for, any portion
of the PPP Loan. The Company received a letter from the SBA dated August 27,
2021 forgiving $454,335 of the PPP Loan principal and $5,755 of interest.
On June 10, 2020, the Company secured a loan offered by the U.S. Small Business
Administration ("SBA") under its Economic Injury Disaster Loan assistance
program ("EIDL") 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 repaid in full on August 5, 2020 with
proceeds from the NWPSA Senior Notes as part of the conditions of that
agreement.
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Senior Secured 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. 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 Company was in default of the minimum liquidity Provisions of the Senior
Secured Promissory Notes beginning in October 2020 and, accordingly, the Senior
Promissory Notes began accruing interest of 5.0% in addition to the stated rate
as of the date of the default.
Convertible promissory notes - 2020
On August 6, 2020, the Company entered into an asset purchase agreement with
Celularity, 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
was not repaid. The Company's failure to pay the outstanding principal balance
when due constituted an event of default under the terms of the Seller Note and,
accordingly, it began accruing additional interest of 5.0% in addition to the
12.0% initial rate, as of the date of default.
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 December 31, 2020. The Seller Note is expressly
subordinate to the NWPSA Senior Notes described above under "Senior Secured
Promissory Notes." The Company may prepay the outstanding principal balance,
together with any accrued but unpaid interest without premium or penalty.
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 liability by the
Company. 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.
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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 flows (uses) from operating, investing and financing activities - For the
years ended December 31, 2020 and 2019, net cash used by operating activities
was $12,718,292 and $6,410,758, respectively, primarily consisting of
compensation costs, research and development activities and general corporate
operations. The increase in the use of cash for operating activities for the
year ended December 31, 2020, as compared to the same period for 2019, of
$6,307,534, or 98.4%, was primarily due to the increase in the net loss, an
increase in accounts receivable, as well as decreases in accrued interest, and
interest payable, related parties, partially offset by increases in certain
non-cash expenses, such as depreciation and amortization, bad debt expense,
amortization of debt issuance costs and original issue discount, and change in
fair value of derivative liability and increases in accounts payable and accrued
expenses.
Net cash used by investing activities in 2020 was $20,052,870 as compared to net
cash used by investing activities of $53,939 in 2019. The increase is primarily
due to the $20,000,000 Acquisition of UltraMist on August 6, 2020.
Net cash provided by financing activities for the year ended December 31, 2020
was $33,447,739, which consisted of proceeds from PIPE offerings of $21,456,468,
proceeds from notes payable of $13,346,547, advances from related parties of
$22,500, net proceeds from sales of convertible preferred stock and convertible
promissory notes totaling $3,550,000, proceeds from SBA loans of $614,335, and
proceeds from exercises of stock options and warrants totaling $58,250, less
principal payments totaling $5,600,361 on debt and finance lease obligations.
Net cash provided by financing activities totaled $7,859,969 in 2019, which
primarily consisted of proceeds from PIPE offering of $2,800,100, advances from
related parties of $2,055,414, proceeds from warrant exercises of $1,758,142,
proceeds from short term notes payable of $1,215,000 and proceeds from line of
credit, related party of $90,000, net of payment of principal on finance leases
of $58,687.
Cash and cash equivalents increased by $676,529 for the year ended December 31,
2020 and cash and cash equivalents increased by $1,395,906 for the year ended
December 31, 2019.
Contractual Obligations
Our major outstanding contractual obligations relate to operating leases for our
two facilities and office equipment, as well purchase and supplier obligations
for product component materials and equipment, and our notes payable, related
parties.
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In August 2016, we entered into a lease agreement for 7,500 square feet of
office space for office, research and development, quality control, production
and warehouse space which expires on December 31, 2021. On February 1, 2018, we
entered into an amendment to the lease agreement for an additional 380 square
feet of office space for storage which expires on December 31, 2021. On January
2, 2019, we entered into a second amendment to the lease agreement for an
additional 2,297 square feet of office space for office space which expires on
December 31, 2021. Under the terms of the lease, we pay monthly rent of
$14,651, subject to a 3% adjustment on an annual basis.
As part of its August 6, 2020 Acquisition, we became party to a lease agreement
for 8,199 square feet of office space for office, research and development,
quality control, and warehouse space which expires on August 31, 2023. Under the
terms of the lease, the Company pays monthly rent of $7,051, with escalation of
approximately 2% on May 1 of each lease year.
Also on August 6, 2020, the Company became party to a lease for office equipment
that requires monthly payments of $669 through May 31, 2025.
We have developed a network of suppliers, manufacturers, and contract service
providers to provide sufficient quantities of product component materials for
our products through the development, clinical testing and commercialization
phases. We have a manufacturing supply agreement with Swisstronics Contract
Manufacturing AG in Switzerland, a division of Cicor Technologies Ltd., covering
the generator box component of our PACE devices. We have a manufacturing supply
agreement with Minnetronix for the UltraMist devices and the Dynamic Group for
UltraMist applicators. Celularity is our current supplier of the Biovance and
Interfyl product lines. See Note 24 Subsequent Events, for information regarding
disputes with Celularity and Minnetronix.
On August 6, 2020 the Company assumed obligations for a purchase order for
UltraMist devices from Celularity related to purchases of UltraMist devices from
Minnetronix . This purchase order had a remaining purchase commitment of
$1,058,170. This purchase agreement also calls for production delay fees of
1.25% of the committed inventory if the Company delays production. There is
also a cancelation clause of 20% of the remaining balance in the event that the
Company delays production for more than six months. For additional details, see
"Subsequent Events" in Note 24 of the Notes to Consolidated Financial
Statements.
Recently Issued Accounting Standards
New accounting pronouncements are issued by the Financial Standards Board
("FASB") or other standards setting bodies that the Company adopts according to
the various timetables the FASB specifies. The Company does not expect the
adoption of recently issued accounting pronouncements to have a significant
impact on the Company's results of operations, financial position or cash flow.
See Note 3 to the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities,
including the use of structured finance, special purpose entities or variable
interest entities.
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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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