UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported):
September 25, 2009
RUB MUSIC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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000-52985
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20-1176000
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(State or other jurisdiction
of incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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11680 Great Oaks Way, Suite 350,
Alpharetta, Georgia
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30022
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(Address of principal executive offices)
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(Zip Code)
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Registrants
telephone number, including area code:
(678) 581-6843
5555 North Star Ridge Way, Star, Idaho 83669
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Item 1.01 Entry into a Material Definitive Agreement.
On September 25, 2009, Rub Music Enterprises, Inc., a Nevada corporation (the Company), and
RME Delaware Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company
(the Merger Sub), entered into an agreement and plan of merger (the Merger Agreement) with
SANUWAVE, Inc., a Delaware corporation (SANUWAVE). Pursuant to the Merger Agreement, the Merger
Sub merged with and into SANUWAVE, with SANUWAVE as the surviving entity (the Reverse Merger).
In connection with the Reverse Merger, the Company acquired 100% of the outstanding capital stock
of SANUWAVE and the stockholders of SANUWAVE received 11,009,657 shares of the Companys common
stock, warrants to purchase up to 1,106,627 shares of the Companys common stock, at $4.00 per
share, and warrants to purchase up to an additional 1,106,627 shares of the Companys common stock,
at $8.00 per share.
In connection with the Reverse Merger, the Company also entered into stock repurchase
agreements, all dated as of September 25, 2009 (the Stock Repurchase Agreements), with certain
stockholders of the Company, pursuant to which the Company purchased from certain stockholders, for
an aggregate purchase price of $180,000, some or all of the Companys common stock held by such
stockholders, such that after the repurchases, 1,500,000 shares of the Companys common stock
remained outstanding (the Share Repurchase).
The Company also entered into lock-up agreements, dated as of September 25, 2009, with certain
stockholders of the Company, in which the stockholders agreed not to sell, assign, transfer, or
encumber any of the shares of common stock underlying warrants, without the consent of the Company,
until January 1, 2011.
In connection with the Merger Agreement, the Company also entered into an indemnification
agreement, made as of September 25, 2009 (the Indemnification Agreement), with SANUWAVE and David
N. Nemelka (Nemelka), pursuant to which Nemelka agrees to indemnify, hold harmless and reimburse
the Company, SANUWAVE and its officers, directors, agents and representatives from and against any
and all losses that may be incurred against such parties relating to the breach of any of the
representations or warranties of the Company or the Merger Sub contained in the Merger Agreement,
any failure by the Company or the Merger Sub to perform or comply with their covenants and
agreements contained in the Merger Agreement, any liability or obligation of the Company existing
as of the closing date of the Reverse Merger, and any third party claim asserted against such
parties relating to the operation of the Companys business or the sale or transfer of the
Companys securities prior to the closing of the Reverse Merger. Nemelkas maximum aggregate
indemnification liability is $100,000, plus the net proceeds value of any stock of the Company held
by Nemelka or his affiliates at the time of payment and any proceeds received by Nemelka or his
affiliates from the sale of any stock of the Company at any time after the date of the
Indemnification Agreement and for a period of one year after the consummation of the Reverse
Merger.
As a result of the Reverse Merger and Share Repurchase, the stockholders of SANUWAVE control
approximately 88% of the Companys outstanding common stock, holding 11,009,657 of the 12,509,657
outstanding shares, and SANUWAVE is considered the accounting acquirer in the Reverse Merger. The
Company was a shell company (as such term is defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) immediately prior to the Reverse Merger. As a result
of the Reverse Merger, the Companys operations are now focused in global medical technology.
Consequently, the Company believes that the Reverse Merger has caused the Company to cease being a
shell company as it no longer has nominal operations.
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In addition, pursuant to the Merger Agreement, Cornelius A. Hofman will submit his resignation
as an officer and director of the Company, and Christopher M. Cashman, Thomas H. Robinson, Kevin A.
Richardson, II and John F. Nemelka will be appointed to serve as members of the board of directors
of the Company, all of which will be effective following the expiration of the ten day period
following the mailing of the information statement required by Rule 14f-1 under the Exchange Act.
Upon the consummation of the Reverse Merger, Cornelius A. Hofman resigned as President, Chief
Executive Officer and Chief Financial Officer of the Company, Christopher M. Cashman was appointed
to serve as Chief Executive Officer and President of the Company, and Barry J. Jenkins was
appointed to serve as Chief Financial Officer of the Company.
Item 2.01 Completion of Acquisition or Disposition of Assets.
Pursuant to the Merger Agreement described in Item 1.01 of this Current Report on Form 8-K,
effective September 25, 2009, SANUWAVE became a wholly-owned subsidiary of the Company.
Caution Regarding Forward-Looking Statements
This Current Report on Form 8-K of Rub Music Enterprises, Inc. and its subsidiaries contains
forward-looking statements. All statements in this Current Report on Form 8-K, including those
made by the management of the Company, other than statements of historical fact, are
forward-looking statements. Examples of forward-looking statements include statements regarding the
Companys future financial results, operating results, business strategies, projected costs,
products, competitive positions, managements plans and objectives for future operations, and
industry trends. These forward-looking statements are based on managements estimates, projections
and assumptions as of the date hereof and include the assumptions that underlie such statements.
Forward-looking statements may contain words such as may, will, should, could, would,
expect, plan, anticipate, believe, estimate, predict, potential and continue, the
negative of these terms, or other comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and uncertainties and other important factors,
including those discussed in this report, including the sections titled Risk Factors and
Managements Discussion and Analysis of Financial Condition and Results of Operations. Other
risks and uncertainties are disclosed in the Companys prior Securities and Exchange Commission
filings. These and many other factors could affect the Companys 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 this Current
Report on Form 8-K.
Except as otherwise indicated by the context, references in this Current Report on
Form 8-K
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we, us and our are to the consolidated business of the Company and SANUWAVE.
BUSINESS
Overview
We are an emerging medical technology company focused on the development and commercialization
of non-invasive, biological response activating devices in the regenerative medicine area for the
repair and regeneration of tissue, musculoskeletal and vascular structures. Our portfolio of
products and product candidates activate biologic signaling and angiogenic responses, including new
vascularization and microcirculatory improvement, helping to restore the bodys normal healing
processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE)
technology in wound healing, orthopedic/spine, plastic/cosmetic and cardiac conditions.
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We believe we have demonstrated through our legacy products that our PACE technology is safe
and effective in stimulating healing in chronic conditions of the foot and the elbow through our
United States Class III PMA-approved Ossatron
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device, and in the stimulation of bone and chronic
tendonitis regeneration in the musculoskeletal environment through the utilization of our Ossatron
and Evotron
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devices in Europe. Our lead product candidate for the global wound care market,
dermaPACE, has received the European Conformity Marking (CE Mark) allowing for commercial use on
acute and chronic defects of the skin and subcutaneous soft tissue.
With the divestiture of our worldwide Versatron
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veterinary product line in June 2009, we are
now entirely focused on developing our PACE technology to stimulate healing in:
(1) wound conditions, including diabetic foot ulcers, pressure sores, burns and other skin
eruption conditions;
(2) orthopedic/spine applications, such as speeding the healing of fractures (including
non-union or delayed-union conditions), improving bone density in osteoporosis, fusing bones in the
extremities and spine, eliminating chronic pain in joints from trauma or arthritis, and other
potential sports injury applications;
(3) plastic/cosmetic applications such as cellulite smoothing, graft and transplant
acceptance, skin tightening, scarring and other potential aesthetic uses; and
(4) cardiac structures for removing plaque due to atherosclerosis and improving heart muscle
performance.
We believe our experience from our preclinical research and the clinical use of our
predecessor legacy devices in Europe and Asia, as well as our Ossatron device in the United States
for the last nine years, demonstrates the safety, clinical utility and efficacy of our product
candidates. In addition, we have preclinical programs focused on the development and better
understanding of treatments specific to our target applications, as well as the development of next
generation devices utilizing our PACE technology to maximize healing response and intervention.
We believe that our studies suggest that our PACE technology will be effective in our target
applications. If successful, we anticipate that these clinical studies should lead to regulatory
approval of our regenerative product candidates in the United States, Europe and Asia. If approved
by the appropriate regulatory authorities, we believe that our product candidates will offer new,
effective and non-invasive treatment options in wound healing, orthopedic/spine injuries,
plastic/cosmetic uses and cardiac procedures, improving the quality of life for millions of
patients suffering from injuries or deterioration of tissue, bones and vascular structures.
According to the National Bureau of Economic Research, the United States economy has been in a
recession since December 2007. This economic downturn and the ensuing instability of markets have
impacted us in the short term by making it difficult to raise the necessary capital to fund our
research and development programs, as well as the infrastructure needed to plan for follow-on
programs, upcoming regulatory submissions, product approvals, market launches and insurance
reimbursement interactions. Furthermore, our general business strategy may be further adversely
affected if the current economic conditions deteriorate further, or do not improve. For example,
the economy may impact the demand for elective medical procedures that we are targeting with our
product candidates, or may impact the pricing of our products. However, since our anticipated
product launch for our lead product candidate remains two years away, the impact of the current
recession on commercial markets for that product remains uncertain.
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Pulsed Acoustic Cellular Expression (PACE) Technology
Our PACE product candidates, including our lead product candidate, dermaPACE, utilize high
energy, acoustic pressure waves that are delivered in the shockwave acoustic spectrum to enhance
new blood vessel formation, and soft tissue and bone regeneration. PACE pressure waves combine
compressive and tensile stresses on cells and structures to promote an inflammatory response in
musculoskeletal and soft tissue, resulting in microcirculatory improvement, including the
production of angiogenic growth factors, enhanced new blood vessel formation (angiogenesis) and
subsequent regeneration of tissue. PACE waves are different from other forms of acoustic energy,
such as ultrasound, in that the wave front, in which the compressive forces exist, is a region of
sudden and forceful change in stress, density and temperature, which reinitiates the inflammatory
and proliferation phases, allowing the bodys own healing response to reinitiate or be enhanced.
We believe that our PACE technology is well suited for various applications due to its stimulation
of a broad spectrum of cellular events critical for the initiation and progression of healing.
Components of our product candidates have been cleared and approved by the United States Food
and Drug Administration (the FDA) for marketing in other applications. High energy, acoustic
pressure waves or shockwaves are the primary component of our previously developed product,
Ossatron, which was approved and marketed in the United States for use in chronic tendonitis of the
foot in 2000 and the elbow in 2003. Additionally, acoustic shockwaves have been used safely at
much higher energy and pulse levels in the lithotripsy procedure (breaking up kidney stones) by
urologists for over 20 years and has reached standard of care status.
In addition, our dermaPACE product candidate has received the European Conformity Marking (CE
Mark) approval to treat acute and chronic defects of the skin and subcutaneous soft tissue, such
as in the treatment of pressure ulcers, diabetic foot ulcers, burns, and traumatic and surgical
wounds. We are actively marketing dermaPACE to the European Community utilizing distributors in
select countries.
We are enrolling patients in a randomized, double-blind, sham controlled FDA investigational
device exemption (IDE) clinical trial for dermaPACE in the treatment of diabetic foot ulcers. We
expect to complete the last phase of the clinical trial enrollment in the first half of 2010 and to
submit to the FDA for regulatory approval in 2011. Our plan is to begin commercializing dermaPACE
in the United States by 2012.
Prior to receiving FDA approval, we intend to begin the process of initiating private industry
payor meetings in the United States to introduce the economics and positive efficacy results of
dermaPACE from Europe. These discussions will focus on building knowledge of dermaPACE and
relationships, and obtaining a new Category III Current Procedural Terminology (CPT) code for
dermaPACE for Medicare tracking purposes, which is a requisite step in obtaining
government-sponsored medical reimbursement for dermaPACE. We believe that, in addition to
improving the quality of life of the patients treated, dermaPACE will provide cost benefits to
payors, employers and society as a whole through improved healing, shortened healing times, and
fewer required treatments.
We have a development pipeline of product candidates. The following chart depicts our
development interests at the research and/or development stage, as well as the regulatory approval
for commercialization stage.
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We have established clinical, manufacturing and development relationships and multiple
regulatory pathways to product development. We believe that these relationships and pathways,
coupled with the well-characterized biologic response, history of safe use and clinically-proven
efficacy of our PACE technology, all position us to become a leader in the development and
commercialization of non-invasive, biological response devices for the repair and regeneration of
tissue, musculoskeletal and vascular structures that will capitalize on the growing market for
these products in wound healing, orthopedic/spine, plastic/cosmetic and cardiac applications.
Although the results of our studies have been positive to date, we cannot provide any assurance
that we will be successful in developing, obtaining regulatory approval for, or commercializing our
current product candidates, or that we will do so in a timely fashion.
Growth Opportunity in Wound Care Treatment
We are focused on the development of products that treat unmet clinical needs in large market
opportunities. Currently, there are limited biological or mechanical therapies to stimulate the
healing and regeneration of tissues, bone and vascular structures. As baby boomers age, the
incidence of their targeted diseases and musculoskeletal injuries and ailments will be far more
prevalent. We believe that our PACE technology is well positioned to address many of these issues.
We believe that our PACE technology, in promoting tissue regeneration, can be effective in a broad
array of applications and address unmet medical needs in wound healing, orthopedic/spine,
plastic/cosmetic and cardiac conditions.
Our primary interest is developing our lead product candidate, dermaPACE, for the global wound
care market, with the first focus in the United States on diabetic foot ulcers. The Advanced
Medical Technology Association (AdvaMed) estimates that the management and treatment of chronic
and complex wounds costs the United States $20 billion annually. According to the American
Diabetes Association (the ADA), 23.6 million people in the United States have diabetes, 57
million are pre-diabetic and 15% of people with diabetes will acquire a non-healing ulcer in their
lifetime. AdvaMed states that over 1.5 million diabetic foot ulcers occur annually, are a
recurrent condition, and lead to over 82,000 amputations each year, at a direct and indirect cost
ranging from $20,000 to $60,000 per patient. AdvaMed estimates that chronic leg wounds (ulcers)
account for the loss of two million workdays per year, at a cost of approximately $300 million in
lost productivity. We believe that our dermaPACE system represents an opportunity to significantly
decrease overall healthcare costs, while providing wound care outcomes that are significantly
better than current treatments.
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A majority of challenging wounds are non-healing chronic wounds. These wounds often involve
physiologic, complex and multiple complications such as reduced blood supply, compromised lymphatic
systems or immune deficiencies that interfere with the bodys normal wound healing processes. In
addition, diabetic ulcers and pressure ulcers are often slow-to-heal wounds. These wounds often
develop due to a patients impaired vascular and tissue repair capabilities. These conditions can
also inhibit a patients healing process, and often fail to heal for many months, and sometimes,
for several years. Wounds that are difficult to treat do not always respond to traditional
therapies, which include hydrocolloids, hydrogels and alginates. We believe that physicians and
hospitals need a therapy that addresses the special needs of these wounds with high levels of both
clinical and cost effectiveness.
We believe we are developing a safe and an advanced technology in the wound healing and tissue
regeneration market with PACE. dermaPACE is non-invasive and does not require anesthesia, making
it a cost-effective, time-efficient and painless approach to wound care. Physicians and nurses
look for therapies that can accelerate the healing process and overcome the obstacles of patients
compromised conditions, and prefer therapies that are easy to administer. In addition, since many
of these patients are not confined to bed, healthcare providers want therapies that are minimally
disruptive to the patients or the caregivers daily routines. dermaPACEs simple protocol of four
treatments over a two week span, followed by simple standard of care dressing changes, are designed
to allow for limited disruption to the patients normal lives and have no effect on mobility while
their wounds heal. dermaPACEs non-invasive protocol is designed to elicit the bodys own healing
response.
Our clinical experiences have demonstrated the ability of dermaPACE to promote wound healing,
improve healing time and help prevent chronic conditions, such as diabetic foot ulcers, from
leading to amputation. Our dermaPACE product candidate has been used safely for various types of
acute and chronic wounds. Our clinical case studies completed to date using dermaPACE have shown
full wound closure in at least 60% of those patients treated at 12 weeks for chronic conditions
that have been previously unresponsive to available treatments, representing as much as a 50%
closure rate improvement over other existing competitor treatment options.
Market Trends
We are focused on the development of products that have the potential to address substantial
unmet clinical needs across broad market indications. We believe there are limited therapeutic
treatments that directly and reproducibly stimulate healing processes in the areas in which we are
focusing, particularly for wound care and repair of certain types of musculoskeletal conditions.
According to AdvaMed, Centers for Medicare & Medicaid Services and our internal projections
for dermaPACE, the United States advanced wound healing market was estimated at $5 billion in 2008,
which includes diabetic foot ulcers, pressure sores, burns and traumatic wounds, and chronic mixed
leg ulcers. We also believe there are significant opportunities in the worldwide orthopedic and
spine markets, driven by aging baby boomers, the desire for active lifestyles well into retirement
and the growth in the incidence of osteoporosis, osteoarthritis, obesity, diabetes and other
diseases that cause injury to orthopedic tissues and/or impair the ability of the body to heal
injuries.
With the success of negative pressure wound therapy devices in the wound care segment over the
last ten years and the recognition of the global epidemic associated with wounds, as well as
deteriorating musculoskeletal conditions attributed to various disease states such as obesity,
diabetes and ischemia due to vascular and heart disease, as well as sports injuries, we believe
that Medicare and private insurers have become aware of the costs and expenditures associated with
the adjunctive therapies being utilized for wound healing and orthopedic/spine conditions with
limited efficacies in full skin closure, or bone and tissue regeneration. We believe the wound
healing and orthopedic markets are undergoing a transition,
and are interested in mechanical, biological response activating devices that are applied
non-invasively and seek to stimulate the bodys own capabilities for regeneration of tissue at
injury sites in a cost-effective manner.
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According to the American Society of Plastic Surgeons (ASPS), plastic surgery was not spared
from the recessionary decline in 2008. According to ASPS, surgical procedures were down nine
percent, although there were 12.1 million cosmetic procedures in the United States in 2008, up 3 %
from 2007, and 10.4 million of them were cosmetic minimally-invasive procedures, up 5% from 2007.
According to ASPS, women encompass 91% of all cosmetic procedures, of which 9.5 million procedures
were minimally-invasive. Although down nine percent from 2007, ASPS states that patients in the
United States still spent $10.3 billion on cosmetic procedures in 2008. We believe our PACE
technology has the potential to have a role in cosmetic procedures based on its mechanism of
action. We also believe that current statistics, demographic growth, the continued growth in
minimally-invasive procedures of the skin and an elective pay market are all positive reasons for
us to continue developing protocols and studying the effects of PACE on cosmetic needs.
In addition, according to the American Heart Association, myocardial ischemia in the United
States continues to be a major problem, with more than six million Americans living with it, and
the World Health Organization states that heart attacks are the leading cause of death globally.
With the continued advances of minimally invasive procedures in heart surgery and angioplasties, we
will continue to develop and look for strategic partners to help develop our PACE technology to
address what we believe to be are unmet cardiac needs.
Strategy
Our objective is to be a leader in the development and commercialization of novel, biological
response activating devices to treat tissue, musculoskeletal and vascular structure conditions.
Our main vehicle for growth is the development and commercialization of our PACE technology. Our
immediate goal involves leveraging the knowledge we gained from our existing human heel, elbow and
bone indications to enter the advanced wound care market with innovative treatments.
The key elements of our strategy include the following:
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Develop and commercialize non-invasive biological response activating devices in the
regenerative medicine area that are superior to current medical devices for the treatment
of tissue, musculoskeletal and vascular structures.
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We intend to use our proprietary technologies and know-how in the use of high energy,
acoustic pressure waves in the shockwave spectrum to address unmet medical needs in wound
care, orthopedics/spine, plastic/cosmetic and cardiac indications.
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Focus on products with a cost-effective time to market that utilize our experiences and
track record in product approvals.
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We have a track record of developing products by relying on our products that have been
previously authorized for marketing by the FDA and by leveraging the lessons learned from
those previous experiences as the cornerstone for further development and regulatory
approvals. We will seek to repeat this process of utilizing FDA-cleared or approved
components in our subsequent product candidates. However, we cannot be certain that this
strategy will accelerate the regulatory approval process for our product candidates, or that
we will obtain such approval.
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Leverage our historical data and experience to accelerate the development of our lead
wound care product candidate, as well as additional product candidates, for our target
markets.
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We believe the ability of our legacy products, such as Ossatron, to safely stimulate and
reestablish normal healing in chronic conditions indicates the potential successful use of
shockwaves, dermaPACE and our other product candidates to stimulate and reinstitute the
normal healing process through angiogenesis. We believe that much of the data and
experience generated as part of the clinical development will be useful in gaining the
required approval of our product candidates, including product manufacturing procedures and
records, stability test results, analytical test methodology, pre-clinical and human safety
test results, and, potentially, efficacy information.
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Maximize the value of our PACE product candidates through control of distribution
channels.
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In the United States, we plan to build a sales force utilizing direct representatives
managed by an in-house sales management team and supported by employee product specialists.
As a result of our prior product approvals, we have spent significant resources on training
and educating specialists in the use of our technology. We believe that this approach will
allow us to have an immediate impact in the market by leveraging existing surgeon
relationships. Outside the United States, we intend to utilize our distributor
relationships for product introduction and adoption in local markets.
Scientific Advisors
We have established a network of advisors that brings expertise in wound healing, orthopedics,
plastics, combined with clinical and scientific research, and FDA experience. We consult our
scientific advisors on an as-needed basis on clinical and pre-clinical study design, product and
product candidate formulation, clinical indications, and all applications of tissue engineering,
focusing on indications and market needs.
We pay consulting fees to members of our scientific advisory board for the services they
provide to us, in addition to reimbursing them for incurred expenses. The amounts vary depending
on the nature of the services. We paid our advisors aggregate consulting fees and reimbursements
of $52,500 for the six months ended June 30, 2009, and $138,000 and $128,800 for the years ended
December 31, 2008 and 2007, respectively.
Sales, Marketing and Distribution
We intend to establish a direct sales force in the wound care market that will market our
products. The direct sales forces will be managed by our in-house sales management team and
supported by product specialists employed by us, who will train the sales force and provide product
education for our surgeon and care giver customers. We expect to have a 75-person sales force in
the United States by the end of 2013 that will represent our initial dermaPACE commercial efforts.
Outside the United States, we intend to employ distributors to represent our products in our
respective international markets. These distributors will be selected based on their existing
business relationships, and the ability of their sales force and distribution capabilities to
effectively penetrate the market with our PACE product line. In addition, we will rely on these
distributors to manage physical distribution, customer service and billing services for our
international customers.
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Manufacturing
We have developed a network of suppliers, manufacturers and contract service providers to
provide sufficient quantities of our products and product candidates through the development and
clinical testing phases.
We have signed a manufacturing supply agreement with SwissTronics Contract Manufacturing AG in
Switzerland, a division of Cicor Technologies, covering the generator box component of our products
and product candidates; therefore, our generator boxes are manufactured in accordance with
applicable quality standards (EN ISO 13485 applicable industry and regulatory standards). From
time to time, we use contract facilities to complete the manufacturing, packaging and generator box
testing for our products and kits, as applicable. We produce the applicator heads and kits for our
products, and perform the final product testing and certifications internally.
Our two facilities in Alpharetta, Georgia consist of approximately 25,000 square feet in
total, and provide office, research and development, production and quality control space.
Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for
our products, product candidates, technology and know-how, to operate without infringing on the
proprietary rights of others and to prevent others from infringing upon our proprietary rights. We
seek to protect our proprietary position by, among other methods, filing United States and selected
foreign patent applications and United States and selected foreign trademark applications related
to our proprietary technology, inventions, products and improvements that are important to the
development of our business. Effective trademark, service mark, copyright, patent and trade secret
protection may not be available in every country in which our products and services are made
available. The protection of our intellectual property may require the expenditure of significant
financial and managerial resources.
Patents
We consider the protection afforded by patents important to our business. We intend to seek
and maintain patent protection in the United States and selected foreign countries where deemed
appropriate for products that we develop. There are no assurances that any patents will result
from our patent applications, that any patents that may be issued will protect our intellectual
property, or that any issued patents or pending applications will not be successfully challenged,
including as to ownership and/or validity, by third parties. In addition, if we do not avoid
infringement of the intellectual property rights of others, we have to seek a license to sell our
products, defend an infringement action or challenge the validity of intellectual property in
court. Any current or future challenges to our patent rights, or challenges by us to the patent
rights of others, could be expensive and time consuming.
We derive our patent rights, including as to both issued patents and patent pending
applications, from three sources: (1) assignee of patent rights in technology we developed; (2)
assignee of patent rights purchased from HealthTronics, Inc. (HealthTronics); and (3) as licensee
of certain patent rights assigned to HealthTronics. In August 2005, we purchased the assets of,
and a majority of our current patents and patent applications from, HealthTronics, to whom we
granted back perpetual and royalty-free-field-of-use license rights in the purchased patent
portfolio. We believe that our owned and licensed patent rights provide a competitive advantage
with respect to others that might seek to utilize certain of our apparatuses and methods
incorporating extracorporeal shockwave technologies that we have patented; however, we do not hold
patent rights that cover all of our products, product components, or methods that utilize our
products. We also have not conducted a competitive analysis or valuation with respect to our
issued and pending patent portfolio in relation to our current products and/or third party
competitor products.
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We are the assignee of thirteen issued United States patents and eight issued foreign patents.
Our current issued United States and foreign patents include patent claims directed to particular
electrode configurations, chemical components for shockwave generation and detachable therapy heads
with data storage. Our United States patents also include patent claims directed to methods of
using acoustic shockwaves, including shockwave devices such as our products, to treat ischemic
conditions, spinal cord scar tissue and spinal injuries, body tissues under positive pressure, bone
surface gaps, and, within particular treatment parameters, diabetic foot ulcers and pressure sores.
While such patented method claims may provide patent protection against certain indirect
infringing promotion and sales activities of competing manufacturers and distributors, certain
medical methods performed by medical practitioners or related health care entities may be subject
to exemption from potential infringement claims under 35 U.S.C. § 287(c) and, therefore, may limit
enforcement of claims of our method patents as compared to device and non-medical method patents.
We also currently maintain two United States provisional applications, ten United States
non-provisional applications and ten foreign patent applications. Our patent-pending rights
include inventions directed to certain shockwave devices and systems, ancillary products and
components for shockwave treatment devices, and various methods of using acoustic pressure waves.
Such patent-pending methods include, for example, using acoustic pressure waves to treat soft
tissue disorders, bones, joints, wounds, skin, blood vessels and circulatory disorders, lymphatic
disorders, cardiac tissue, fat and cellulite, cancer, blood and fluids for sterilization, and to
destroy pathogens. All of our United States and foreign pending applications either have yet to be
examined or require response to an examiners office action rejections and, therefore, remain
subject to further prosecution, the possibility of further rejections and appeals, and/or the
possibility we may elect to abandon prosecution, without assurance that a patent may issue from any
pending application.
Under our license to HealthTronics, we reserve exclusive rights in our purchased portfolio as
to orthopedic, tendonopathy, skin wounds, cardiac, dental, neural medical conditions and to all
conditions in animals (the Ortho Field). HealthTronics receives field-exclusive and
sublicensable rights under the purchased portfolio as to (1) certain HealthTronics lithotripsy
devices in all fields other than the Ortho Field, and (2) all products in the treatment of renal,
ureteral, gall stones and other urological conditions (the Litho Field). HealthTronics also
receives non-exclusive and non-sublicensable rights in the purchased portfolio as to any products
in all fields other than the Ortho Field and Litho Field.
Pursuant to mutual amendment and other assignment-back rights under the patent license
agreement with HealthTronics, we are also a licensee of certain patents and patent applications
that have been assigned to HealthTronics. Under issued U.S. Pat. No. 6,972,116, directed to
particular compositions of shockwave device electrodes, we receive a perpetual, exclusive and
royalty-free license in the Ortho Field and a non-exclusive license in all other fields other than
the Litho Field (reserved exclusively to HealthTronics). We also receive a perpetual,
non-exclusive and royalty-free license to six issued foreign patents and one pending United States
patent application. Our non-exclusive license is subject to HealthTronics sole discretion to
further maintain any of the patents and pending applications assigned back to it.
As part of the sale of the veterinary business, we have also granted certain exclusive and
non-exclusive patent license rights to Pulse Veterinary Technologies, LLC under most of our patent
portfolio to utilize shockwave technologies in the field of non-human mammals.
11
Given our international patent portfolio, there are growing risks of challenges to our
existing and future patent rights. Such challenges may result in invalidation or modification of
some or all of our patent rights in a particular patent territory, and reduce our competitive
advantage with respect to third
party products and services. Such challenges may also require the expenditure of significant
financial and managerial resources.
A Swiss-based competitor, SwiTech Medical AG (SwiTech), has challenged one of our issued
United States patents and three of our issued German patents. The United States Patent & Trademark
Office (the USPTO) notified us that an ex parte reexamination request was filed on May 19, 2009,
against our U.S. Pat. No. 6,080,119, which includes patent claims directed to processes and devices
for utilizing a catalyst in shockwave devices to suppress electrolytic formation of gases in a
liquid medium surrounding high voltage electrodes. We have not received further notice as to
whether the USPTO will grant such request. This United States reexamination request followed
SwiTechs nullity action brought against the foreign counterpart German Pat. No. DE 197 18 512.
The German Federal Patent Court ordered a partial revocation of claims of the corresponding German
patent and upheld a narrower patent claim directed to further combination of a dispensing container
for a catalyst that suppresses the electrolytic creation of gas caused when the high voltage is
applied to shockwave device electrodes. Following an assignment to HealthTronics, with a
non-exclusive license-back to us, HealthTronics filed an appeal to the partial revocation decision
of German Pat. No. DE 197 18 512 that remains pending.
SwiTech also filed a partial nullity action against two claims (out of ten total claims) of
German Pat. No. DE 197 18 513. The German Federal Patent Court held in an oral decision on August
6, 2009, that those challenged claims, directed to a shockwave device with a pressure-tight liquid
volume including electrodes with a spark gap (claim 1) and further with an additive improving
conductivity and/or recombination of electrolytic gas (claim 6), were revoked. The unchallenged
claims directed to certain further combinations of electrode and reflector electrical contact,
configurations and additive remain in the issued patent. We have not received a formal written
decision of the German Patent Court or determined whether to appeal the partial revocation.
SwiTech further filed a partial nullity action against seven claims (out of twenty-two total
claims) of German Pat. No. DE 197 18 511 that we have defended which remains pending for oral
hearing on February 11, 2010 before the German Federal Patent Court. The challenged German patent
claims are directed to shockwave devices, including a therapy head with a detachable mechanical and
electrical coupling to a supply unit, and certain dependent claims, including device combinations
with other limitations. Unchallenged claims include dependent claims to further device
combinations with a detection mechanism and also to device combinations with data communication
between a therapy head and a supply unit.
If we become involved in future litigation or any other adverse intellectual property
proceeding, for example, as a result of an alleged infringement, or a third party alleging an
earlier date of invention, we may have to spend significant amounts of money and time and, in the
event of an adverse ruling, we could be subject to liability for damages, including treble damages,
invalidation of our intellectual property and injunctive relief that could prevent us from using
technologies or developing products, any of which could have a significant adverse effect on our
business, financial condition and results of operation. In addition, any claims relating to the
infringement of third party proprietary rights, or earlier date of invention, even if not
meritorious, could result in costly litigation, lengthy governmental proceedings, divert
managements attention and resources and require us to enter into royalty or license agreements
which are not advantageous, if available at all.
12
Trademarks
Since other products on the market compete with our products, we believe that our product
brand names are an important factor in establishing product recognition. We have trademark
registrations for SANUWAVE
®
in the United States, European Community, Canada, Japan, Switzerland,
Taiwan and under the Madrid Protocol. We have filed pending trademark applications for dermaPACE
in the United States and Canada and received registrations in the European Community, Japan, South
Korea, Switzerland, Taiwan and under the Madrid Protocol. We have received trademark registrations
for PACE Pulse Acoustic Cellular Expression in the European Community, Hong Kong, Singapore,
Switzerland, Taiwan and have pending applications in Canada, China and the Unites States. We have
filed pending applications for evoPACE and angioPACE, in Australia, Canada, European Community,
Switzerland and the United States of America. We also maintain trademark registrations for the
marks Ossatron
®
(U.S.A. and Germay), Evotron
®
(U.S.A., Germany and Switzerland), Evotrode
®
(Germany
and Switzerland), Healing Today. Curing Tomorrow
®
(U.S.A.), HMT
®
(Switzerland), Orthotripsy
®
(U.S.A.), Reflectron
®
(Germany and Switzerland), Reflectrode
®
(Germany and Switzerland), CSWT
®
(Switzerland), OSWT
®
(Switzerland) and TSWT
®
(Switzerland).
Potential Intellectual Property Issues
Although we believe that the patents and patent applications, including those that we license,
provide a competitive advantage, the patent positions of biotechnology and device companies are
highly complex and uncertain. The combination product and medical device industries are
characterized by the existence of a large number of patents and frequent litigation based on
allegations of patent infringement. Our success will depend in part on us not infringing on
patents issued to others, including our competitors and potential competitors, as well as our
ability to enforce our patent rights. We also rely on trade secrets, know-how, continuing
technological innovation and in-licensing opportunities to develop and maintain our proprietary
position.
Despite any measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products and product candidates, or to obtain and use information
that we regard as proprietary. In enforcement proceedings in Switzerland, we are currently
assisting HealthTronics as an informer of misappropriation by SwiTech and related third parties of
intellectual property rights in legacy software and devices relating to assets we purchased from
HealthTronics in August 2005. Such present or future actions against violations of our
intellectual property rights may incur material expense and divert the attention of management.
Third parties that license our proprietary rights, such as trademarks, patented technology or
copyrighted material, may also take actions that diminish the value of our proprietary rights or
reputation. In addition, the steps we take to protect our proprietary rights may not be adequate
and third parties may infringe or misappropriate our copyrights, trademarks, trade dress, patents
and similar proprietary rights.
We collaborate with other persons and entities on research, development and commercialization
activities and expect to do so in the future. Disputes may arise about inventorship and
corresponding rights in know-how and inventions resulting from the joint creation or use of
intellectual property by us and our collaborators, researchers, licensors, licensees and
consultants. In addition, other parties may circumvent any proprietary protection that we do have.
As a result, we may not be able to maintain our proprietary position.
For additional risks related to our intellectual property, see Risk Factors Risks Related
to Intellectual Property.
13
Competition
We believe the advanced wound care market is dramatically underserved. Current technologies
developed by Kinetic Concepts (KCI), Smith & Nephew, ConvaTec, Johnson & Johnson, Molnlycke and
3M manage wounds, but, in our opinion, do not impact the biologic factors to promote healing like
our PACE technology. The leading medical device serving this market is the Vacuum Assisted Closure
(V.A.C.) System, marketed by KCI. The V.A.C. is a negative pressure wound device that applies
suction to debride and better manage wounds. KCI successfully launched the V.A.C. in the United
States to address the void in advanced wound care, received a Medicare Part B reimbursement code in
2000, gained inclusion in the diabetic foot ulcer guidelines from the Tucson Expert Consensus
Conference in 2004 and recorded revenue of $1.4 billion from the V.A.C. in 2008.
The tissue market for regenerative medicine include companies that provide human allograft
products and services such as Cook, Integra LifeSciences, LifeCell (acquired by KCI), C.R. Bard,
TEI Biosciences, Regranex and Tissue Science Labs, plc. There are also several companies that
market extracorporeal shockwave device products targeting lithotripsy and orthopedic markets,
including Dornier MedTech, Storz Medical and Tissue Regeneration Technologies, and could ultimately
pursue the wound care market. Nevertheless, we believe that dermaPACE has a competitive advantage
over all of these existing technologies by achieving wound closure by means of a minimally invasive
process through innate biological response to PACE.
Developing and commercializing new products is highly competitive. The market is
characterized by extensive research and clinical efforts and rapid technological change. We face
intense competition worldwide from medical device, biomedical technology and medical products and
combination products companies, including major pharmaceutical companies. We may be unable to
respond to technological advances through the development and introduction of new products. Most
of our existing and potential competitors have substantially greater financial, marketing, sales,
distribution, manufacturing and technological resources than us. These competitors also may be in
the process of seeking FDA or other regulatory approvals, or patent protection, for new products.
Our competitors may commercialize new products in advance of our products. Our products also face
competition from numerous existing products and procedures, which currently are considered part of
the standard of care. In order to compete effectively, our products will have to achieve
widespread market acceptance.
Regulatory Matters
FDA Regulation
Each of our products must be cleared or approved by the FDA before it is marketed in the
United States. Before and after approval or clearance in the United States, our product candidates
are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act
and/or the Public Health Service Act, as well as by other regulatory bodies. FDA regulations
govern, among other things, the development, testing, manufacturing, labeling, safety, storage,
record-keeping, market clearance or approval, advertising and promotion, import and export,
marketing and sales, and distribution of medical devices and pharmaceutical products.
In the United States, the FDA subjects medical products to rigorous review. If we do not
comply with applicable requirements, we may be fined, the government may refuse to approve our
marketing applications or allow us to manufacture or market our products, and we may be criminally
prosecuted. Failure to comply with the law could result in, among other things, warning letters,
civil penalties, delays in approving or refusal to approve a product candidate, product recall,
product seizure, interruption of production, operating restrictions, suspension or withdrawal of
product approval, injunctions, or criminal prosecution.
14
The FDA has determined that our technology and product candidates constitute medical
devices. The FDA determines what center or centers within the FDA will review the product and its
indication for use, and also determines under what legal authority the product will be reviewed.
For the current indications, our product candidate is being reviewed by the Center for Devices and
Radiological Health. However, we cannot be sure that the FDA will not select a different center
and/or legal authority for one or more of our other product candidates, in which case the
governmental review requirements would vary in some respects.
FDA Approval or Clearance of Medical Devices
In the United States, medical devices are subject to varying degrees of regulatory control and
are classified in one of three classes depending on the extent of controls the FDA determines are
necessary to reasonably ensure their safety and efficacy:
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Class I: general controls, such as labeling and adherence to quality system regulations;
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Class II: special controls, pre-market notification (510(k)), specific controls such as
performance standards, patient registries, and postmarket surveillance, and additional
controls such as labeling and adherence to quality system; and
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Class III: special controls and approval of a pre-market approval (PMA) application.
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Each of our product candidates is in Class I, Class II or Class III, and requires FDA
authorization prior to marketing, by means of either a 510(k) clearance or a PMA approval. We are
currently proceeding along the path that dermaPACE is a Class III device requiring a PMA approval.
Other product candidates alone should be eligible for clearance via the 510(k) route with use of
more generic labeling. For example, we may submit and obtain clearance for a 510(k) application
for clearance of PACE products for temporary improvement in blood circulation utilizing predicate
devices.
To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market
notification demonstrating that the proposed device is substantially equivalent to another legally
marketed medical device, has the same intended use, and is as safe and effective as a legally
marketed device and does not raise different questions of safety and effectiveness than does a
legally marketed device. 510(k) submissions generally include, among other things, a description of
the device and its manufacturing, device labeling, medical devices to which the device is
substantially equivalent, safety and biocompatibility information, and the results of performance
testing. In some cases, a 510(k) submission must include data from human clinical studies.
Marketing may commence only when the FDA issues a clearance letter finding substantial equivalence.
After a device receives 510(k) clearance, any product modification that could significantly affect
the safety or effectiveness of the product, or that would constitute a significant change in
intended use, requires a new 510(k) clearance or, if the device would no longer be substantially
equivalent, would require a PMA. If the FDA determines that the product does not qualify for
510(k) clearance, then the company must submit and the FDA must approve a PMA before marketing can
begin.
15
A PMA application must provide a demonstration of safety and effectiveness, which generally
requires extensive pre-clinical and clinical trial data. Information about the device and its
components, device design, manufacturing and labeling, among other information, must also be
included in the PMA. As part of the PMA review, the FDA will inspect the manufacturers facilities
for compliance with Quality System Regulation, or QSR, requirements, which govern testing, control,
documentation and other aspects of quality assurance with respect to manufacturing. If the FDA
determines the application or manufacturing facilities are not acceptable, the FDA may outline the
deficiencies in the submission and often will request additional testing or information.
Notwithstanding the submission of any requested additional information, the FDA ultimately may
decide that the application does not satisfy the regulatory
criteria for approval. During the review period, an FDA advisory committee, typically a panel
of clinicians and statisticians, is likely to be convened to review the application and recommend
to the FDA whether, or upon what conditions, the device should be approved. The FDA is not bound
by the advisory panel decision, but the FDA often follows the panels recommendation. If the FDA
finds the information satisfactory, it will approve the PMA. The PMA approval can include
post-approval conditions, including, among other things, restrictions on labeling, promotion, sale
and distribution, or requirements to do additional clinical studies post-approval. Even after
approval of a PMA, a new PMA or PMA supplement is required to authorize certain modifications to
the device, its labeling or its manufacturing process. Supplements to a PMA often require the
submission of the same type of information required for an original PMA, except that the supplement
is generally limited to that information needed to support the proposed change from the product
covered by the original PMA.
During the review of either a 510(k) submission or PMA application, the FDA may request more
information or additional studies and may decide that the indications for which we seek approval or
clearance should be limited. We cannot be sure that our product candidates will be cleared or
approved in a timely fashion or at all. The review of combination products is often more complex
and more time consuming than the review of a product under the jurisdiction of only one center
within the FDA. In addition, laws and regulations and the interpretation of those laws and
regulations by the FDA may change in the future. We cannot foresee what effect, if any, such
changes may have on us.
Clinical Trials of Medical Devices
One or more clinical trials are almost always required to support a PMA application and are
sometimes required to support a 510(k) submission. Clinical studies of unapproved or uncleared
medical devices or devices being studied for uses for which they are not approved or cleared
(investigational devices) must be conducted in compliance with FDA requirements. If an
investigational device could pose a significant risk to patients, the sponsor company must submit
an IDE application to the FDA prior to initiation of the clinical study. An IDE application must
be supported by appropriate data, such as animal and laboratory test results, showing that it is
safe to test the device on humans and that the testing protocol is scientifically sound. The IDE
will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the
company that the investigation may not begin. Clinical studies of investigational devices may not
begin until an institutional review board, or IRB, has approved the study.
During the study, the sponsor must comply with the FDAs IDE requirements. These requirements
include investigator selection, trial monitoring, adverse event reporting, and record keeping. The
investigators must obtain patient informed consent, rigorously follow the investigational plan and
study protocol, control the disposition of investigational devices, and comply with reporting and
record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical
trial is being conducted may suspend a clinical trial at any time for various reasons, including a
belief that the subjects are being exposed to an unacceptable risk. During the approval or
clearance process, the FDA typically inspects the records relating to the conduct of one or more
investigational sites participating in the study supporting the application.
16
Post-Approval Regulation of Medical Devices
After a device is cleared or approved for marketing, numerous and pervasive regulatory
requirements continue to apply. These include:
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the QSR, which governs, among other things, how manufacturers design, test, manufacture,
exercise quality control over, and document manufacturing of their products;
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labeling and claims regulations, which prohibit the promotion of products for unapproved
or off-label uses and impose other restrictions on labeling; and
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the Medical Device Reporting regulation, which requires reporting to the FDA certain
adverse experiences associated with use of the product.
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We continue to be subject to inspection by the FDA to determine our compliance with regulatory
requirements, as do our suppliers, contract manufacturers, and contract testing laboratories.
International sales of medical devices manufactured in the United States that are not approved
or cleared by the FDA are subject to FDA export requirements. Exported devices are subject to the
regulatory requirements of each country to which the device is exported.
Manufacturing cGMP Requirements
If and when we manufacture medical devices, we will be required to comply with applicable FDA
manufacturing requirements contained in the FDAs current good manufacturing practices, or cGMP,
regulations. cGMP regulations require among other things, quality control and quality assurance as
well as the corresponding maintenance of records and documentation. The manufacturing facility for
our products must meet cGMP requirements to the satisfaction of the FDA pursuant to a pre-PMA
approval inspection before we can use them. We and some of our third party service providers are
also subject to periodic inspections of facilities by the FDA and other authorities, including
procedures and operations used in the testing and manufacture of our products to assess our
compliance with applicable regulations. Failure to comply with statutory and regulatory
requirements subjects a manufacturer to possible legal or regulatory action, including the seizure
or recall of products, injunctions, consent decrees placing significant restrictions on or
suspending manufacturing operations, and civil and criminal penalties. Adverse experiences with
the product must be reported to the FDA and could result in the imposition of marketing
restrictions through labeling changes or in product withdrawal. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems concerning safety or
efficacy of the product occur following the approval.
International Regulation
We are subject to regulations and product registration requirements in many foreign countries
in which we may sell our products, including in the areas of product standards, packaging
requirements, labeling requirements, import and export restrictions and tariff regulations, duties
and tax requirements. The time required to obtain clearance required by foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for licensing a product in
a foreign country may differ significantly from FDA requirements.
The primary regulatory body in Canada is Health Canada. In addition to needing appropriate
data to obtain market licensing in Canada, SANUWAVE must have an ISO 13485:2003 certification, as
well as meet additional requirements of Canadian laws. We currently have this certification and
will need to maintain it in order to have the potential to gain approval of a product candidate in
Canada.
The primary regulatory environment in Europe is the European Union, which consists of 25
member states and 42 competent authorities encompassing most of the major countries in Europe. In
the European Union, the European Medicines Agency (EMA) and the European Union Commission have
determined that Ossatron, Evotron, Reflectron and dermaPACE will be regulated as medical device
products.
17
The primary regulatory bodies and paths in Asia and Australia are determined by the requisite
country authority. In most cases, establishment registration and device licensing are applied for
at the
applicable Ministry of Health through a local intermediary. The requirements placed on the
manufacturer are typically the same as those contained in ISO 9001 or ISO 13485.
European Good Manufacturing Practices (GMP)
In the European Union, the manufacture of medical devices is subject to good manufacturing
practice, or GMP, as set forth in the relevant laws and guidelines of the European Union and its
member states. Compliance with GMP is generally assessed by the competent regulatory authorities.
Typically, quality system evaluation is performed by a Notified Body, which also recommends to the
relevant competent authority for the European Community CE marking of a device. The Competent
Authority may conduct inspections of relevant facilities, and review manufacturing procedures,
operating systems and personnel qualifications. In addition to obtaining approval for each
product, in many cases each device manufacturing facility must be audited on a periodic basis by
the Notified Body. Further inspections may occur over the life of the product.
U.S. Anti-Kickback and False Claims Laws
In the United States, there are Federal and state anti-kickback laws that prohibit the payment
or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or
recommendation of healthcare products and services. Violations of these laws can lead to civil and
criminal penalties, including exclusion from participation in Federal healthcare programs. These
laws are potentially applicable to manufacturers of combination products regulated by the FDA as
medical devices, such as us, and hospitals, physicians and other potential purchasers of such
products. Other provisions of state and Federal law provide civil and criminal penalties for
presenting, or causing to be presented, to third-party payers for reimbursement, claims that are
false or fraudulent, or which are for items or services that were not provided as claimed.
Although we intend to structure our future business relationships with purchasers of our products
to comply with these and other applicable laws, it is possible that some of our business practices
in the future could be subject to scrutiny and challenge by Federal or state enforcement officials
under these laws.
Third-Party Reimbursement
We anticipate that sales volumes and prices of the products we commercialize will depend in
large part on the availability of coverage and reimbursement from third party payers. Third party
payers include governmental programs such as Medicare and Medicaid, private insurance plans, and
workers compensation plans. These third party payers may deny coverage and reimbursement for a
product or therapy, in whole or in part, if they determine that the product or therapy was not
medically appropriate or necessary. The third party payers also may place limitations on the types
of physicians or clinicians that can perform specific types of procedures. In addition, third
party payers are increasingly challenging the prices charged for medical products and services.
Some third party payers must also pre-approve coverage for new or innovative devices or therapies
before they will reimburse health care providers who use the products or therapies. Even though a
new product may have been approved or cleared by the FDA for commercial distribution, we may find
limited demand for the device until adequate reimbursement has been obtained from governmental and
private third party payers.
In international markets, reimbursement and healthcare payment systems vary significantly by
country, and many countries have instituted price ceilings on specific product lines and
procedures. There can be no assurance that procedures using our products will be considered
medically reasonable and necessary for a specific indication, that our products will be considered
cost-effective by third party payers, that an adequate level of reimbursement will be available or
that the third party payers reimbursement policies will not adversely affect our ability to sell
our products profitably.
18
A key component in the reimbursement decision by most private insurers and governmental
payers, including the Centers for Medicare & Medicaid Services, which administers Medicare, is the
assignment of a billing code. Billing codes are used to identify the procedures performed when
providers submit claims to third-party payers for reimbursement for medical services. They also
generally form the basis for payment amounts. While there are no specific codes for our wound care
product candidates, there are existing codes that describe various wound care services and products
used during the course of those services. It remains uncertain whether third-party payers will
determine that existing billing codes should be used to report procedures using our products. We
expect to demonstrate through clinical evidence and economic studies that clinical outcomes
achieved with our products are comparable or superior to other covered therapies. For non-wound
care indications of our product candidates, we expect that a new billing code will likely be
required, and we will seek a new code as part of our efforts to commercialize such product
candidates.
In the United States, some insured individuals are receiving their medical care through
managed care programs, which monitor and often require pre-approval of the services that a member
will receive. Some managed care programs are paying their providers on a per capita basis, which
puts the providers at financial risk for the services provided to their patients by paying these
providers a predetermined payment per member per month, and consequently, may limit the willingness
of these providers to use products, including ours.
We believe that the overall escalating costs of medical products and services has led to, and
will continue to lead to, increased pressures on the healthcare industry to reduce the costs of
products and services. In addition, recent healthcare reform measures, as well as legislative and
regulatory initiatives at the Federal and state levels, create significant additional
uncertainties. There can be no assurance that third-party coverage and reimbursement will be
available or adequate, or that future legislation, regulation, or reimbursement policies of third
party payers will not adversely affect the demand for our products or our ability to sell these
products on a profitable basis. The unavailability or inadequacy of third party payer coverage or
reimbursement would have a material adverse effect on our business, operating results and financial
condition.
Environmental and Occupational Safety and Health Regulations
Our operations are subject to extensive Federal, state, provincial and municipal environmental
statutes, regulations and policies, including those promulgated by the Occupational Safety and
Health Administration, the United States Environmental Protection Agency, Environment Canada,
Alberta Environment, the Department of Health Services, and the Air Quality Management District,
that govern activities and operations that may have adverse environmental effects such as
discharges into air and water, as well as handling and disposal practices for solid and hazardous
wastes. Some of these statutes and regulations impose strict liability for the costs of cleaning
up, and for damages resulting from, sites of spills, disposals, or other releases of contaminants,
hazardous substances and other materials and for the investigation and remediation of environmental
contamination at properties leased or operated by us and at off-site locations where we have
arranged for the disposal of hazardous substances. In addition, we may be subject to claims and
lawsuits brought by private parties seeking damages and other remedies with respect to similar
matters. We have not to date needed to make material expenditures to comply with current
environmental statutes, regulations and policies. However, we cannot predict the impact and costs
those future statutes, regulations and policies will have on our business.
19
Milestone and Royalty Payments
Under an agreement with Sci-Do AG, an Austrian company from which we purchased certain
patents, we are required to make various milestone and royalty payments based on the occurrence of
certain events. Pursuant to the terms of the agreement, we are required to make a royalty payment
of $100,000 upon FDA approval of our product for wound care. In addition, we are required to make
royalty payments, based on 1% of operating profit, for sales of FDA-approved wound care products in
excess of $500,000 of earnings before interest and taxes. During the period beginning September
2005 through June 2009, we have paid $300,000 under the agreement.
Legal Proceedings
Other than legal proceedings relating to our intellectual property, there are no material
pending legal proceedings to which we are a party or of which any of our properties are subject;
nor are there material proceedings known to us to be contemplated by any governmental authority.
We have several material pending legal proceedings relating to our patents. For information
regarding these legal proceedings, please see Intellectual Property Patents above. There are
no material proceedings known to us, pending or contemplated, in which any of our directors,
officers or affiliates or any of our principal security holders, or any associate of any of the
foregoing, is a party or has an interest adverse to us.
Employees
As of September, 2009, we had a total of 21 employees in the United States and two in
Switzerland. Of these 23 full-time employees, eight were engaged in research and development,
including clinical, regulatory and quality. None of our employees are represented by a labor union
or covered by a collective bargaining agreement. We believe our relationship with our employees is
good.
RISK FACTORS
Risks Related to Our Business
We have a history of losses and we expect to continue to incur losses and may not achieve or
maintain profitability.
We have invested and continue to invest a significant portion of our time and resources in
developing and testing our PACE product candidates, with current emphasis on dermaPACE. As a
result of our significant research, clinical development, regulatory compliance and general and
administrative expenses, we expect to incur losses for at least the next several years as we
continue to incur significant expenses for clinical trials. As of June 30, 2009, we had an
accumulated deficit of $33.3 million. In June 2009, we sold our Versatron
®
veterinary product
line. This transaction enabled us to focus our expertise and future development efforts on the
development of our PACE technology in wound care, orthopedic/spine, plastic/cosmetic and cardiac
conditions. Even if we succeed in developing and commercializing one or more of our product
candidates, we may not be able to generate sufficient revenues and we may never achieve or maintain
profitability.
20
Current economic conditions could adversely affect our operations.
According to the National Bureau of Economic Research, the United States economy has been in a
recession since December 2007. This economic downturn and the instability of markets have made the
business climate more volatile and more costly. Consequently, our general business strategy may be
adversely affected by unpredictable and unstable market conditions. If the current equity and
credit markets deteriorate further, or do not improve, it may make any necessary debt or equity
financing more
difficult, more costly and more dilutive. While we believe that our existing cash and investments
will be sufficient to meet our anticipated cash requirements at least through the first quarter of
2010, a more radical economic downturn or increase in our expenses will likely make it more
difficult for us to seek additional financing, and may force us to accept less than attractive
rates or terms that are excessively dilutive to existing stockholders. Failure to secure any
necessary financing in a timely manner and on favorable terms could have a material adverse effect
on our business strategy, financial performance and stock price, and could require us to delay or
abandon product development plans or plans to acquire additional technology.
There is a risk that one or more suppliers, clinical investigators, consultants and other
partners may encounter difficulties during these challenging economic times, which would directly
affect our ability to attain our operating goals on schedule and on budget.
The current economic conditions may also adversely affect our potential customers, including
patients, medical professionals and their practices, hospitals and other healthcare providers.
These conditions may also impact the overall amount spent on healthcare generally. This could
result in a decrease in the demand for our products, longer sales cycles, slower adoption of our
new technology and increased price competition.
Our product candidates may not be developed or commercialized successfully.
Our product candidates are based on a technology that often times has not been used previously
in the manner we propose and must compete with more established treatments currently accepted as
the standards of care. Market acceptance of our products will largely depend on our ability to
demonstrate their relative safety, efficacy, cost-effectiveness and ease of use.
We are subject to the risks that:
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the FDA or a foreign regulatory authority finds our product candidates ineffective
or unsafe;
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we do not receive necessary regulatory approvals;
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we are unable to get our product candidates in commercial quantities at reasonable
costs; and
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the patient and physician community does not accept our product candidates.
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In addition, our product development program may be curtailed, redirected, eliminated or
delayed at any time for many reasons, including:
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adverse or ambiguous results;
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undesirable side effects that delay or extend the trials;
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the inability to locate, recruit, qualify and retain a sufficient number of
clinical investigators or patients for our trials; and
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regulatory delays or other regulatory actions.
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We cannot predict whether we will successfully develop and commercialize our product
candidates. If we fail to do so, we will not be able to generate substantial revenues, if any.
The medical device/therapeutic product industries are highly competitive and subject to rapid
technological change. If our competitors are better able to develop and market products that are
safer and more effective than any products we may develop, our commercial opportunities will be
reduced or eliminated.
Our success depends, in part, upon our ability to maintain a competitive position in the
development of technologies and products. We face competition from established medical device,
pharmaceutical and biotechnology companies, as well as from academic institutions, government
agencies, and private and public research institutions in the United States and abroad. Many of
our principal competitors have significantly greater financial resources and expertise than we do
in research and development, manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products. Smaller or early-stage companies
may also prove to be significant competitors, particularly through collaborative arrangements with,
or mergers with or acquisitions by, large and established companies or through the development of
novel products and technologies.
The industry in which we operate has undergone, and we expect it to continue to undergo, rapid
and significant technological change, and we expect competition to intensify as technological
advances are made. Our competitors may develop and commercialize pharmaceutical, biotechnology or
medical devices that are safer or more effective, have fewer side effects or are less expensive
than any products that we may develop. We also compete with our competitors in recruiting and
retaining qualified scientific and management personnel, in establishing clinical trial sites and
patient registration for clinical trials, and in acquiring technologies and technology licenses
complementary to our programs or advantageous to our business.
If our products and product candidates do not gain market acceptance among physicians, patients and
the medical community, we may be unable to generate significant revenues, if any.
Even if we obtain regulatory approval for our product candidates, they may not gain market
acceptance among physicians, healthcare payers, patients and the medical community. Market
acceptance will depend on our ability to demonstrate the benefits of our approved products in terms
of safety, efficacy, convenience, ease of administration and cost effectiveness. In addition, we
believe market acceptance depends on the effectiveness of our marketing strategy, the pricing of
our approved products and the reimbursement policies of government and third party payers.
Physicians may not prescribe our approved products for a variety of reasons and patients may
determine for any reason that our product is not useful to them. If any of our approved products
fail to achieve market acceptance, our ability to generate revenues will be limited.
We currently purchase most of our raw materials from single suppliers. If we are unable to obtain
raw materials and other products from our suppliers that we depend on for our operations, our
ability to deliver our products to market will likely be impeded.
We depend on suppliers for raw materials and other components that are subject to stringent
regulatory requirements. We currently purchase most of our raw materials from single suppliers and
the loss of any of these suppliers could result in a disruption in our production. If this were to
occur, it may be difficult to arrange a replacement supplier because certain of these materials may
only be available from one or a limited number of sources. Our suppliers may encounter problems
during manufacturing due to a variety of reasons, including failure to follow specific protocols
and procedures, failure to comply with applicable regulations, equipment malfunction and
environmental factors. In addition,
establishing additional or replacement suppliers for these materials may take a substantial period
of time, as certain of these suppliers must be approved by regulatory authorities.
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If we are unable to secure on a timely basis sufficient quantities of the materials we depend
on to manufacture our products, if we encounter delays or contractual or other difficulties in our
relationships with these suppliers, or if we cannot find replacement suppliers at an acceptable
cost, then the manufacturing of our products may be disrupted, which could increase our costs and
have a material adverse effect on our revenues.
The loss of our key management and scientific personnel would likely hinder our ability to execute
our business plan.
As a small company with 23 employees, our success depends on the continuing contributions of
our management team and scientific personnel, and on maintaining relationships with the network of
medical and academic centers that conduct our clinical trials. We depend on the services of our
key scientific employees and principal members of our management team. Our success depends in
large part on our ability to attract and retain highly qualified personnel. We face intense
competition in our hiring efforts from other pharmaceutical, biotechnology and medical device
companies, as well as from universities and nonprofit research organizations, and we may have to
pay higher salaries to attract and retain qualified personnel. The loss of one or more of these
individuals, or our inability to attract additional qualified personnel, could substantially impair
our ability to implement our business plan.
We face an inherent risk of liability in the event that the use or misuse of our product candidates
results in personal injury or death.
The use of our product candidates in clinical trials and the sale of any approved products may
expose us to product liability claims which could result in financial loss. Our clinical and
commercial product liability insurance coverage may not be sufficient to cover claims that may be
made against us. In addition, we may not be able to maintain insurance coverage at a reasonable
cost, or in sufficient amounts or scope, to protect us against losses. Any claims against us,
regardless of their merit, could severely harm our financial condition, strain our management team
and other resources, and adversely impact or eliminate the prospects for commercialization of the
product candidate, or sale of the product, which is the subject of any such claim. Although we do
not promote any off-label use, off-label uses of products are common and the FDA does not regulate
a physicians choice of treatment. Off-label uses of any product for which we obtain approval may
subject us to additional liability.
Risks Related to Intellectual Property
The protection of our intellectual property is critical to our success and any failure on our part
to adequately protect those rights could materially adversely affect our business.
Our commercial success depends to a significant degree on our ability to:
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obtain and/or maintain protection for our product candidates under the patent
laws of the United States and other countries;
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defend and enforce our patents once obtained;
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obtain and/or maintain appropriate licenses to patents, patent applications or
other proprietary rights held by others with respect to our technology, both in the
United States and other countries;
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maintain trade secrets and other intellectual property rights relating to our
product candidates; and
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operate without infringing upon the patents, trademarks, copyrights and
proprietary rights of third parties.
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The degree of intellectual property protection for our technology is uncertain, and only
limited intellectual property protection may be available for our product candidates, which may
prevent us from gaining or keeping any competitive advantage against our competitors. Although we
believe the patents that we own or license, and the patent applications that we own or license,
generally provide us a competitive advantage, the patent positions of biotechnology,
biopharmaceutical and medical device companies are generally highly uncertain, involve complex
legal and factual questions and have been the subject of much litigation. Neither the United
States Patent and Trademark Office nor the courts have a consistent policy regarding the breadth of
claims allowed or the degree of protection afforded under many biotechnology patents. Even if
issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our
ability to stop competitors from marketing similar products or limit the length of term of patent
protection we may have for our products. Further, a court or other government agency could
interpret our patents in a way such that the patents do not adequately cover our current or future
product candidates. Changes in either patent laws or in interpretations of patent laws in the
United States and other countries may diminish the value of our intellectual property or narrow the
scope of our patent protection.
We also rely upon trade secrets and unpatented proprietary know-how and continuing
technological innovation in developing our products, especially where we do not believe patent
protection is appropriate or obtainable. We seek to protect this intellectual property, in part,
by generally requiring our employees, consultants, and current and prospective business partners to
enter into confidentiality agreements in connection with their employment, consulting or advisory
relationships with us, where appropriate. We also require our employees, consultants, researchers
and advisors who we expect to work on our products and product candidates to agree to disclose and
assign to us all inventions conceived during the work day, developed using our property or which
relate to our business. We may lack the financial or other resources to successfully monitor and
detect, or to enforce our rights in respect of, infringement of our rights or breaches of these
confidentiality agreements. In the case of any such undetected or unchallenged infringements or
breaches, these confidentiality agreements may not provide us with meaningful protection of our
trade secrets and unpatented proprietary know-how or adequate remedies. In addition, others may
independently develop technology that is similar or equivalent to our trade secrets or know-how.
If any of our trade secrets, unpatented know-how or other confidential or proprietary information
is divulged to third parties, including our competitors, our competitive position in the
marketplace could be harmed and our ability to sell our products successfully could be severely
compromised. Enforcing a claim that a party illegally obtained and is using trade secrets that
have been licensed to us or that we own is also difficult, expensive and time-consuming, and the
outcome is unpredictable. In addition, courts outside the United States may be less willing to
protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce
and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret
protection could have a material adverse effect on our business. Moreover, some of our academic
institution licensees, evaluators, collaborators and scientific advisors have rights to publish
data and information to which we have rights. If we cannot maintain the confidentiality of our
technologies and other confidential information in connection with our collaborations, our ability
to protect our proprietary information or obtain patent protection in the future may be impaired,
which could have a material adverse effect on our business.
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In particular, we cannot assure you that:
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we or the owners or other inventors of the patents that we own or that have been
licensed to us, or that may be issued or licensed to us in the future, were the first
to file patent applications or to invent the subject matter claimed in patent
applications relating to the technologies upon which we rely;
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others will not independently develop similar or alternative technologies or
duplicate any of our technologies;
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any of our patent applications will result in issued patents;
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the patents and the patent applications that we own or that have been licensed to
us, or that may be issued or licensed to us in the future, will provide a basis for
commercially viable products or will provide us with any competitive advantages, or
will not be challenged by third parties;
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the patents and the patent applications that have been licensed to us are valid and
enforceable;
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we will develop additional proprietary technologies that are patentable;
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we will be successful in enforcing the patents that we own or license and any
patents that may be issued or licensed to us in the future against third parties;
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the patents of third parties will not have an adverse effect on our ability to do
business; or
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our trade secrets and proprietary rights will remain confidential.
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Accordingly, we may fail to secure meaningful patent protection relating to any of our
existing or future product candidates or discoveries despite the expenditure of considerable
resources. Further, there may be widespread patent infringement in countries in which we may seek
patent protection, including countries in Europe, which may instigate expensive and time consuming
litigation which could adversely affect the scope of our patent protection. In addition, others
may attempt to commercialize products similar to our product candidates in countries where we do
not have adequate patent protection. Failure to obtain adequate patent protection for our product
candidates, or the failure by particular countries to enforce patent laws or allow prosecution for
alleged patent infringement, may impair our ability to be competitive. The availability of
infringing products in markets where we have patent protection, or the availability of competing
products in markets where we do not have adequate patent protection, could erode the market for our
product candidates, negatively impact the prices we can charge for our product candidates, and harm
our reputation if infringing or competing products are manufactured to inferior standards.
Patent applications owned by or licensed to us may not result in issued patents, and our
competitors may commercialize the discoveries we attempt to patent.
The patent applications that we own and that have been licensed to us, and any future patent
applications that we may own or that may be licensed to us, may not result in the issuance of any
patents. The standards that the United States Patent and Trademark Office and foreign patent
offices use to grant patents are not always applied predictably or uniformly and can change.
Consequently, we cannot be certain as to the type and scope of patent claims to which we may in the
future be entitled under our license agreements or that may be issued to us in the future. These
applications may not be sufficient to meet the statutory requirements for patentability and,
therefore, may not result in enforceable patents covering the product candidates we want to
commercialize. Further, patent applications in the United States that are not filed in other
countries may not be published or generally are not published until at least 18 months after they
are first filed, and patent applications in certain foreign countries generally are not published
until many months after they are filed. Scientific and patent publication often occurs long after
the date of the scientific developments disclosed in those publications. As a result, we cannot be
certain that we will be the first
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creator of inventions covered by our patents or applications, or
the first to file such patent applications. As a result, our issued patents and our patent applications could
become subject to challenge by third parties that created such inventions or filed patent
applications before us or our licensors, resulting in, among other things, interference proceedings
in the United States Patent and Trademark Office to determine priority of discovery or invention.
Interference proceedings, if resolved adversely to us, could result in the loss of or significant
limitations on patent protection for our products or technologies. Even in the absence of
interference proceedings, patent applications now pending or in the future filed by third parties
may prevail over the patent applications that have been or may be owned by or licensed to us or
that we may file in the future, or may result in patents that issue alongside patents issued to us
or our licensors or that may be issued or licensed to us in the future, leading to uncertainty over
the scope of the patents owned by or licensed to us or that may in the future be owned by us or our
freedom to practice the claimed inventions.
Our patents may not be valid or enforceable, and may be challenged by third parties.
We cannot assure you that the patents that have been issued or licensed to us would be held
valid by a court or administrative body or that we would be able to successfully enforce our
patents against infringers, including our competitors. The issuance of a patent is not conclusive
as to its validity or enforceability, and the validity and enforceability of a patent is
susceptible to challenge on numerous legal grounds. Challenges raised in patent infringement
litigation brought by or against us may result in determinations that patents that have been issued
or licensed to us or any patents that may be issued to us or our licensors in the future are
invalid, unenforceable or otherwise subject to limitations. In the event of any such
determinations, third parties may be able to use the discoveries or technologies claimed in these
patents without paying licensing fees or royalties to us, which could significantly diminish the
value of our intellectual property and our competitive advantage. Even if our patents are held to
be enforceable, others may be able to design around our patents or develop products similar to our
products that are not within the scope of any of our patents.
In addition, enforcing the patents that we own or license, and any patents that may be issued
to us in the future, against third parties may require significant expenditures regardless of the
outcome of such efforts. Our inability to enforce our patents against infringers and competitors
may impair our ability to be competitive and could have a material adverse effect on our business.
Issued patents and patent licenses may not provide us with any competitive advantage or provide
meaningful protection against competitors.
The discoveries or technologies covered by issued patents we own or license may not have any
value or provide us with a competitive advantage, and many of these discoveries or technologies may
not be applicable to our product candidates at all. We have devoted limited resources to
identifying competing technologies that may have a competitive advantage relative to ours,
especially those competing technologies that are not perceived as infringing on our intellectual
property rights. In addition, the standards that courts use to interpret and enforce patent rights
are not always applied predictably or uniformly and can change, particularly as new technologies
develop. Consequently, we cannot be certain as to how much protection, if any, will be afforded by
these patents with respect to our products if we, our licensees or our licensors attempt to enforce
these patent rights and those rights are challenged in court.
The existence of third party patent applications and patents could significantly limit our
ability to obtain meaningful patent protection. If patents containing competitive or conflicting
claims are issued to third parties, we may be enjoined from pursuing research, development or
commercialization of product candidates or may be required to obtain licenses, if available, to
these patents or to develop or obtain alternative technology. If another party controls patents or
patent applications covering our product
candidates, we may not be able to obtain the rights we need to those patents or patent applications
in order to commercialize our product candidates or we may be required to pay royalties, which
could be substantial, to obtain licenses to use those patents or patent applications.
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In addition, issued patents may not provide commercially meaningful protection against
competitors. Other parties may seek and/or be able to duplicate, design around or independently
develop products having effects similar or identical to our patented product candidates that are
not within the scope of our patents.
Limitations on patent protection in some countries outside the United States, and the
differences in what constitutes patentable subject matter in these countries, may limit the
protection we have under patents issued outside of the United States. We do not have patent
protection for our product candidates in a number of our target markets. The failure to obtain
adequate patent protection for our product candidates in any country would impair our ability to be
commercially competitive in that country.
The ability to market the products we develop is subject to the intellectual property rights of
third parties.
The biotechnology, biopharmaceutical and medical device industries are characterized by a
large number of patents and patent filings and frequent litigation based on allegations of patent
infringement. Competitors may have filed patent applications or have been issued patents and may
obtain additional patents and proprietary rights related to products or processes that compete with
or are similar to ours. We may not be aware of all of the patents potentially adverse to our
interests that may have been issued to others. Because patent applications can take many years to
issue, there may be currently pending applications, unknown to us, which may later result in issued
patents that our product candidates or proprietary technologies may infringe. Third parties may
claim that our products or related technologies infringe their patents. Further, we, our licensees
or our licensors, may need to participate in interference, opposition, protest, reexamination or
other potentially adverse proceedings in the United States Patent and Trademark Office or in
similar agencies of foreign governments with regards to our patents, patent applications, and
intellectual property rights. In addition, we, our licensees or our licensors may need to initiate
suits to protect our intellectual property rights.
Litigation or any other proceeding relating to intellectual property rights, even if resolved
in our favor, may cause us to incur significant expenses, divert the attention of our management
and key personnel from other business concerns and, in certain cases, result in substantial
additional expenses to license technologies from third parties. Some of our competitors may be
able to sustain the costs of complex patent litigation more effectively than we can because they
have substantially greater resources. An unfavorable outcome in any patent infringement suit or
other adverse intellectual property proceeding could require us to pay substantial damages,
including possible treble damages and attorneys fees, cease using our technology or developing or
marketing our products, or require us to seek licenses, if available, of the disputed rights from
other parties and potentially make significant payments to those parties. There is no guarantee
that any prevailing party would offer us a license or that we could acquire any license made
available to us on commercially acceptable terms. Even if we are able to obtain rights to a third
partys patented intellectual property, those rights may be nonexclusive and, therefore, our
competitors may obtain access to the same intellectual property. Ultimately, we may be unable to
commercialize our product candidates or may have to cease some of our business operations as a
result of patent infringement claims, which could materially harm our business. We cannot
guarantee that our products or technologies will not conflict with the intellectual property rights
of others.
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If we need to redesign our products to avoid third party patents, we may suffer significant
regulatory delays associated with conducting additional studies or submitting technical, clinical,
manufacturing or other information related to any redesigned product and, ultimately, in
obtaining regulatory approval. Further, any such redesigns may result in less effective and/or
less commercially desirable products, if the redesigns are possible at all.
Additionally, any involvement in litigation in which we, our licensees or our licensors are
accused of infringement may result in negative publicity about us or our products, injure our
relations with any then-current or prospective customers and marketing partners, and cause delays
in the commercialization of our products.
Regulatory Risks
We are subject to extensive governmental regulation, including the requirement of FDA approval or
clearance, before our product candidates may be marketed.
Both before and after approval or clearance of our product candidates, we, our product
candidates, our suppliers, our contract manufacturers and our contract testing laboratories are
subject to extensive regulation by governmental authorities in the United States and other
countries. Failure to comply with applicable requirements could result in, among other things, any
of the following actions:
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fines and other monetary penalties;
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unanticipated expenditures;
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delays in FDA approval and clearance, or FDA refusal to approve or clear a product
candidate:
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product recall or seizure;
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interruption of manufacturing or clinical trials;
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operating restrictions;
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The process of obtaining FDA approval is lengthy, expensive and uncertain, and we cannot be
sure that our product candidates will be approved in a timely fashion, or at all. If the FDA does
not approve or clear our product candidates in a timely fashion, or at all, our business and
financial condition would likely be adversely affected. We cannot be sure that the FDA will not
select a different center and/or different legal authority for our other product candidates, in
which case the path to regulatory approval would be different and could be more lengthy and costly.
In addition to the approval and clearance requirements, other numerous and pervasive
regulatory requirements apply, both before and after approval or clearance, to us, our products and
product candidates, and our suppliers, contract manufacturers and contract laboratories. These
include requirements related to the following:
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reporting to the FDA certain adverse experiences associated with the use of the
products; and
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obtaining additional approvals or clearances for certain modifications to the
products or their labeling or claims.
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We are also subject to inspection by the FDA to determine our compliance with regulatory
requirements, as are our suppliers, contract manufacturers and contract testing laboratories, and
we cannot be sure that the FDA will not indentify compliance issues that may disrupt production or
distribution, or require substantial resources to correct.
The FDAs requirements may change and additional government regulations may be promulgated
that could affect us, our product candidates, and our suppliers, contract manufacturers and
contract laboratories. We cannot predict the likelihood, nature or extent of government regulation
that may arise from future legislation or administrative action. There can be no assurance that we
will not be required to incur significant costs to comply with such laws and regulations in the
future, or that such laws or regulations will not have a material adverse effect upon our business.
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our
products abroad.
International sales of our products and any of our product candidates that we commercialize
are subject to the regulatory requirements of each country in which the products are sold.
Accordingly, the introduction of our product candidates in markets outside the United States will
be subject to regulatory approvals in those jurisdictions. The regulatory review process varies
from country to country. Many countries impose product standards, packaging and labeling
requirements, and import restrictions on medical devices. In addition, each country has its own
tariff regulations, duties and tax requirements. The approval by foreign government authorities is
unpredictable and uncertain, and can be expensive. Our ability to market our approved products
could be substantially limited due to delays in receipt of, or failure to receive, the necessary
approvals or clearances.
Prior to marketing our products in any country outside the United States, we must obtain
marketing approval in that country. Approval and other regulatory requirements vary by
jurisdiction and differ from the United States requirements. We may be required to perform
additional pre-clinical or clinical studies even if FDA approval has been obtained.
The results of our clinical trials may be insufficient to obtain regulatory approval for our
product candidates
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We will only receive regulatory approval to commercialize a product candidate if we can
demonstrate to the satisfaction of the FDA or the applicable foreign regulatory agency, in well
designed and conducted clinical trials, that the product candidate is safe and effective. If we
are unable to demonstrate that a product candidate will be safe and effective in advanced clinical
trials involving larger numbers of patients, we will be unable to submit the necessary application
to receive regulatory approval to commercialize the product candidate. We face risks that:
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the product candidate may not prove to be safe or effective;
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the product candidates benefits may not outweigh its risks;
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the results from more advanced clinical trials may not confirm the positive results
from pre-clinical studies and early clinical trials;
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the FDA or comparable foreign regulatory authorities may interpret data from
pre-clinical and clinical testing in different ways than us; and
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the FDA or other regulatory agencies may require additional or expanded trials.
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If we fail to obtain an adequate level of reimbursement for our approved products by third party
payers, there may be no commercially viable markets for our approved products or the markets may be
much smaller than expected.
The availability and levels of reimbursement by governmental and other third party payers
affect the market for our approved products. The efficacy, safety, performance and
cost-effectiveness of our product and product candidates, and of any competing products, will
determine the availability and level of reimbursement. Reimbursement and healthcare payment
systems in international markets vary significantly by country, and include both government
sponsored healthcare and private insurance. To obtain reimbursement or pricing approval in some
countries, we may be required to produce clinical data, which may involve one or more clinical
trials, that compares the cost-effectiveness of our approved products to other available therapies.
We may not obtain international reimbursement or pricing approvals in a timely manner, if at all.
Our failure to receive international reimbursement or pricing approvals would negatively impact
market acceptance of our approved products in the international markets in which those approvals
are sought.
We believe that future reimbursement may be subject to increased restrictions both in the
United States and in international markets. Future legislation, regulation or reimbursement
policies of third party payers may adversely affect the demand for our future approved products
currently under development and limit our ability to sell our approved products on a profitable
basis. In addition, third party payers continually attempt to contain or reduce the costs of
healthcare by challenging the prices charged for healthcare products and services. If
reimbursement for our approved products is unavailable or limited in scope or amount, or if pricing
is set at unsatisfactory levels, market acceptance of our approved products would be impaired and
our future revenues, if any, would be adversely affected.
If we fail to comply with the United States Federal Anti-Kickback Statute and similar state laws,
we could be subject to criminal and civil penalties and exclusion from the Medicare and Medicaid
programs, which would have a material adverse effect on our business and results of operations.
A provision of the Social Security Act, commonly referred to as the Federal Anti-Kickback
Statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in
return for referring, ordering, leasing, purchasing or arranging for, or recommending the ordering,
purchasing or leasing of, items or services payable by Medicare, Medicaid or any other Federal
healthcare program. The Federal Anti-Kickback Statute is very broad in scope and many of its
provisions have not been uniformly or definitively interpreted by existing case law or regulations.
In addition, most of the states in which our approved products may be sold have adopted laws
similar to the Federal Anti-Kickback Statute, and some of these laws are even broader than the
Federal Anti-Kickback Statute in that their prohibitions are not limited to items or services paid
for by Federal healthcare programs, but instead apply regardless of the source of payment.
Violations of the Federal Anti-Kickback Statute may result in substantial civil or criminal
penalties and exclusion from participation in Federal healthcare programs.
All of our financial relationships with healthcare providers and others who provide products
or services to Federal healthcare program beneficiaries are potentially governed by the Federal
Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the
Federal Anti-Kickback Statute and similar state laws. However, we cannot be certain that we will
not be subject to investigations or litigation alleging violations of these laws, which could be
time-consuming and costly to us and could divert managements attention from operating our
business, which in turn could have a
material adverse effect on our business. In addition, if our arrangements were found to violate
the Federal Anti-Kickback Statute or similar state laws, the consequences of such violations would
likely have a material adverse effect on our business and results of operations.
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Patients may discontinue their participation in our clinical studies, which may negatively impact
the results of these studies and extend the timeline for completion of our development programs.
Clinical trials for our product candidates require sufficient patient enrollment. We may not
be able to enroll a sufficient number of patients in a timely or cost-effective manner. Patients
enrolled in our clinical studies may discontinue their participation at any time during the study
as a result of a number of factors, including withdrawing their consent or experiencing adverse
clinical events, which may or may not be judged to be related to our product candidates under
evaluation. If a large number of patients in any one of our studies discontinue their
participation in the study, the results from that study may not be positive or may not support a
filing for regulatory approval of our product candidates.
In addition, the time required to complete clinical trials is dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a function of many factors,
including the following:
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the size of the patient population;
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the nature of the clinical protocol requirements;
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the availability of other treatments or marketed therapies (whether approved or
experimental);
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our ability to recruit and manage clinical centers and associated trials;
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the proximity of patients to clinical sites; and
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the patient eligibility criteria for the study.
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Product quality or performance issues may be discovered through ongoing regulation by the FDA and
by comparable international agencies, as well as through our internal standard quality process.
The medical device industry is subject to substantial regulation by the FDA and by comparable
international agencies. In addition to requiring clearance or approval to market new or improved
devices, we are subject to ongoing regulation as a device manufacturer. Governmental regulations
cover many aspects of our operations, including quality systems, marketing and device reporting.
As a result, we continually collect and analyze information about our product quality and product
performance through field observations, customer feedback and other quality metrics. If we fail to
comply with applicable regulations or if post market safety issues arise, we could be subject to
enforcement sanctions, our promotional practices may be restricted, and our marketed products could
be subject to recall or otherwise impacted. Each of these potential actions could result in a
material adverse effect on our operating results.
The use of hazardous materials in our operations may subject us to environmental claims or
liability.
We conduct research and development and some manufacturing operations in our Alpharetta,
Georgia facility. Our research and development process involves the controlled use of hazardous
materials and chemicals. We will conduct experiments that are common in the medical device
industry, in which we may use small quantities of chemicals, including those that are corrosive,
toxic and flammable. The risk of accidental injury or contamination from these materials cannot be
eliminated. We do not maintain a separate insurance policy for these types of risks. In the event
of an accident or environmental discharge or contamination, we may be held liable for any resulting
damages, and any liability could exceed our resources. We are subject to Federal, state and local
laws and regulations
governing the use, storage, handling and disposal of these materials and specified waste products.
The cost of compliance with these laws and regulations could be significant.
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Risks Related to Our Common Stock
We are no longer able to rely on Prides Capital Partners, LLC and NightWatch Capital LLC for
financial support, and must now rely on third parties for financing.
In the past, we have relied on Prides Capital Partners, LLC (Prides) and NightWatch Capital
LLC (NightWatch) for the ongoing financial support necessary to operate our business. Neither
Prides nor NightWatch currently provides us with financing or financial support, nor do they
currently intend to provide us any additional financing or financial support in the future. To the
extent we must obtain financing to support our cash needs, we will be entirely reliant on third
parties for financing. We do not have any lines of credit or other financing arrangements in place
with banks or other financial institutions. Therefore, we may require additional financing in the
future, and additional financing may not be available at times, in amounts or on terms acceptable
to us, or at all, which would have a material adverse effect on our business.
If we are unable to successfully raise additional capital in the future, our product development
could be limited and our long term viability may be threatened; however, if we do raise additional
capital, your percentage ownership as a stockholder could decrease and constraints could be placed
on the operations of our business.
We have experienced negative operating cash flows since our inception and have funded our
operations primarily from proceeds received from sales of our capital stock, the issuance of notes
payable to related parties, the sale of our veterinary division in June 2009 and product sales. We
believe our existing cash and investments will be sufficient to meet our anticipated cash
requirements at least through the first quarter of 2010. We will seek to obtain additional funds
at any time in the future through equity or debt financings, or strategic alliances with third
parties, either alone or in combination with equity financings. These financings could result in
substantial dilution to the holders of our common stock or require contractual or other
restrictions on our operations or on alternatives that may be available to us. If we raise
additional funds by issuing debt securities, these debt securities could impose significant
restrictions on our operations. Any such required financing may not be available in amounts or on
terms acceptable to us, and the failure to procure such required financing could have a material
adverse effect on our business, financial condition and results of operations, or threaten our
ability to continue as a going concern.
A variety of factors could impact our need to raise additional capital, the timing of any
required financings and the amount of such financings. Factors that may cause our future capital
requirements to be greater than anticipated or could accelerate our need for funds include, without
limitation:
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unforeseen developments during our pre-clinical activities and clinical trials;
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delays in timing of receipt of required regulatory approvals;
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unanticipated expenditures in research and development or manufacturing activities;
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delayed market acceptance of any approved product;
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unanticipated expenditures in the acquisition and defense of intellectual property
rights;
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the failure to develop strategic alliances for the marketing of some of our product
candidates;
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additional inventory builds to adequately support the launch of new products;
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unforeseen changes in healthcare reimbursement for procedures using any of our
approved products;
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inability to train a sufficient number of physicians to create a demand for any of
our approved products;
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lack of financial resources to adequately support our operations;
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difficulties in maintaining commercial scale manufacturing capacity and capability;
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unforeseen problems with our third-party manufacturers, service providers or
specialty suppliers of certain raw materials;
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unanticipated difficulties in operating in international markets;
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unanticipated financial resources needed to respond to technological changes and
increased competition;
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unforeseen problems in attracting and retaining qualified personnel to market our
approved products;
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enactment of new legislation or administrative regulations;
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the application to our business of new court decisions and regulatory
interpretations;
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claims that might be brought in excess of our insurance coverage;
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the failure to comply with regulatory guidelines; and
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the uncertainty in industry demand and patient wellness behavior as businesses and
individuals suffer from the current economic downturn.
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In addition, although we have no present commitments or understandings to do so, we may seek
to expand our operations and product line through acquisitions or joint ventures. Any acquisition
or joint venture would likely increase our capital requirements.
If adequate financing is not available, we may be required to delay, scale back or eliminate
our operations. Consequently, our long-term viability would be threatened.
Prides and NightWatch control and may continue to control us and may have conflicts of interest
with us or you in the future.
As of September 25, 2009, Prides owned 66.9% of our outstanding common stock and NightWatch
owned 17.0% of our outstanding common stock. In addition, certain of our directors were appointed
by Prides and NightWatch to serve on our board of directors. For as long as Prides and NightWatch
own a majority of our shares of common stock, they will be able to control the election of all of
the members of our board of directors and control the vote of stockholders on other matters. For
as long as they own a significant percentage of our outstanding stock, even if less than a
majority, Prides and NightWatch will be able to control and exercise significant influence over our
business affairs, including the strategic direction of our business generally, the incurrence of
indebtedness by us, the issuance of any additional equity securities, the repurchase of equity
securities and the payment of dividends, and will have the power to determine or significantly
influence the outcome of matters submitted to a vote of our stockholders, including mergers,
consolidations, sales or dispositions of assets, reductions in share capital, other business
combinations and amendments to our articles of incorporation. Prides and NightWatch may take
actions with which you or we do not agree, including actions that delay, defer or prevent a change
in control of our company or that could adversely affect the market price of our common stock. In
addition, they may take other action that might be favorable to them, but not favorable to us or
our other stockholders. Also, if either Prides or NightWatch sells all or a portion of its
interest in us, it may cause the value of your investment to decrease.
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Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could fluctuate
widely in response to various factors, many of which are beyond our control, including the
following:
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changes in our industry;
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our ability to obtain additional financing and, if available, the terms and
conditions of the financing;
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additions or departures of key personnel;
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sales of our common stock;
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our ability to execute our business plan;
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operating results that fall below expectations;
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period-to-period fluctuations in our operating results;
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new regulatory requirements and changes in the existing regulatory environment; and
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general economic conditions and other external factors.
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In addition, the securities markets have from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of particular companies. These
market fluctuations may also materially and adversely affect the market price of our common stock.
There is currently no liquid trading market for our common stock and we cannot ensure that one will
ever develop or be sustained.
To date, there has been no liquid trading market for our common stock and we cannot predict
how liquid the market for our common stock might become. Our common stock is quoted on the
Over-the-Counter Bulletin Board (the OTCBB), which is an inter-dealer, over-the-counter market
that provides significantly less liquidity than the New York Stock Exchange or the NASDAQ Stock
Market. The quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists. The market price for our common stock is
subject to volatility and holders of our common stock may be unable to resell their shares at or
near their original purchase price, or at any price. In the absence of an active trading market:
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investors may have difficulty buying and selling, or obtaining market quotations;
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market visibility for our common stock may be limited; and
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a lack of visibility for our common stock may have a depressive effect on the
market for our common stock.
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If a public market for our common stock develops, trading will be limited under the SECs penny
stock regulations, which will likely adversely affect the liquidity of our common stock.
The trading price of our common stock is less than $5.00 per share and, as a result, our
common stock is considered a penny stock, and trading in our common stock is subject to
requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker-dealers who recommend
low-priced securities to persons other than established customers and accredited investors must
satisfy special sales practice requirements. Generally, the broker-dealer must make an
individualized written suitability determination for the purchaser and receive the purchasers
written consent prior to the transaction.
SEC Regulations also require additional disclosure in connection with any trades involving a
penny stock, including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and its associated risks. These requirements severely
limit the
liquidity of securities in the secondary market because only a few brokers or dealers are likely to
undertake these compliance activities. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third parties or to otherwise
dispose of them in the market.
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We have not voluntarily implemented various corporate governance measures, in the absence of which,
shareholders may have more limited protections against interested director transactions, conflicts
of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the
adoption of various corporate governance measures designed to promote the integrity of corporate
management and the securities markets. Some of these measures have been adopted in response to
legal requirements and others have been adopted by companies in response to the requirements of
national securities exchanges, such as the New York Stock Exchange and the NASDAQ Stock Market.
Among the corporate governance measures that are required under the rules of the national
securities exchanges are those that address board of directors independence, audit committee
oversight and the adoption of a code of ethics. While we intend to adopt certain corporate
governance measures, such as a code of ethics and an established audit committee, we presently only
have one independent director. It is possible that if we were to have more independent directors
on our board of directors, shareholders would benefit from somewhat greater assurances that
internal corporate decisions were being made by disinterested directors and that policies had been
implemented to define responsible conduct. For example, in the absence of a compensation committee
comprised of at least a majority of independent directors, decisions concerning matters such as
compensation packages to our executive officers may be made by our directors who have an interest
in the outcome of the matters being decided. Prospective investors should bear in mind our current
lack of both corporate governance measures and a majority of independent directors in formulating
their investment decisions.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any
return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the
foreseeable future. The payment of dividends on our common stock will depend on earnings,
financial condition and other business and economic factors affecting us at such time as our board
of directors may consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if our stock price appreciates.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are an emerging medical technology company focused on the development and commercialization
of noninvasive, biological response activating devices in the regenerative medicine area for the
repair and regeneration of tissue, musculoskeletal and vascular structures. Our portfolio of
products and product candidates activate biologic signaling and angiogenic responses, including new
vascularization and microcirculatory improvement, helping to restore the bodys normal healing
processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE)
technology in wound healing, orthopedic/spine, plastic/cosmetic and cardiac conditions.
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We believe we have demonstrated that our PACE technology is safe and effective in stimulating
healing in chronic conditions of the foot and the elbow through our United States Class III PMA
approved
Ossatron
®
device, and in the stimulation of bone and chronic tendonitis regeneration in the
musculoskeletal environment through the utilization of our Ossatron and Evotron
®
devices in Europe.
Our lead product candidate for the global wound care market, dermaPACE, has received the European
Conformity Marking (CE Mark) allowing for commercial use on acute and chronic defects of the skin
and subcutaneous soft tissue.
With the divestiture of our worldwide Versatron
®
veterinary product line in June 2009, we are
now entirely focused on developing our PACE technology to stimulate healing in:
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wound conditions, including diabetic foot ulcers, pressure sores, burns and other skin
eruption conditions;
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orthopedic/spine applications, such as speeding the healing of fractures (including
non-union or delayed-union conditions), improving bone density in osteoporosis, fusing
bones in the extremities and spine, eliminating chronic pain in joints from trauma or
arthritis, and other potential sports injury applications;
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plastic/cosmetic applications such as cellulite smoothing, graft and transplant
acceptance, skin tightening, scarring and other potential aesthetic uses; and
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cardiac structures for removing plaque due to atherosclerosis and improving heart muscle
performance.
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Recent Developments
We are enrolling patients for our first IDE wound care clinical study focused on the healing
of diabetic foot ulcers utilizing our lead product candidate, dermaPACE. We believe our experience
from preclinical research and the clinical use of our predecessor devices in Europe and Asia, as
well as our Ossatron device in the United States for the last nine years, demonstrate the safety,
clinical utility and efficacy of our product candidates. In addition, we have preclinical programs
focused on the development and better understanding of treatments specific to our target
applications, as well as toward the development of next generation devices utilizing our PACE
technology to maximize healing response and intervention.
We believe that those studies suggest that our platform technology will be effective in our
target applications. If successful, we expect these clinical studies should lead to regulatory
approval of our regenerative product candidates in the United States, Europe and Asia. If approved
by the appropriate regulatory authorities, we believe that our product candidates will offer new,
effective and noninvasive treatment options in wound healing, orthopedic/spine injuries,
plastic/cosmetic uses and cardiac procedures to improve the quality of life for millions of
patients suffering injuries or deterioration of tissue, bones and vascular structures.
Financial Overview
Since our inception in 2005, we have funded our operations from the sale of capital stock
(primarily convertible participating preferred stock), the issuance of notes payable to related
parties, the sale of our veterinary division in June 2009, and product sales. At June 30, 2009,
the balance of cash and cash equivalents totaled $3.1 million.
We continue to incur research and development expenses for clinical trials and the development
of products for additional indications. We expect that research and development expenses will
continue to increase as a result of new and ongoing clinical and pre-clinical studies in the United
States and in Europe, as well as expenses associated with regulatory filings. In addition, we
anticipate that our general
and administrative expenses will continue to increase as we expand our operations, facilities
and other administrative activities related to our efforts to bring our product candidates to
commercialization.
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Since our inception, we have incurred losses from operations each year. As of June 30, 2009,
we had an accumulated deficit of $33.3 million. Although the size and timing of our future
operating losses are subject to significant uncertainty, we expect that operating losses will
continue over the next few years as we continue to fund our research and development activities and
clinical trials, and as we prepare for a future sales network to represent our products. In
addition, given the sale of our veterinary division in 2009 and the discontinuation of the Ossatron
mobile service business in 2008, we do not currently have an FDA approved product in
commercialization in the United States.
We cannot reasonably estimate the nature, timing and costs of the efforts necessary to
complete the development and approval of, or the period in which material net cash flows are
expected to be generated from, any of our products, due to the numerous risks and uncertainties
associated with developing products, including the uncertainty of:
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the scope, rate of progress and cost of our clinical trials;
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future clinical trial results;
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the cost and timing of regulatory approvals;
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the establishment of marketing, sales and distribution;
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the cost and timing associated with establishing reimbursement for our products;
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the timing and results of our pre-clinical research programs;
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the effects of competing technologies and market developments; and
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the industry demand and patient wellness behavior as businesses and individuals
suffer from the current economic downturn.
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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 Risk Factors.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with United States
generally accepted accounting principles. The preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those related to
revenue recognition, accrued expenses, fair valuation of inventory, fair valuation of stock related
to stock-based compensation and income taxes. We base our estimates on authoritative literature
and pronouncements, historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources.
Our actual results may differ from these estimates under different assumptions or conditions. The
discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements. The results of our operations for any historical period are not
necessarily indicative of the results of our operations for any other future period.
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While our significant accounting policies are more fully described in Note 1 to our
consolidated financial statements filed with this Current Report on Form 8-K, we believe that the
following accounting policies relating to revenue recognition, research and development costs,
inventory valuation, accrued expenses and deferred liabilities, stock-based compensation and income
taxes are significant and, therefore, important to aid you in fully understanding and evaluating
our reported financial results.
Revenue Recognition
We follow the revenue recognition criteria outlined in Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements (SAB 101), as amended by SAB 104, Revenue
Recognition. Sales of medical devices, including related applicators and applicator kits, are
recognized when shipped to the customer. Fees from services performed are recognized when the
procedure is performed.
Research and Development Costs
We expense costs associated with research and development activities as incurred. We evaluate
payments made to suppliers and other vendors in accordance with Statement of Financial Accounting
Standards (SFAS) No. 2, Accounting for Research and Development Costs, and determine the
appropriate accounting treatment based on the nature of the services provided, the contractual
terms, and the timing of the obligation. Research and development costs include payments to third
parties that specifically relate to our products in clinical development, such as payments to
contract research organizations, clinical investigators, product related consultants, contract
manufacturer start-up costs and insurance premiums for clinical studies. In addition, employee
costs (salaries, payroll taxes, benefits and travel) for employees of the production, regulatory
affairs, clinical affairs, quality assurance, quality control, and research and development
departments are classified as research and development costs.
Inventory Valuation
We value our inventory at the lower of our actual cost or the current estimated market value.
We regularly review existing inventory quantities and expiration dates of existing inventory to
evaluate a provision for excess, expired, obsolete and scrapped inventory based primarily on our
historical usage and anticipated future usage. Although we make every effort to ensure the
accuracy of our forecasts of future product demand, any significant unanticipated change in demand
or technological developments could have a significant impact on the value of our inventory and our
reported operating results.
Inventory is carried at the lower of cost or market, and consists primarily of the purchase of
component materials for assembly of finished products, less reserves for obsolescence.
Stock-based Compensation
During 2006, SANUWAVEs board of directors approved the adoption of the 2006 Stock Incentive
Plan (the 2006 Plan). The 2006 Plan provides that stock options, other equity interests or
equity-based incentives in SANUWAVE may be granted to key personnel at an exercise price determined
by SANUWAVEs board of directors, at the time the option is granted, taking into account the fair
value of the common stock on the date of grant. The maximum term of any option granted pursuant to
the 2006 Plan is ten years from the date of grant.
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In accordance with SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)), the fair value of
each option award is estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted average assumptions amortized to expense over the options vesting
periods for
the year ended December 31, 2008: risk-free interest rate of 3.29%, expected dividend yield of 0%,
volatility factor of the expected market price of our common stock of 46.3% and weighted average
expected life of the option of 6.0 years. 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
options vesting period.
The risk-free rate for periods within the contractual life of the option is based on the
United States Treasury yield curve in effect at the time of the grant.
Income Taxes
We account for income taxes utilizing the asset and liability method prescribed by the
provisions of SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). Deferred tax assets
and liabilities are determined based on differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation allowance is provided for the
deferred tax assets related to future years, including loss carryforwards, if there is not
sufficient evidence to indicate that the results of operations will generate sufficient taxable
income to realize the net deferred tax asset in future years.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 provides
guidance for how uncertain tax provisions should be recognized, measured, presented and disclosed
in the consolidated financial statements. FIN 48 requires the evaluation of tax positions taken or
expected to be taken in the course of preparing our tax returns to determine whether the tax
positions would more-likely-than-not be sustained if challenged by the applicable tax authority.
Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax
benefit or expense in the current year.
Effective January 1, 2007, the Company adopted FIN No. 48 Accounting for Uncertainty in
Income Taxes. FIN 48 specifies the way public companies are to account for uncertainties in
income tax reporting, and prescribes a methodology for recognizing, reversing and measuring tax
benefits of a tax position taken, or expected to be taken, in a tax return. The adoption of FIN 48
did not have a material effect on the Company.
Results of Operations for the six months ended June 30, 2009 and 2008 (unaudited)
The information provided below, including per share numbers and dollar amounts, is prior to
giving effect to the Reverse Merger.
Disposal of Veterinary Division
On June 3, 2009, we sold our veterinary division for $3.5 million in cash to Pulse Veterinary
Technologies, LLC (Pulse Vet). As a result, we recorded a net gain of $2.5 million on the
transaction. Under terms of the sale agreement, we will continue to provide purchasing,
production, shipping and warehousing services to Pulse Vet for a fee until April 30, 2011, unless
Pulse Vet elects to terminate the agreement at an earlier date. The net income from discontinued
operations was $0.6 million for the six months ended June 30, 2009, as compared to $0.1 million for
the same period in 2008.
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Revenues and Cost of Revenues
Revenues for the six months ended June 30, 2009 were $0.4 million, compared to $0.7 million
for the same period in 2008, a decrease of 37%. Revenues result primarily from sales of devices
and applicators in Europe of our legacy Evotron device for orthopedic conditions and our dermaPACE
device for advanced wound care. Revenues decreased in 2009 compared to 2008 primarily because of
declining sales of the legacy Evotron device due to our focus on our resources in the United States
and the reduction of our European sales and marketing staff.
Cost of revenues for the six months ended June 30, 2009 was $0.1 million, compared to $0.2
million for the same period in 2008. Gross profit as a percentage of revenues was 77% for the six
months ended June 30, 2009, as compared to 68% for the same period in 2008. The increase in gross
profit in 2009 was primarily due to increasing sales of the higher margin dermaPACE device
applicator kits as a percentage of sales.
Research and Development Expenses
Research and development expenses for the six months ended June 30, 2009 were $1.6 million,
compared to $1.5 million for the same period in 2008, an increase of 6%. Research and development
costs include payments to third parties that specifically relate to our products in clinical
development, such as payments to contract research organizations, clinical investigators, product
related consultants, contract manufacturer start-up costs and insurance premiums for clinical
studies. In addition, employee costs (salaries, payroll taxes, benefits, and travel) for employees
of the production, regulatory affairs, clinical affairs, quality assurance, quality control, and
research and development departments are classified as research and development costs.
We expect that research and development expenses will continue to increase as a result of next
generation technology development, the ongoing clinical trial of dermaPACE for diabetic foot ulcers
in the United States and other new product candidates, as well as continuing expenses associated
with pre-clinical studies and regulatory filings.
General and Administrative Expenses
General and administrative expenses for the six months ended June 30, 2009 were $1.9 million,
compared to $4.1 million for the same period in 2008, a decrease of 53%. We closed our European
office, effective April 2009. Expenses related to this office totaled $0.7 million for the six
months ended June 30, 2009, as compared to $1.4 million for the same period in 2008. Excluding
these costs, general and administrative expenses were $1.2 million for the six months ended June
30, 2009, as compared to $2.7 million for the same period in 2008, a decrease of 56%. The decrease
is primarily due to reduced headcount and the related savings in wages, bonuses and benefits, and
reduced legal expenses. We expect that general and administrative expenses will increase as we
expand our operations and other administrative activities related to our efforts to bring our
products to commercialization.
Depreciation and Amortization
Depreciation and amortization for the six months ended June 30, 2009 was $0.3 million,
compared to $0.3 million for the same period in 2008.
Other Expense
Interest expense due to related parties for the six months ended June 30, 2009 was $0.3
million, compared to $0.1 million for the same period in 2008. The increase was due to interest on
notes payable to related parties, issued to Prides Capital Fund I, L.P., totaling $3.1 million,
entered into between October 2008 and May 2009, and one note payable to related parties, issued to
NightWatch Capital Partners II, L.P., for $0.1 million, entered into in October 2008. The notes
payable to related parties bear
interest at 15% annually. Interest is paid quarterly in arrears beginning December 31, 2008,
if elected by the holders of the notes payable. As of June 30, 2009, the holders of the notes
payable had not elected to receive interest quarterly. All remaining unpaid accrued interest and
principal is due September 30, 2011.
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Provision for Income Taxes
At June 30, 2009, we had Federal net operating loss carryforwards of approximately $27.9
million that will begin to expire in 2025. Our ability to use these net operating loss
carryforwards to reduce our future Federal income tax liabilities could be subject to annual
limitations. Additionally, because United States tax laws limit the time during which net
operating loss carryforwards may be applied against future taxable income and tax liabilities, we
may not be able to take advantage of our net operating loss carryforwards for Federal income tax
purposes.
Net Income (Loss)
Net loss for the six months ended June 30, 2009 was $0.8 million, or $(97.93) per basic and
diluted share, compared to net loss of $5.5 million, or $(686.29) per basic and diluted share, for
the six months ended June 30, 2008. We anticipate that our operating losses will continue over the
next few years as we continue to fund our research and development activities and clinical trials,
and as we prepare for a future sales network to represent our products.
Results of Operations for the years ended December 31, 2008 and 2007
The information provided below, including per share numbers and dollar amounts, is prior to
giving effect to the Reverse Merger.
Discontinued operations
As of October 31, 2008, we discontinued our Ossatron mobile service business because the
mobile service business model was not profitable and in order to focus on our resources our next
generation smaller devices. Accordingly, our consolidated financial statements have been prepared
with the net assets, results of operations and cash flows of this business displayed separately as
discontinued operations.
On June 3, 2009, we sold our Veterinary Division to Pulse Vet. As a result, our consolidated
financial statements have been prepared with the net assets, results of operations and cash flows
of this business displayed separately as discontinued operations.
The net income from discontinued operations was $2.0 million for the year ended December 31,
2008, as compared to net loss from discontinued operations of $0.5 million for the same period in
2007.
Revenues and Cost of Revenues
Revenues for the year ended December 31, 2008 were $1.0 million, compared to $1.2 million for
the same period in 2007, a decrease of 13%. Revenues result primarily from sales of devices and
applicators in Europe of our legacy Evotron device for orthopedic conditions and our dermaPACE
device for advanced wound care. Revenues decreased in 2008 compared to 2007 primarily due to
declining sales of our legacy Evotron device and applicators.
41
Cost of revenues for the year ended December 31, 2008 were $0.4 million, compared to $0.3
million for the same period in 2007. Gross profit as a percentage of revenues was 66% in 2008 as
compared to 79% for 2007. The decrease in gross profit in 2008 compared to 2007 was primarily
due to the change in the mix of device and applicator sales during the periods.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2008 were $3.7 million,
compared to $2.0 million for the same period in 2007, an increase of 87%. The increase in 2008
compared to 2007 was due to the start of the United States IDE study on diabetic foot ulcers using
the dermaPACE device, which started in late 2007. Research and development costs include payments
to third parties that specifically relate to our products in clinical development, such as payments
to contract research organizations, clinical investigators, product related consultants, contract
manufacturer start-up costs and insurance premiums for clinical studies. In addition, employee
costs (salaries, payroll taxes, benefits, and travel) for employees of the production, regulatory
affairs, clinical affairs, quality assurance, quality control, and research and development
departments are classified as research and development costs.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2008 were $7.8 million,
compared to $9.8 million for the same period in 2007, a decrease of 21%. To reduce expenses from
duplicate operations, we have closed our European office, effective April 2009. Expenses related
to this office totaled $2.7 million in 2008 as compared to $1.7 million in 2007. Excluding these
costs, general and administrative expenses were $5.1 million for the year ended December 31, 2008
as compared to $8.1 million for the same period in 2007, a decrease of 37%. During 2007, we had
many one-time expenses related to partnership consolidations and intellectual property legal
expenses, which were not incurred in 2008.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2008 was $0.6 million, compared
to $0.5 million for the same period in 2007.
Other Expense
Interest expense due to related parties for the year ended December 31, 2008 was $0.3 million,
compared to $0.3 million for the same period in 2007.
Provision for Income Taxes
At December 31, 2008, we had Federal net operating loss carryforwards of approximately $27.9
million that will begin to expire in 2025. Our ability to use our net operating loss carryforwards
could be limited. Our ability to use these net operating loss carryforwards to reduce our future
Federal income tax liabilities could be subject to annual limitations. Additionally, because
United States tax laws limit the time during which net operating loss carryforwards may be applied
against future taxable income and tax liabilities, we may not be able to take advantage of our net
operating loss carryforwards for Federal income tax purposes.
Net Income (Loss)
Net loss for the year ended December 31, 2008 was $9.4 million, or $(1,158.45) per basic and
diluted share, compared to net loss of $12.1 million, or $(1,517.94) per basic and diluted share,
for the
year ended December 31, 2007. We anticipate that our operating losses will continue over the
next few years as we continue to fund our research and development activities and clinical trials,
and as we prepare for a future sales network to represent our products.
42
Liquidity and Capital Resources
We incurred a net loss of $0.8 million for the six months ended June 30, 2009, which includes
a loss from continuing operations of $3.8 million. We incurred a net loss of $9.4 million and
$12.1 million for the years ended December 31, 2008 and 2007, respectively. These operating losses
create an uncertainty about our ability to continue as a going concern. Management believes we
will raise additional capital through public or private equity offerings. Our consolidated
financial statements do not include any adjustments that might be necessary if we are unable to
continue as a going concern. We are economically dependent upon future capital contributions or
financing to fund ongoing operations. On June 3, 2009, we sold our veterinary division for $3.5
million in cash to Pulse Vet. During the six months ended June 30, 2009 and the year ended
December 31, 2008, we obtained cash infusions totaling $2.1 million and $1.1 million, respectively,
in the form of notes payable from related parties. The notes payable can be converted into
additional shares of convertible participating preferred stock, with all or any portion of the
unpaid principal, at a conversion price of $100 per share. In addition, for the years ended
December 31, 2008 and 2007, additional shares of convertible participating preferred stock were
issued to existing stockholders for total cash proceeds of $5.7 million and $11.2 million,
respectively.
At June 30, 2009, we had $3.1 million in cash and cash equivalents held in four financial
institutions. Our excess cash reserves are invested in money market accounts.
We believe that the June 30, 2009 balance of our cash and cash equivalents and additional
sales of SANUWAVEs securities in September 2009, totaling $1.8 million, will be sufficient to fund
our business operations through at least the first quarter of 2010.
We expect to devote substantial resources to continue our research and development efforts,
including clinical trials. Clinical study costs are comprised of payments for work performed by
contract research organizations, universities and hospitals. Because of the significant time it
will take for our products to complete the clinical trial process, and for us to obtain approval
from regulatory authorities and successfully commercialize our products, we will require
substantial additional capital resources. We may raise additional capital through public or
private equity offerings, debt financings, corporate collaborations or other means. We may attempt
to raise additional capital due to favorable market conditions or other strategic considerations
even if we have sufficient funds for planned operations. To the extent that we raise additional
funds by issuance of equity securities, our stockholders will experience dilution, and debt
financings, if available, may involve restrictive covenants or may otherwise constrain our
financial flexibility. To the extent that we raise additional funds through collaborative
arrangements, it may be necessary to relinquish some rights to our intellectual property or grant
licenses on terms that are not favorable to us. In addition, payments made by potential
collaborators or licensors generally will depend upon our achievement of negotiated development and
regulatory milestones. Failure to achieve these milestones would harm our future capital position.
Additional financing may not be available on acceptable terms, if at all. Capital may become
difficult or impossible to obtain due to poor market or other conditions outside of our control.
If at any time sufficient capital is not available, either through existing capital resources or
through raising additional funds, we may be required to delay, reduce the scope of, eliminate or
divest one or more of our research, pre-clinical or clinical programs.
43
For the six months ended June 30, 2009, net cash used by continuing operations for operating
activities was $4.0 million, primarily consisting of salaries, clinical trials, research and
development activities and general corporate operations. Net cash provided by continuing
operations for financing
activities for the six months ended June 30, 2009 was $2.1 million, which consisted of the proceeds
from issuance of notes payable to related parties. Net cash provided by discontinued operations
was $4.6 million for the six months ended June 30, 2009, which primarily includes $1.0 million for
discontinued operating activities and $3.5 million for the sale of our veterinary division.
For the year ended December 31, 2008, net cash used by continuing operations for operating
activities was $9.5 million, primarily consisting of salaries, clinical trials, research and
development activities and general corporate operations. Net cash used by continuing operations
for investing activities was $0.1 million for the year ended December 31, 2008 and included
purchases of property and equipment for research and development. Net cash provided by continuing
operations for financing activities for the year ended December 31, 2008 was $6.8 million,
primarily consisting of $5.7 million in net proceeds from issuance of convertible preferred stock
to related parties and $1.1 million from the proceeds from the issuance of notes payable to related
parties. Net cash provided by discontinued operations was $2.9 million for the year ended December
31, 2008.
Segment Information
We have determined that we are principally engaged in one operating segment. Our product
candidates are primarily used for the repair and regeneration of tissue, musculoskeletal and
vascular structures in wound healing, orthopedic/spine, plastic/cosmetic and cardiac condition.
Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income (SFAS No. 130), establishes standards for
reporting and display of comprehensive income (loss) and its components in the consolidated
financial statements. Our comprehensive loss as defined by SFAS No. 130 is the total of net loss
and all other changes in equity resulting from non-owner sources, including unrealized gains/losses
on foreign currency translation adjustments.
Contractual Obligations
Our major outstanding contractual obligations relate to our operating leases for our
facilities, purchase and supplier obligations for raw materials and equipment, and our notes
payable.
In October 2006, we entered into a sublease agreement for the corporate office in Alpharetta,
Georgia for 15,025 square feet of space. Under the terms of the sublease, we pay monthly rent of
$18,468, as adjusted on an annual basis for additional proportionate operating and insurance costs
associated with the building over the base amount. The initial term of the sublease continues
until September 30, 2009, and we have exercised the option to extend the term to October 31, 2012.
In April 2007, we entered into a lease agreement for the production and research and
development office for 5,168 square feet of space. Under the terms of the lease, we pay monthly
rent of $8,075, as adjusted on an annual basis for additional proportionate operating and insurance
costs associated with the building over the base amount. The initial term of the sublease
continues until July 31, 2010, and the lease provides for an annual increase in the base rent of
three percent per year.
We have developed a network of suppliers, manufacturers, and contract service providers to
provide sufficient quantities of raw materials for our products through the development, clinical
testing and commercialization phases. We have contractual obligations under a supply agreement
with SwissTronics Contract Manufacturing AG for the manufacture of our devices.
44
In August 2005, as part of the purchase of the orthopedic division assets of HealthTronics, we
entered into two promissory notes with HealthTronics for $2.0 million each. The promissory notes
bear interest at 6% annually. Quarterly interest through June 30, 2010 is accrued and added to the
principal balance. Interest is paid quarterly in arrears beginning September 30, 2010. All
remaining unpaid accrued interest and principal is due August 1, 2015. Accrued interest on the
promissory notes totaled $1.1 million at June 30, 2009 and $0.9 million at December 31, 2008.
In the fourth quarter of 2008, we entered into three notes payable with Prides Capital Fund I,
L.P. for $1.0 million in total and one note payable with NightWatch Capital Partners II, L.P. for
$0.1 million. The notes payable bear interest at 15% annually. Interest is paid quarterly in
arrears beginning December 31, 2008, if elected by the holders of the notes payable. As of June
30, 2009, the holders of the notes payable had not elected to receive interest quarterly. All
remaining unpaid accrued interest and principal is due September 30, 2011. All or any portion of
the unpaid principal can be converted into preferred stock with a conversion price of $100 per
share. Accrued interest on the notes payable totaled $0.2 million at June 30, 2009 and $20,251 at
December 31, 2008.
Recent Accounting Pronouncements
On April 9, 2009, the FASB issued three FASB Staff Positions (FSP): (1) FSP FAS 157-4, which
provides guidance on determining fair value when market activity has decreased; (2) FSP FAS 115-2
and FAS 124-2, which addresses other-than-temporary impairments for debt securities; and (3) FSP
FAS 107-1 and APB 28-1, which discusses fair value disclosures for financial instruments in interim
periods. These FSPs are effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted. The implementation of these FSPs, effective January 1, 2009, did not
have a material impact on us.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No.
162 (FAS 168). The Codification will become the source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under
authority of Federal securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of FAS 168, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in
the Codification will become nonauthoritative. FAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We do not expect that the
adoption of FAS 168 will have a material impact on our consolidated financial position or results
of operations.
In May 2009, the FASB issued Statement No. 165, Subsequent Events (FAS 165). FAS 165
establishes general standards of accounting for and disclosures of events that occur after the
balance sheet date, but before financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated subsequent events and the
basis for that date. FAS 165 was effective for interim or annual financial periods ending after
June 15, 2009. We adopted FAS 165 during the second quarter of 2009 and its application did not
affect our consolidated financial position, results of operations, or cash flows. We evaluated
subsequent events through the date the accompanying financial statements were authorized for
issuance, which was September 25, 2009.
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.
45
Effects of Inflation
Because our assets are, to an extent, liquid in nature, they are not significantly affected by
inflation. However, the rate of inflation affects such expenses as employee compensation, office
space leasing costs and research and development charges, which may not be readily recoverable
during the period of time that we are bringing the product candidates to market. To the extent
inflation results in rising interest rates and has other adverse effects on the market, it may
adversely affect our consolidated financial condition and results of operations.
MANAGEMENT
Below are the names and certain information regarding the Companys executive officers and
directors. The information provided below is after giving effect to the Reverse Merger and the
change in control which will become effective following the expiration of the ten day period
following the mailing of the information statement required by Rule 14f-1 under the Exchange Act.
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Name
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Age
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Position Held
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Christopher M. Cashman
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42
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President, Chief Executive Officer and Director
Officer
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Barry J. Jenkins
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47
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Chief Financial Officer
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Thomas H. Robinson
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50
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Director
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Kevin A. Richardson, II
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41
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Director
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John F. Nemelka
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43
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Director
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Christopher M. Cashman
joined SANUWAVE as President, Chief Executive Officer and a director in
December of 2005. Immediately prior to joining SANUWAVE, he served as President of Therapeutic
Surfaces for Kinetic Concepts, Inc., a global leader in advanced wound care, from October of 2005
to December of 2005. In November of 2001, Mr. Cashman conducted a management buyout of Snowden
Pencer, Inc., a minimally invasive surgical device manufacturer, and assumed the role of Chief
Executive Officer and President until Snowden Pencer, Inc. was sold to Cardinal Health, Inc. in
March 2004. Mr. Cashman also served as a business unit head with Genzyme Biosurgery and held
several senior sales and marketing positions with Genzyme Surgical Products and Deknatel Snowden
Pencer. Mr. Cashman graduated from the United States Naval Academy in 1989 with a B.S. in
Economics and served on a fast attack submarine as Supply Officer. He received his M.B.A. in 2001
from the Kellogg Graduate School of Management at Northwestern University.
Barry J. Jenkins
joined SANUWAVE as Chief Financial Officer in April of 2006. Prior to
joining SANUWAVE, he served as Chief Financial Officer for the Benefit Services Division of
Automatic Data Processing, Inc. from March of 2005 to April of 2006. He was also the Chief
Financial Officer of Snowden Pencer, Inc. from January of 2002 to November of 2004. Mr. Jenkins is
a certified public accountant with 25 years of financial management experience and a cum laude
graduate of Virginia Tech.
Thomas H. Robinson
joined SANUWAVE as a member of the board of directors in August of 2005.
Since 1998, Mr. Robinson has served as managing partner of the North American medical technology
practice, which includes the medical device, hospital supply/distribution and medical software
areas, of Spencer Stuart, Inc., a global executive search firm. Since 2002, Mr. Robinson has been
a member of Spencer Stuarts board services practice, which assists corporations identifying and
recruiting outside directors. From 1998 to 2000, Mr. Robinson headed Spencer Stuarts North
American biotechnology specialty practice. From 1993 to 1997, Mr. Robinson served as President of
the emerging markets business at Boston Scientific Corporation, a global medical devices
manufacturer. From 1991 to
1993, Mr. Robinson also served as President and Chief Operating Officer of Brunswick Biomedical, a
cardiology medical device company. Mr. Robinson is also a member of the board of directors and is
chairman of the compensation committee of Cynosure, Inc., an aesthetic medical laser company.
46
Kevin A. Richardson, II
joined SANUWAVE as a member of the board of directors in August of
2005. Since 2004, Mr. Richardson has served as managing partner of Prides Capital LLC, an
investment management firm. Mr. Richardson is also a member of the board of directors of
eDiets.com, Inc., a weight loss solutions company, and Pegasus Solutions, Inc., a travel technology
company.
John F. Nemelka
joined SANUWAVE as a member of the board of directors in August of 2005.
Since 2001, Mr. Nemelka has served as a Managing Principal of NightWatch Capital Advisors, LLC, an
investment management firm. Mr. Nemelka is also a member of the board of directors and the
compensation committee of KANA Software, Inc., a provider of customer service software solutions.
EXECUTIVE COMPENSATION
Summary Compensation Table for Fiscal Years 2007 and 2008
The following table provides certain information for the fiscal years ended December 31, 2007
and 2008 concerning compensation earned for services rendered in all capacities by our named
executive officers during the fiscal years ended December 31, 2007 and 2008.
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Change in
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Pension Value
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and
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Nonqualified
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Non-Equity
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Deferred
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Name and
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Principal
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Position
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Year
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($)
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($)
(1)
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($)
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($)
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($)
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($)
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($)
(3)
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($)
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(h)
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(i)
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(j)
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Christopher M. Cashman
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2008
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$
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305,000
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$
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232,899
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$
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18,101
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$
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556,000
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Chief Executive Officer and President
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2007
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$
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275,000
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$
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137,500
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$
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63,434
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$
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17,550
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$
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493,484
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Barry J. Jenkins
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2008
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$
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222,600
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$
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114,815
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$
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17,879
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$
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355,294
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Chief Financial Officer
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2007
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$
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209,667
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$
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84,800
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$
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32,986
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$
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17,090
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$
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344,543
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Cornelius A. Hofman
(2)
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2008
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Former Sole Officer and Director
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2007
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(1)
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Bonuses included for 2007 were earned in 2007, but paid in 2008.
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(2)
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Cornelius A. Hofman will submit his resignation as an officer and director, effective following
the expiration of the ten day period following the mailing of the information statement required by
Rule 14f-1 under the Exchange Act.
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(3)
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Includes health, dental and disability insurance premiums, and employee 401(k) matching
contributions.
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47
Employment Agreements
The information provided below, including the share numbers and dollar amounts, is after
giving effect to the Reverse Merger and the change in control which will become effective following
the expiration of the ten day period following the mailing of the information statement required by
Rule 14f-1 under the Exchange Act.
Christopher M. Cashman
General Terms.
Pursuant to his employment agreement, as amended, Mr. Cashman agreed to serve
as the Chief Executive Officer and President of SANUWAVE for a term commencing on December 19, 2005
and with no specific duration. Mr. Cashman is entitled to an annual base salary of $275,000;
provided that, effective January 1, 2010, he is entitled to an annual base salary of $350,000, and
effective January 1, 2011, he is entitled to an annual base salary of not less than $385,000. He
is also entitled to a performance and compensation review not less often than annually, at which
time compensation may be adjusted as determined by the board of directors; provided that such
increase is at least 105% of his previous annual base salary. With respect to each full fiscal
year, Mr. Cashman is eligible to earn an annual bonus award of not less than 50% and not more than
200% of his annual base salary based on the achievement of certain performance goals established by
the board of directors and generally consistent with SANUWAVEs budget and performance goals
established for other management employees. Mr. Cashman is also entitled to participate in
SANUWAVEs employee benefit plans (other than annual bonus and incentive plans). In the event of
Mr. Cashmans death during the term of his employment, his heirs will receive a death benefit equal
to at least $1,500,000 pursuant to a life insurance policy on the life of Mr. Cashman, the premiums
for which will be paid by SANUWAVE. The employment agreement contains an agreement not to compete,
which covers the term of employment and two years thereafter, and a confidentiality provision,
which is indefinite.
Equity Arrangements.
Upon the execution of his employment agreement, Mr. Cashman was granted
options to purchase 160,451 shares of common stock, at an exercise price of $2.92 per share. The
options vest and become exercisable in four equal installments on December 19, 2006, 2007, 2008 and
2009. Upon the execution of his employment agreement and his commencement of employment, Mr.
Cashman purchased 88,151 shares of common stock, at a purchase price of $2.92 per share.
In addition, upon the execution of his employment agreement, Mr. Cashman was granted three
supplemental options to purchase common stock. The terms of the supplemental options were amended
on September 15, 2009. The first supplemental option provides him with the right to purchase
30,810 shares of common stock, at $11.68 per share, the second supplemental option provided him
with the right to purchase 30,810 shares of common stock, at $23.37 per share, and the third
supplemental option provided him with the right to purchase 46,215 shares of common stock, at
$35.05 per share. The first supplemental option will fully vest on the earlier of (i) December 19,
2011, and (ii) the date that SANUWAVE or its shareholders (A) enters into a transaction that
establishes a value for SANUWAVE on a per share basis equal to at least $8.76 per share, or (B)
receives a valuation that establishes a value for SANUWAVE on a per share basis equal to at least
$8.76 per share. Notwithstanding the above, if the common stock becomes listed on a national
securities exchange and the closing price equals or exceeds three times the closing price as of the
first date that the common stock is listed, the first supplemental option will fully vest. In such
an event, the exercise price of the first supplemental option will be the closing price of the
common stock on the first date that the common stock is listed. The second supplemental option
will fully vest on the earlier of (i) December 19, 2011, and (ii) the date that SANUWAVE or its
shareholders (A) enters into a transaction that establishes a value for SANUWAVE on a per share
basis equal to at least $17.53 per share, or (B) receives a valuation that establishes a value for
SANUWAVE on a per share basis equal
48
to at
least $17.53 per share. Notwithstanding the above, if the common stock becomes listed on a national securities exchange and the closing price equals or
exceeds six times the closing price as of the first date that the common stock is listed, the
second supplemental option will fully vest. In such an event, the exercise price of the second
supplemental option will be the closing price of the common stock on the first date that
the common
stock is listed. The third supplemental option will fully vest on the earlier of (i) December 19,
2011, and (ii) the date that SANUWAVE or its shareholders (A) enters into a transaction that
establishes a value for SANUWAVE on a per share basis equal to at least $26.29 per share, or (B)
receives a valuation that establishes a value
for SANUWAVE on a per share basis equal to at least $26.29 per share. Notwithstanding the
above, if the common stock becomes listed on a national securities exchange and the closing price
equals or exceeds nine times the closing price as of the first date that the common stock is
listed, the third supplemental option will fully vest. In such an event, the exercise price of the
third supplemental option will be the closing price of the common stock on the first date that the
common stock is listed.
Upon the execution of the first amendment to his employment agreement on September 15, 2009,
Mr. Cashman was granted three additional supplemental options to purchase common stock. The first
and second supplemental options each provided him with the right to purchase 139,159 shares of
common stock and the third supplemental option provided him with the right to purchase 208,755
shares of common stock, all at $2.92 per share. The first supplemental option will fully vest on
the earlier of (i) December 19, 2011, and (ii) the date that SANUWAVE or its shareholders (A)
enters into a transaction that establishes a value for SANUWAVE on a per share basis equal to at
least $8.76 per share, or (B) receives a valuation that establishes a value for SANUWAVE on a per
share basis equal to at least $8.76 per share. Notwithstanding the above, if the common stock
becomes listed on a national securities exchange and the closing price equals or exceeds three
times the closing price as of the first date that the common stock is listed, the first
supplemental option will fully vest. In such an event, the exercise price of the first
supplemental option will be the closing price of the common stock on the first date that the common
stock is listed. The second supplemental option will fully vest on the earlier of (i) December 19,
2011, and (ii) the date that SANUWAVE or its shareholders (A) enters into a transaction that
establishes a value for SANUWAVE on a per share basis equal to at least $17.53 per share, or (B)
receives a valuation that establishes a value for SANUWAVE on a per share basis equal to at least
$17.53 per share. Notwithstanding the above, if the common stock becomes listed on a national
securities exchange and the closing price equals or exceeds six times the closing price as of the
first date that the common stock is listed, the second supplemental option will fully vest. In
such an event, the exercise price of the second supplemental option will be the closing price of
the common stock on the first date that the common stock is listed. The third supplemental option
will fully vest on the earlier of (i) December 19, 2011, and (ii) the date that SANUWAVE or its
shareholders (A) enters into a transaction that establishes a value for SANUWAVE on a per share
basis equal to at least $26.29 per share, or (B) receives a valuation that establishes a value for
SANUWAVE on a per share basis equal to at least $26.29 per share. Notwithstanding the above, if
the common stock becomes listed on a national securities exchange and the closing price equals or
exceeds nine times the closing price as of the first date that the common stock is listed, the
third supplemental option will fully vest. In such an event, the exercise price of the third
supplemental option will be the closing price of the common stock on the first date that the common
stock is listed.
In addition, upon the execution of the first amendment to his employment agreement, Mr.
Cashman was granted the right to receive annually shares of common stock equal to two and one-half
times his annual base salary in effect on the date of execution of the first amendment. The shares
vest in four equal installments on each twelve month anniversary of the date of grant; provided,
that the vesting may be accelerated upon the achievement of certain performance goals established
by the board of directors.
49
Gross-Ups.
In the event that any payment made to Mr. Cashman under his employment agreement
or under any other plan maintained by SANUWAVE is subject to the excise tax imposed by Section 4999
of the Internal Revenue Code, SANUWAVE will pay Mr. Cashman an additional amount to compensate him
for the economic cost of the (1) excise tax of such payment, (2) Federal, state and local income
tax, and (3) excise tax on the gross-up payment.
Termination.
Mr. Cashmans employment may be terminated by either party at any time and for
any reason; provided that Mr. Cashman will be required to give SANUWAVE at least 30 days advance
written notice of any resignation. If Mr. Cashman is terminated by SANUWAVE for cause or
resigns without good reason, he will be entitled to receive his (1) base salary through the
termination date, (2) any annual bonus earned, but unpaid as of the date of termination for the
immediately preceding fiscal year, (3) reimbursement for certain unreimbursed business expenses,
and (4) such employee benefits to which he may be entitled under the employee benefit plans of
SANUWAVE. If Mr. Cashman is terminated by SANUWAVE without cause or resigns for good reason, he
will be entitled to receive all of the above plus (1) subject to his compliance with certain other
provisions of the employment agreement related to non-competition and confidentiality and the
execution of an effective release of claims, continued payment of the base salary until twelve
months following the date of termination, and (2) continued coverage of him and his beneficiaries
under SANUWAVEs health insurance programs for a period of up to twelve months.
Effective as of the first anniversary of the Reverse Merger, if Mr. Cashman is terminated by
SANUWAVE without cause or resigns with good reason, he will be entitled to receive (1) his base
salary through the termination date, (2) any annual bonus earned, but unpaid as of the date of
termination for the immediately preceding fiscal year, (3) reimbursement for certain unreimbursed
business expenses, (4) such employee benefits to which he may be entitled under the employee
benefit plans of SANUWAVE, (5) subject to his compliance with certain other provisions of the
employment agreement related to confidentiality and the execution of an effective release of
claims, a payment equal to 200% of his annual base salary then in effect plus the sum of the cash
bonuses paid to him during the previous two fiscal years (but in no case less than 50% of the value
of 200% of his annual base salary then in effect), (6) full vesting of all outstanding options and
shares of common stock, and (7) a lump sum payment equal to 24 months of the monthly premium cost
of providing continuation coverage for Mr. Cashman and his beneficiaries under the Consolidated
Omnibus Budget Reconciliation Act of 1986, as amended.
Change of Control.
In addition to any other termination benefits that Mr. Cashman may be
entitled to receive, if a change of control (as defined below) occurs, then subject to his
compliance with certain other provisions of the employment agreement related to non-competition and
confidentiality and the execution of an effective release of claims, Mr. Cashman will also be
entitled to receive 100% accelerated vesting of his options. Effective as of the first anniversary
of the Reverse Merger, Mr. Cashmans right to receive the above change of control termination
benefits will no longer be subject to his compliance with the non-compete provisions of his
employment agreement. A change in control is defined in the employment agreement as the occurrence
of any of the following events: (1) the sale, exchange, lease or other disposition of all or
substantially all of the assets of SANUWAVE to a person (other than Prides or NightWatch) that will
continue the business of SANUWAVE in the future; (2) a merger or consolidation involving SANUWAVE
in which the voting securities of SANUWAVE owned by the shareholders of SANUWAVE immediately prior
to such merger or consolidation do not represent, after conversion if applicable, more than 50% of
the total voting power of the surviving controlling entity outstanding immediately after such
merger or consolidation; or (3) any person (other than Prides or NightWatch) is or becomes the
beneficial owner, directly or indirectly, of more than 50% of the total voting power of the voting
stock of SANUWAVE and the representatives of Prides and NightWatch cease to have the ability to
elect a majority of the board of directors.
50
Barry J. Jenkins
General Terms.
Pursuant to his employment agreement, Mr. Jenkins agreed to serve as the Chief
Financial Officer of SANUWAVE for a term commencing on April 10, 2006 and with no specific
duration. Mr. Jenkins is entitled to an annual base salary of $205,000, with a performance and
compensation review not less often than annually, at which time compensation may be adjusted as
determined by the board of directors. With respect to each full fiscal year, Mr. Jenkins is
eligible to earn an annual bonus award of 40% of his annual base salary based on the achievement of
certain performance
goals established by the board of directors and generally consistent with SANUWAVEs budget
and performance goals established for other management employees. Mr. Jenkins is also entitled to
participate in SANUWAVEs employee benefit plans (other than annual bonus and incentive plans).
The employment agreement contains an agreement not to compete, which covers the term of employment
and two years thereafter, and a confidentiality provision, which is indefinite.
Equity Arrangements.
Upon the execution of his employment agreement, Mr. Jenkins was granted
options to purchase 104,677 shares of common stock, at an exercise price of $2.92 per share. The
options vest and become exercisable in four equal installments on April 10, 2007, 2008, 2009 and
2010. Upon the execution of his employment agreement and his commencement of employment, Mr.
Jenkins purchased 35,089 shares of common stock, at a purchase price of $2.92 per share.
In addition, upon the execution of his employment agreement, Mr. Jenkins was granted three
supplemental options to purchase common stock. The terms of the supplemental options were amended
on September 15, 2009. The first supplemental option provided him with the right to purchase
10,065 shares of common stock, at $11.68 per share, the second supplemental option provided him
with the right to purchase 10,065 shares of common stock, at $23.37 per share, and the third
supplemental option provided him with the right to purchase 15,097 shares of common stock, at
$35.05 per share. The first supplemental option will fully vest on the earlier of (i) April 10,
2012, and (ii) the date that SANUWAVE or its shareholders (A) enters into a transaction that
establishes a value for SANUWAVE on a per share basis equal to at least $8.76 per share, or (B)
receives a valuation that establishes a value for SANUWAVE on a per share basis equal to at least
$8.76 per share. Notwithstanding the above, if the common stock becomes listed on a national
securities exchange and the closing price equals or exceeds three times the closing price as of the
first date that the common stock is listed, the first supplemental option will fully vest. In such
an event, the exercise price of the first supplemental option will be the closing price of the
common stock on the first date that the common stock is listed. The second supplemental option
will fully vest on the earlier of (i) April 10, 2012, and (ii) the date that SANUWAVE or its
shareholders (A) enters into a transaction that establishes a value for SANUWAVE on a per share
basis equal to at least $17.53 per share, or (B) receives a valuation that establishes a value for
SANUWAVE on a per share basis equal to at least $17.53 per share. Notwithstanding the above, if
the common stock becomes listed on a national securities exchange and the closing price equals or
exceeds six times the closing price as of the first date that the common stock is listed, the
second supplemental option will fully vest. In such an event, the exercise price of the second
supplemental option will be the closing price of the common stock on the first date that the common
stock is listed. The third supplemental option will fully vest on the earlier of (i) April 10,
2012, and (ii) the date that SANUWAVE or its shareholders (A) enters into a transaction that
establishes a value for SANUWAVE on a per share basis equal to at least $26.29 per share, or (B)
receives a valuation that establishes a value for SANUWAVE on a per share basis equal to at least
$26.29 per share. Notwithstanding the above, if the common stock becomes listed on a national
securities exchange and the closing price equals or exceeds nine times the closing price as of the
first date that the common stock is listed, the third supplemental option will fully vest. In such
an event, the exercise price of the third supplemental option will be the closing price of the
common stock on the first date that the common stock is listed.
51
Termination.
Mr. Jenkins employment may be terminated by either party at any time and for
any reason; provided that Mr. Jenkins will be required to give SANUWAVE at least 30 days advance
written notice of any resignation. If Mr. Jenkins is terminated by SANUWAVE for cause or resigns
without good reason, he will be entitled to receive his (1) base salary through the termination
date, (2) any annual bonus earned, but unpaid as of the date of termination for the immediately
preceding fiscal year, (3) reimbursement for certain unreimbursed business expenses, and (4) such
employee benefits to which he may be entitled under the employee benefit plans of SANUWAVE. If
Mr. Jenkins is terminated by SANUWAVE without cause or resigns for good reason, he will be entitled
to receive all of the above plus
(1) subject to his compliance with certain other provisions of the employment agreement
related to non-competition and confidentiality and the execution of an effective release of claims,
continued payment of the base salary until six months following the date of termination, and (2)
continued coverage of him and his beneficiaries under SANUWAVEs health insurance programs for a
period of up to six months.
Change of Control.
In addition to any other termination benefits that Mr. Jenkins may be
entitled to receive, if a change of control (as defined above) occurs, then subject to his
compliance with certain other provisions of the employment agreement related to non-competition and
confidentiality and the execution of an effective release of claims, Mr. Jenkins will also be
entitled to receive 100% accelerated vesting of his options.
Stock Incentive Plan
On October 24, 2006, SANUWAVEs board of directors adopted the 2006 Stock Incentive Plan of
SANUWAVE, Inc. (the 2006 Plan). The 2006 Plan sets aside 684,666 shares of common stock for
grants to employees, directors and certain independent contractors, consultants and advisors. The
terms of the options granted under the 2006 Plan expire as determined by individual option
agreements (or on the tenth anniversary of the grant date), unless terminated earlier on the first
to occur of the following: (1) the date on which the participants service with SANUWAVE is
terminated by SANUWAVE for cause; (2) 60 days after the participants death; or (3) 60 days after
the termination of the participants service with SANUWAVE for any reason other than cause or the
participants death; provided that, if during any part of such 60 day period the option is not
exercisable solely because of specified securities law restrictions, the option will not expire
until the earlier of the expiration date or until it has been exercisable for an aggregate period
of 60 days after the termination of the participants service with SANUWAVE. The options vest as
provided for in individual option agreements and the exercise prices for the options are determined
by the board of directors at the time the option is granted; provided that the exercise price shall
in no event be less than the fair market value per share of SANUWAVEs common stock on the grant
date. In the event of any change in the common stock underlying the options, by reason of any
merger or exchange of shares of common stock, the board of directors shall make such substitution
or adjustment as it deems to be equitable to (1) the class and number of shares underlying such
option, (2) the exercise price applicable to such option, or (3) any other affected terms of such
option.
In the event of a change of control, unless specifically modified by an individual option
agreement: (1) all options outstanding as of the date of such change of control will become fully
vested; and (2) notwithstanding (1) above, in the event of a merger or share exchange, the board of
directors may, in its sole discretion, determine that any or all options granted pursuant to the
2006 Plan will not vest on an accelerated basis if the board of directors, the surviving
corporation or the acquiring corporation, as the case may be, has taken such action as in the
opinion of the board of directors is equitable or appropriate to protect the rights and interests
of the participants under the plan.
On September 25, 2009, there were 323,167 shares of common stock available for grant under the
2006 Plan. No options were granted to SANUWAVEs executive officers during the last fiscal year
under the 2006 Plan. The 2006 Plan expires in October of 2016. The Company intends to assume and
adopt the 2006 Plan.
52
Outstanding Equity Awards at 2008 Fiscal Year End
The following table provides certain information concerning the outstanding equity awards for
each named executive officer as of December 31, 2008.
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Option Awards
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Stock Awards
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Equity
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Equity
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Incentive
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Incentive Plan
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Equity
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Plan
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Awards:
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Incentive Plan
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Awards:
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Market or
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Awards:
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Number
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Market
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Number of
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Payout Value
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Number of
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Number of
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Number of
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of Shares
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Value of
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Unearned
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of Unearned
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Securities
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Securities
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Securities
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or Units
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Shares or
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Shares, Units
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Shares, Units
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Underlying
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Underlying
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Underlying
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of Stock
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Units of
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or Other
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or Other
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Unexercised
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Unexercised
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Unexercised
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Option/
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Option/
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That Have
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Stock That
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Rights That
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Rights That
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Options/
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Options/
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Unearned
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Warrant
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Warrant
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Not
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Have Not
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Have Not
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Have Not
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Warrants (#)
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Warrants (#)
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Options
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Exercise
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Expiration
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Vested
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Vested
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Vested
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Vested
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Name
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Exercisable
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Unexercisable
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(#)
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Price ($)
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Date
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(#)
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($)
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(#)
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($)
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(h)
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(i)
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(j)
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Christopher M.
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509,304
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$
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2.92
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12/19/2015
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Cashman
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169,768
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$
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2.92
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12/19/2015
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106,637
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$
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11.68
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12/19/2015
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106,637
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$
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23.37
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12/19/2015
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159,938
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$
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35.05
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12/19/2015
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Barry J. Jenkins
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167,688
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$
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2.92
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10/24/2016
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167,688
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$
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2.92
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10/24/2016
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26,662
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$
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11.68
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10/24/2016
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26,662
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$
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23.37
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10/24/2016
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39,992
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$
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35.05
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10/24/2016
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Cornelius A. Hofman
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|
|
|
|
Discussion of Director Compensation
SANUWAVE did not pay any director compensation during the fiscal year ended December 31, 2008.
The Company may begin to compensate its directors at some time in the future.
Compensation Committee Interlocks and Insider Participation
The Company does not have a separate compensation committee. During the fiscal year ended
December 31, 2008, the entire board of directors participated in the deliberations of the board
concerning executive compensation, including Christopher Cashman, who is the Companys President
and Chief Executive Officer.
53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Other than as described below, for the fiscal year ended December 31, 2008, there were no
transactions with related persons required to be disclosed in this report. During October 2008 and
May 2009, SANUWAVE issued notes payable, totaling $3.1 million, to Prides Capital Fund I, L.P., a
shareholder of the Company. Kevin A. Richardson, II, one of our directors, serves as a managing
partner of Prides Capital, LLC, an affiliate of Prides Capital Fund I, L.P. In October 2008,
SANUWAVE issued notes payable, totaling $0.1 million, to NightWatch Capital Partners II, L.P., a
shareholder of the Company. John F. Nemelka, one of our directors, serves as a Managing Principal
of NightWatch Capital Advisors, LLC, an affiliate of NightWatch Capital Partners II, L.P. As of
June 30, 2009, no principal has been paid on the notes. The notes bear interest at 15% annually.
Interest is paid quarterly in arrears beginning December 31, 2008, if elected by the holders of the
notes. As of June 30, 2009, the holders of the notes had not elected to receive interest
quarterly. All remaining unpaid accrued interest and principal is due September 30, 2011.
Our board of directors has determined that Thomas H. Robinson qualifies as an independent
director based on the NASDAQ Stock Market definition of independent director.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of September 25, 2009, with respect to
the beneficial ownership of the outstanding common stock by (i) any holder of more than five
percent, (ii) each of the Companys executive officers and directors, and (iii) the Companys
directors and executive officers as a group. The information relating to the ownership interests
of such shareholders is provided after giving effect to the Reverse Merger.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Percent of
|
|
|
|
Beneficially
|
|
|
Shares
|
|
Name of Beneficial Owner
(1)
|
|
Owned
(2)
|
|
|
Outstanding
|
|
Christopher M. Cashman
(3)
|
|
|
880,773
|
|
|
|
6.7
|
%
|
Barry J. Jenkins
(4)
|
|
|
424,278
|
|
|
|
3.3
|
%
|
Thomas H. Robinson
|
|
|
15,000
|
|
|
|
*
|
|
Kevin A. Richardson, II
|
|
|
5,000
|
|
|
|
*
|
|
John F. Nemelka
|
|
|
5,000
|
|
|
|
*
|
|
Cornelius A. Hofman
(5)
|
|
|
10,000
|
|
|
|
*
|
|
Prides Capital Fund I, LP
(6)
|
|
|
9,602,783
|
|
|
|
66.9
|
%
|
NightWatch Capital Partners II, LP
(7)
|
|
|
2,158,923
|
|
|
|
17.0
|
%
|
All directors and executive officers as a group (6 persons)
|
|
|
1,340,051
|
|
|
|
10.0
|
%
|
|
|
|
*
|
|
Less than 1% of outstanding shares.
|
|
(1)
|
|
Unless otherwise noted, each beneficial owner has the same address as the Company.
|
|
(2)
|
|
Beneficial ownership includes shares for which an individual, directly or indirectly, has or shares voting or investment
power, or both, and also includes options that are exercisable within 60 days of September 25, 2009. Unless otherwise
indicated, all of the listed persons have sole voting and investment power over the shares listed opposite their names.
Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 of the Securities
Exchange Act of 1934, as amended, referred to in this current report as the Exchange Act. Pursuant to the rules of the
Securities and Exchange Commission, referred to in this current report as the SEC, certain shares of our common stock that a
beneficial owner has the right to acquire within 60 days pursuant to the exercise of stock options or warrants are deemed to
be outstanding for the purpose of computing the percentage ownership of such owner, but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
|
|
(3)
|
|
Includes options to purchase up to 542,700 shares of common stock and warrants to purchase up to 8,816 shares of common stock.
|
|
(4)
|
|
Includes options to purchase up to 267,028 shares of common stock and warrants to purchase up to 3,508 shares of common stock.
|
|
(5)
|
|
Mr. Hofmans address is 5555 North Star Ridge Way, Star, Idaho 83669.
|
|
(6)
|
|
Includes warrants to purchase up to 775,726 shares of common stock and notes convertible into 1,069,791 shares of common
stock. The principal business address of Prides Capital Fund I, LP is 200 High Street, Suite 700, Boston, MA 02110.
|
|
(7)
|
|
Includes warrants to purchase up to 193,932 shares of common stock and notes convertible into 25,675 shares of common stock.
The principal business address of NightWatch Capital Partners II, LP is 5314 River Run Drive, Suite 350, Provo, Utah 84604.
|
54
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 50,000,000 shares of common stock, $0.001 par value.
As of September 25, 2009, there are 12,509,657 shares of common stock issued and outstanding that
are held by approximately 43 stockholders of record.
Common Stock
The holders of common stock are entitled to one vote per share on each matter submitted to a
vote of stockholders. In the event of a liquidation, holders of common stock are entitled to share
ratably in the distribution of the remaining assets, if any, after payment of liabilities. Holders
of common stock have no cumulative voting rights and holders of a majority of the outstanding
shares have the ability to elect all of the directors. Holders of common stock have no preemptive
rights or other rights to subscribe for shares and are entitled to such dividends as may be
declared by the board of directors out of funds legally available for dividends.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred stock, $0.001 par
value. As of September 25, 2009, there are no preferred shares issued and outstanding. Our board
of directors has the authority, without action by our stockholders, to issue all or any portion of
the authorized but unissued preferred stock in one or more classes, and to determine the voting
rights, designations, preferences, limitations, restrictions and relative rights of any class or
series.
Warrants
As of September 25, 2009, the Company had (1) Class A Warrants to purchase up to 1,106,627
shares of common stock outstanding, (2) Class B Warrants to purchase up to 1,106,627 shares of
common stock outstanding, and (3) Class C Warrants to purchase up to 1,500,000 shares of common
stock outstanding. The Class A Warrants and Class B Warrants expire on September 25, 2014, and the
Class C Warrants expire on September 25, 2011. The Class A Warrants and Class C Warrants have an
exercise price of $4.00 per share, and the Class B Warrants have an exercise price of $8.00 per
share.
The exercise price of, and the number of shares covered by, the Class A, B and C Warrants will
be adjusted if we split or combine our common stock, if there is a recapitalization of our common
stock, or if we consolidate with or merge into another corporation. The Class C Warrants may be
redeemed by us if the closing price of our common stock on the trading market is $5.00 per share or
more, with 15,000 shares of average daily volume, for 20 consecutive trading days, or if we
consummate a private offering of our common stock. In both cases, the redemption price will be
$0.01 per share for each share purchasable upon the exercise of the warrant.
Lock-Up Agreements
On September 25, 2009, the Company entered into lock-up agreements, dated as of September 25,
2009, with certain stockholders of the Company, in which the stockholders agreed not sell, assign,
transfer, or encumber any of the shares of common stock underlying the Class C Warrants, without
the consent of the Company, until January 1, 2011.
In September 2009, SANUWAVE entered into lock-up agreements with certain of its shareholders
pursuant to which the shareholders agreed not to sell, assign, transfer, or encumber any of
SANUWAVEs common stock, preferred stock, option, warrants or other rights issued by SANUWAVE,
without the consent of SANUWAVE, until January 1, 2011. The lock-up agreements also apply to
securities of any successor or assign of SANUWAVE, including the Company; therefore, any shares of
the Companys common stock received by these SANUWAVE shareholders in connection with the Reverse
Merger may not be transferred, without the consent of the Company, until January 1, 2011.
55
Management Stockholders Agreement
On December 19, 2005, SANUWAVE entered into a management stockholders agreement with Prides
and certain SANUWAVE shareholders (the Management Stockholders), which agreement was subsequently
amended on October 24, 2006 and September 25, 2009 (the Management Stockholders Agreement). The
Management Stockholders Agreement provides that no transfer of shares by a Management Stockholder
will be effective unless the transferee has executed an instrument agreeing to be bound by the
terms of the Management Stockholders Agreement. Pursuant to the Management Stockholders Agreement,
at any time Prides proposes to transfer its shares to a proposed transferee, Prides must provide
notice to the Management Stockholders and, for a period of 20 days after such notice, each
Management Stockholder will have the right to sell shares to the proposed transferee at the same
price and upon the same terms as Prides. In addition, at any time Prides proposes to sell more
than 50% of the aggregate outstanding shares held by Prides and the Management Stockholders to a
third party, Prides must provide notice to the Management Stockholders and each Management
Stockholder will be obligated to sell the same percentage of shares held by such Management
Stockholder as Prides proposes to sell. The Management Stockholders Agreement also applies to
securities of any successor or assign of SANUWAVE, including the Company; therefore, any shares of
the Companys common stock received by Prides and the Management Stockholders in connection with
the Reverse Merger will be subject to the provisions of the Management Stockholders Agreement.
Transfer Agent
Action Stock Transfer Corporation, 7609 S. Highland Drive, Suite 300, Salt Lake City, Utah
84121, is the Companys transfer agent.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Although the Companys common stock is quoted on the OTCBB under the symbol RBME, there is
no established public trading market for its common stock. Since its initial quotation in October
2008, no trades have occurred to date. As of September 25, 2009, 2,006,675 shares of the Companys
common stock are subject to outstanding options and 3,713,254 shares of the Companys common stock
are subject to outstanding warrants. In addition, as of September 25, 2009, 1,500,000 shares of
the Companys common stock may be sold pursuant to Rule 144. The Company has not agreed to
register any shares of its outstanding common stock under the Securities Act of 1933, as amended
(the Securities Act), for sale by stockholders.
Holders of the Common Stock
As of September 25, 2009, there were approximately 43 holders of record of the Companys
common stock.
56
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company
intends to retain future earnings, if any, to finance the expansion of its business. As a result,
the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
|
Number of
|
|
|
|
|
|
|
available for
|
|
|
|
securities to be
|
|
|
Weighted-
|
|
|
future issuance
|
|
|
|
issued upon
|
|
|
average exercise
|
|
|
under equity
|
|
|
|
exercise of
|
|
|
price of
|
|
|
compensation
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
plans (excluding
|
|
|
|
options,
|
|
|
options,
|
|
|
securities
|
|
|
|
warrants and
|
|
|
warrants and
|
|
|
reflecting in
|
|
|
|
rights
|
|
|
rights
|
|
|
column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
2,006,675
|
|
|
$
|
2.92
|
|
|
|
323,167
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,006,675
|
|
|
$
|
2.92
|
|
|
|
323,167
|
|
|
|
|
|
|
|
|
|
|
|
RECENT SALES OF UNREGISTERED SECURITIES
On September 25, 2009, the Company entered into and closed a Merger Agreement with the
shareholders of SANUWAVE pursuant to which the Company issued 11,009,657 shares of the Companys
common stock. See Item 1.01 above for additional information regarding the Reverse Merger.
On September 25, 2009, the Company amended and restated warrants to purchase up to 1,500,000
shares of common stock that were initially issued on July 17, 2009 in connection with promissory
notes in the aggregate amount of $15,000. See Description of Securities Warrants for a
description of the Class C Warrants.
In December 2006, the Company issued 32,000,000 shares of common stock to Cornelius A. Hofman
for $32,000 in cash.
From May 2005 to July 2009, the Company borrowed an aggregate amount of $48,000 from Cornelius
A. Hofman and an aggregate amount of $15,000 from certain shareholders. In connection with such
indebtedness, the Company issued promissory notes in the aggregate amount of $63,000, which accrued
interest at the rate of 8% annually. In connection with the Reverse Merger, these promissory notes
were paid in full.
57
The Company relied upon the exemption from securities registration provided by Section 4(2)
and/or Rule 506 of Regulation D as promulgated under the Securities Act.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companys bylaws provide for the indemnification of its directors, officers, employees and
agents to the fullest extent permitted by the laws of the State of Nevada. Section 78.7502 of the
Nevada Revised Statutes permits a corporation to indemnify any of its directors, officers,
employees or agents
against expenses actually and reasonably incurred by such person in connection with any
threatened, pending or completed action, suit or proceeding, whether civil criminal, administrative
or investigative (except for an action by or in right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the corporation; provided,
that it is determined that such person acted in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 78.751 of the Nevada Revised Statutes requires that the determination that
indemnification is proper in a specific case must be made by: (1) the stockholders, (2) the board
of directors by majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding, or (3) independent legal counsel in a written opinion, if a majority
vote of a quorum consisting of disinterested directors is not possible, or if such opinion is
requested, by a quorum consisting of disinterested directors.
The bylaws provide that we will indemnify our directors and officers and may indemnify our
employees and agents to the fullest extent permitted by law against liabilities and expenses
incurred in connection with litigation in which they may be involved because of their offices with
the Company. However, nothing in the Companys charter or bylaws protects or indemnifies a
director, officer, employee or agent against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
Any amendment to or repeal of the Companys bylaws will not adversely affect any right or
protection of any of the Companys directors or officers for, or with respect to, any acts or
omissions of such director or officer occurring prior to such amendment.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers or persons controlling the Company pursuant to the foregoing provisions or
otherwise, the Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Item 3.02 Unregistered Sales of Equity Securities.
See Items 1.01 and 2.01 above.
Item 4.01 Changes in Registrants Certifying Accountant.
In connection with the Reverse Merger, the board of directors of the Company dismissed
Pritchett, Siler & Hardy, P.C., its independent registered public accounting firm, and engaged HLB
Gross Collins, P.C. as the Companys new independent registered accounting firm. None of the
reports for Pritchett, Siler & Hardy, P.C. on the Companys financial statements for either of the
past two years or subsequent interim period contained an adverse opinion or disclaimer of opinion,
or was qualified or modified as to uncertainty, audit scope or accounting principles, except for a
going concern qualification in the reports for the Companys audited financial statements contained
in its Form 10-Ks for the fiscal years ended December 31, 2008 and 2007.
58
During the Companys two most recent fiscal years and the subsequent interim periods, there
were no disagreements with Pritchett, Siler & Hardy, P.C., whether or not resolved, on any matter
of accounting principles or practices, financial statement disclosure, or auditing scope or
procedure, which,
if not resolved to Pritchett, Siler & Hardy, P.C.s satisfaction, would have caused it to make
reference to the subject matter of the disagreement in connection with its report on the Companys
financial statements.
The Company has requested that Pritchett, Siler & Hardy, P.C. furnish it with a letter
addressed to the Securities and Exchange Commission stating whether it agrees with the above
statements. The letter is attached as an exhibit to this Form 8-K.
In connection with the Reverse Merger, the Company engaged HLB Gross Collins, P.C. as its
independent accountant. During the two most recent fiscal years and the interim periods preceding
the engagement, the Company has not consulted HLB Gross Collins, P.C. regarding either:
(i) the application of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Companys financial statements
and no written report was provided to the Company nor was oral advice provided that HLB Gross
Collins, P.C. concluded was an important factor considered by the Company in reaching a decision as
to an accounting, auditing or financial reporting issue; or
(ii) any matter that was either the subject of a disagreement, as defined in Item
304(a)(1)(iv) of Regulation S-K and the related instruction or a reportable event as described in
Item 304(a)(1)(v) of Regulation S-K.
Item 5.01 Change in Control of Registrant.
See Items 1.01 and 2.01 above.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers.
Following the ten day period following the mailing of the information statement required by
Rule 14f-1 under the Exchange Act: (1) Cornelius A. Hofman will resign as an officer and director
of the Company; and (2) Christopher M. Cashman, Thomas H. Robinson, Kevin A. Richardson, II and
John F. Nemelka will be appointed to serve as members of the board of directors of the Company.
On September 25, 2009, Cornelius A. Hofman resigned as President, Chief Executive Officer and Chief
Financial Officer of the Company, Christopher M. Cashman was appointed to serve as Chief Executive
Officer and President of the Company, and Barry J. Jenkins was appointed to serve as Chief
Financial Officer of the Company. For additional information on these individuals, please see the
sections entitled Management and Executive Compensation in Item 2.01 above.
Item 5.06 Change in Shell Company Status.
See Items 1.01 and 2.01 above.
59
Item 9.01 Financial Statements and Exhibits.
|
(a)
|
|
Financial statements of business acquired.
|
Audited financial statements of SANUWAVE, Inc. for the fiscal years ended December
31, 2008 and 2007 and unaudited financial statements of SANUWAVE, Inc. for the
period ended June 30, 2009.
|
(b)
|
|
Pro forma financial information.
|
Combined unaudited pro forma balance sheet of SANUWAVE, Inc. at June 30, 2009 and
Rub Music Enterprises, Inc. at June 30, 2009.
|
(c)
|
|
Shell company transactions.
|
Audited financial statements of SANUWAVE, Inc. for the fiscal years ended December
31, 2008 and 2007, unaudited financial statements of SANUWAVE, Inc. for the period
ended June 30, 2009, and combined unaudited pro forma balance sheet of SANUWAVE,
Inc. at June 30, 2009 and Rub Music Enterprises, Inc. at June 30, 2009.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
2.1
|
|
|
Agreement and Plan of Merger, dated as of September 25, 2009, by and between
Rub Music Enterprises, Inc., RME Delaware Merger Sub, Inc. and SANUWAVE, Inc.
|
|
|
|
|
|
|
4.1
|
|
|
Form of Class A Warrant Agreement.
|
|
|
|
|
|
|
4.2
|
|
|
Form of Class B Warrant Agreement.
|
|
|
|
|
|
|
4.3
|
|
|
Form of Amended and Restated Class C Warrant Agreement.
|
|
|
|
|
|
|
4.4
|
|
|
Form of Amended Senior Note issued by SANUWAVE, Inc. to Prides Capital Fund I,
L.P. and NightWatch Capital Partners II, L.P.
|
|
|
|
|
|
|
4.5
|
|
|
Form of Promissory Note, dated August 1, 2005, issued by SANUWAVE, Inc. to
Healthtronics, Inc.
|
|
|
|
|
|
|
10.1
|
|
|
Form of Stock Repurchase Agreement, dated as of September 25, 2009, by and
among Rub Music Enterprises, Inc. and certain stockholders of Rub Music Enterprises,
Inc.
|
|
|
|
|
|
|
10.2
|
|
|
Indemnification Agreement, dated September 25, 2009, by and among Rub Music
Enterprises, Inc., SANUWAVE, Inc. and David N. Nemelka.
|
|
|
|
|
|
|
10.3
|
|
|
Form of Lock-Up Agreement, dated September 25, 2009, by and between certain
stockholders of Rub Music Enterprises, Inc. and Rub Music Enterprises, Inc.
|
|
|
|
|
|
|
10.4
|
|
|
Form of Lock-Up Agreement, dated September 2009, by and between certain
shareholders of SANUWAVE, Inc. and SANUWAVE, Inc.
|
60
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
10.5
|
|
|
Form of Lock-Up Agreement, dated September 2009, by and between certain
substantial shareholders of SANUWAVE, Inc. and SANUWAVE, Inc.
|
|
|
|
|
|
|
10.6
|
|
|
Employment Agreement, dated December 19, 2005, by and between SANUWAVE, Inc.
and Christopher M. Cashman. (Management compensation plan or arrangement)
|
|
|
|
|
|
|
10.7
|
|
|
First Amendment to Employment Agreement, dated September 15, 2009, by and
between SANUWAVE, Inc. and Christopher M. Cashman. (Management compensation plan or
arrangement)
|
|
|
|
|
|
|
10.8
|
|
|
Amendment to Nonstatutory Stock Option Award and Nonstatutory Supplemental
Agreements, dated September 15, 2009, by and between SANUWAVE, Inc. and Christopher M.
Cashman. (Management compensation plan or arrangement)
|
|
|
|
|
|
|
10.9
|
|
|
Employment Agreement, dated April 10, 2006, by and between SANUWAVE, Inc. and
Barry J. Jenkins. (Management compensation plan or arrangement)
|
|
|
|
|
|
|
10.10
|
|
|
Amendment to Nonstatutory Stock Option Award and Nonstatutory Supplemental
Agreements, dated September 15, 2009, by and between SANUWAVE, Inc. and Barry J.
Jenkins. (Management compensation plan or arrangement)
|
|
|
|
|
|
|
10.11
|
|
|
Management Stockholders Agreement, dated as of December 19, 2005, among
SANUWAVE, Inc., Prides Capital Fund I, L.P. and certain shareholders of SANUWAVE, Inc.
|
|
|
|
|
|
|
10.12
|
|
|
Amendment to Management Stockholders Agreement, dated as of October 24, 2006,
among SANUWAVE, Inc., Prides Capital Fund I, L.P. and certain shareholders of SANUWAVE,
Inc.
|
|
|
|
|
|
|
10.13
|
|
|
Second Amendment to Management Stockholders Agreement, dated as of September
25, 2009, among SANUWAVE, Inc., Prides Capital Fund I, L.P. and certain shareholders of
SANUWAVE, Inc.
|
|
|
|
|
|
|
16.1
|
|
|
Letter regarding change in certifying accountant from Pritchett, Siler & Hardy,
P.C.
|
|
|
|
|
|
|
21.1
|
|
|
List of subsidiaries
|
|
|
|
|
|
|
23.1
|
|
|
Consent of HLB Gross Collins, P.C.
|
|
|
|
|
|
|
99.1
|
|
|
Financial Statements
|
61
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
|
|
|
|
RUB MUSIC ENTERPRISES, INC.
|
|
|
By:
|
/s/ Christopher M. Cashman
|
|
|
|
Name:
|
Christopher M. Cashman
|
|
|
|
Title:
|
President
|
|
Dated: September 30, 2009
62
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
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2.1
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Agreement and Plan of Merger, dated as of September 25, 2009, by and between
Rub Music Enterprises, Inc., RME Delaware Merger Sub, Inc. and SANUWAVE, Inc.
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4.1
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Form of Class A Warrant Agreement.
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4.2
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Form of Class B Warrant Agreement.
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4.3
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Form of Amended and Restated Class C Warrant Agreement.
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4.4
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Form of Amended Senior Note issued by SANUWAVE, Inc. to Prides Capital Fund I,
L.P. and NightWatch Capital Partners II, L.P.
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4.5
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Form of Promissory Note, dated August 1, 2005, issued by SANUWAVE, Inc. to
Healthtronics, Inc.
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10.1
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Form of Stock Repurchase Agreement, dated as of September 25, 2009, by and
among Rub Music Enterprises, Inc. and certain stockholders of Rub Music Enterprises,
Inc.
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10.2
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Indemnification Agreement, dated September 25, 2009, by and among Rub Music
Enterprises, Inc., SANUWAVE, Inc. and David N. Nemelka.
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10.3
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Form of Lock-Up Agreement, dated September 25, 2009, by and between certain
stockholders of Rub Music Enterprises, Inc. and Rub Music Enterprises, Inc.
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10.4
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Form of Lock-Up Agreement, dated September 2009, by and between certain
shareholders of SANUWAVE, Inc. and SANUWAVE, Inc.
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10.5
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Form of Lock-Up Agreement, dated September 2009, by and between certain
substantial shareholders of SANUWAVE, Inc. and SANUWAVE, Inc.
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10.6
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Employment Agreement, dated December 19, 2005, by and between SANUWAVE, Inc.
and Christopher M. Cashman. (Management compensation plan or arrangement)
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10.7
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First Amendment to Employment Agreement, dated September 15, 2009, by and
between SANUWAVE, Inc. and Christopher M. Cashman. (Management compensation plan or
arrangement)
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10.8
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Amendment to Nonstatutory Stock Option Award and Nonstatutory Supplemental
Agreements, dated September 15, 2009, by and between SANUWAVE, Inc. and Christopher M.
Cashman. (Management compensation plan or arrangement)
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10.9
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Employment Agreement, dated April 10, 2006, by and between SANUWAVE, Inc. and
Barry J. Jenkins. (Management compensation plan or arrangement)
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63
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Exhibit No.
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Description
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10.10
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Amendment to Nonstatutory Stock Option Award and Nonstatutory Supplemental
Agreements, dated September 15, 2009, by and between SANUWAVE, Inc. and Barry J.
Jenkins. (Management compensation plan or arrangement)
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10.11
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Management Stockholders Agreement, dated as of December 19, 2005, among
SANUWAVE, Inc., Prides Capital Fund I, L.P. and certain shareholders of SANUWAVE, Inc.
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10.12
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Amendment to Management Stockholders Agreement, dated as of October 24, 2006,
among SANUWAVE, Inc., Prides Capital Fund I, L.P. and certain shareholders of SANUWAVE,
Inc.
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10.13
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Second Amendment to Management Stockholders Agreement, dated as of September
25, 2009, among SANUWAVE, Inc., Prides Capital Fund I, L.P. and certain shareholders of
SANUWAVE, Inc.
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16.1
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Letter regarding change in certifying accountant from Pritchett, Siler & Hardy,
P.C.
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21.1
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List of subsidiaries
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23.1
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Consent of HLB Gross Collins, P.C.
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99.1
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Financial Statements
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64
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
by and among
Rub Music Enterprises, Inc.,
RME Delaware Merger Sub, Inc.
and
SANUWAVE, Inc.
dated as of
September 25, 2009
TABLE OF CONTENTS
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TABLE OF CONTENTS
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i
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AGREEMENT AND PLAN OF MERGER
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1
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ARTICLE I THE MERGER
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2
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1.1 Merger
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2
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1.2 Effective Time
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2
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1.3 Closing
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2
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ARTICLE II CONVERSION OF SECURITIES
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3
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2.1 Terms of Merger
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3
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF RME AND MERGER SUB
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7
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3.1 Existence and Good Standing of RME
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7
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3.2 Existence and Good Standing of MERGER SUB
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7
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3.3 Authority of RME
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8
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3.4 Authority of MERGER SUB
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8
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3.5 No Violation
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8
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3.6 Subsidiaries
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8
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3.7 Capitalization of RME
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9
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3.8 Capitalization of MERGER SUB
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9
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3.9 Options and Warrants of MERGER SUB
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9
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3.10 Shareholders, Options and Warrants of RME
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10
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3.11 Officers and Directors
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10
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3.12 Banks
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10
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3.13 Title to Assets
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10
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3.14 Personnel, Compensation and Benefits
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10
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3.15 Financial Statements
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10
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3.16 Property
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11
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3.17 Consents Required
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11
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3.18 Indebtedness
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11
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3.19 Contracts
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11
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3.20 Compliance with Laws
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11
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3.21 Litigation
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12
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3.22 Taxes
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12
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3.23 Insurance Policies
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12
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3.24 Operations
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12
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3.25 Permits
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12
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3.26 Undisclosed Liabilities
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12
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3.27 Absence of Changes
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13
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3.28 Accuracy of Information
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13
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3.29 Improper Payments
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13
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3.30 Copies of Documents
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13
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3.31 SEC Filings
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13
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3.32 SarbanesOxley Compliance
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14
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3.33 Valid Issuance of Securities
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14
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3.34 Related Party Transactions
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14
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3.35 Foreign Assets Control Regulations
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14
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3.36 Private Offering by RME
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14
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3.37 Brokers and Finders
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15
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SANUWAVE
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15
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4.1 Existence and Good Standing of SANUWAVE
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15
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4.2 Authority of SANUWAVE
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15
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4.3 No Violation
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15
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4.4 Subsidiaries
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16
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4.5 Capitalization of SANUWAVE
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16
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4.6 Shareholders, Options and Warrants
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16
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4.7 Officers and Directors
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16
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4.8 Title to Assets
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17
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4.9 Personnel, Compensation and Benefits
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17
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4.10 Financial Statements
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17
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4.11 Consents Required
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18
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4.12 Indebtedness
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18
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4.13 Leases and Contracts
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18
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4.14 Compliance with Laws
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19
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4.15 Litigation
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19
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4.16 Taxes
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19
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4.17 Permits
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19
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4.18 Undisclosed Liabilities
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19
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4.19 Absence of Changes
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20
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4.20 Accuracy of Information
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20
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4.21 Improper Payments
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20
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4.22 Copies of Documents
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20
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4.23 Brokers and Finders
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20
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ARTICLE V CONDUCT AND TRANSACTIONS PRIOR TO THE EFFECTIVE TIME OF THE MERGER
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21
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5.1 Conduct and Transactions of RME and MERGER SUB
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21
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5.2 Conduct and Transactions of SANUWAVE
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22
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ARTICLE VI RIGHTS OF INSPECTION
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23
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ARTICLE VII CLOSING
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23
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7.1 Closing Deliveries of SANUWAVE
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23
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7.2 Closing Deliveries of RME and MERGER SUB
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24
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ARTICLE VIII CONDITIONS PRECEDENT TO SANUWAVES OBLIGATION
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25
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8.1 Representations and Warranties True
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25
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8.2 Performance of Obligations
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25
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8.3 Changes in Financial Condition of RME and MERGER SUB
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25
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ii
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8.4 Consents
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26
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8.5 Statutory Requirements
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26
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8.6 Absence of Pending Litigation
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26
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8.7 Delivery of Materials
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26
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ARTICLE IX CONDITIONS PRECEDENT TO RMES OBLIGATION
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26
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9.1 Representations and Warranties True
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26
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9.2 Performance of Obligations
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26
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9.3 Changes in Financial Condition of SANUWAVE
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27
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9.4 Statutory Requirements
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27
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9.5 Absence of Pending Litigation
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27
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9.6 Delivery of Materials
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27
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ARTICLE X COVENANTS AND FURTHER ASSURANCE
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27
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ARTICLE XI TERMINATION OF AGREEMENT AND ABANDONMENT OF REORGANIZATION
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28
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11.1 Termination
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28
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11.2 Post Termination Obligations
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28
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ARTICLE XII ISSUANCE OF SHARES; FRACTIONAL SHARES
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29
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12.1 Issuance of Share Certificates
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29
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12.2 Restrictions on Shares Issued to SANUWAVE Stockholders
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29
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ARTICLE XIII MISCELLANEOUS
|
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29
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13.1 Amendment
|
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29
|
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13.2 Representations and Warranties
|
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29
|
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13.3 Notices
|
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|
30
|
|
13.4 Counterparts
|
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30
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|
13.5 Entire Agreement; Not Third Party Beneficiaries
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30
|
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13.6 Severability
|
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31
|
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13.7 Expenses
|
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31
|
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13.8 Captions and Section Headings
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31
|
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13.9 Governing Law
|
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31
|
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13.10 Enforcement and Interpretation
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31
|
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13.11 Time of Essence
|
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31
|
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13.12 Extension; Waiver
|
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32
|
|
13.13 Assignment
|
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32
|
|
iii
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this
Agreement
), is dated as of the 25th day of
September, 2009, by and among Rub Music Enterprises, Inc., a Nevada corporation (
RME
), RME
Delaware Merger Sub, Inc., a Delaware corporation (
MERGER SUB
) and Sanuwave, Inc., a Delaware
corporation (
SANUWAVE
). As used in this Agreement, capitalized terms have the meanings ascribed
to them in
Annex A
.
THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts, intentions and
understandings:
WHEREAS, RME is a corporation organized under the laws of the State of Nevada on May 6, 2004.
RME has authorized capital stock of (i) 50,000,000 common shares, $0.001 par value per share (the
RME Common Stock
), of which 1,500,000 shares are issued and outstanding, and (ii) 5,000,000
preferred shares, $0.001 par value per share (the
RME Preferred Stock
), of which none are issued
and outstanding. RME also has outstanding warrants and options (collectively, the
RME Warrants
)
to acquire up to 1,500,000 shares of RME Common Stock;
WHEREAS, MERGER SUB is Delaware corporation organized on August 25, 2009. MERGER SUB has
authorized capital stock of 100 common shares, $0.001 par value per share (the
MERGER SUB Common
Stock
), of which 1 share is issued and outstanding;
WHEREAS, MERGER SUB is a wholly owned subsidiary of RME;
WHEREAS, SANUWAVE is a privately held corporation organized under the laws of the State of
Delaware on July 21, 2005. SANUWAVE has authorized capital stock of (i) 750,000 shares of common
stock, $0.01 par value per share, (the
SANUWAVE Common Stock
) and (ii) 750,000 shares of the
Series A Convertible Participating Preferred Stock, $0.01 par value per share (the
SANUWAVE
Preferred Stock
).
WHEREAS, (i) other than the SANUWAVE Common Stock purchased pursuant to the Private Placement
Offering (which shall not exceed 20,000 shares of SANUWAVE Common Stock), 17,036.25 shares of the
SANUWAVE Common Stock are issued and outstanding, and (ii) 286,850 shares of the SANUWAVE Preferred
Stock are issued and outstanding. SANUWAVE also has outstanding warrants and options
(collectively, the
SANUWAVE Warrants/Options
) to acquire up to 58,617.52 shares of SANUWAVE
Common Stock (which does not include the warrants issued pursuant to the Private Placement
Offering, which shall not exceed 40,000 warrants to purchase shares of SANUWAVE Common Stock);
WHEREAS, the respective boards of directors of RME, MERGER SUB and SANUWAVE have deemed it
advisable and in the best interests of RME, MERGER SUB and SANUWAVE that MERGER SUB merge with and
into SANUWAVE, with SANUWAVE as the surviving corporation, pursuant to the terms and conditions set
forth in this Agreement;
WHEREAS, the respective boards of directors of RME, MERGER SUB and SANUWAVE have approved and
authorized this Agreement;
WHEREAS, this Agreement provides for the merger of MERGER SUB with and into SANUWAVE, with
SANUWAVE as the surviving corporation (the
Merger
), and pursuant to which certain stockholders of
SANUWAVE (non-Private Placement Offering stockholders) will receive shares and warrants of RME in
exchange for their shares, certain stockholders of SANUWAVE (Private Placement Offering
stockholders) will receive shares of RME in exchange for their shares, and the warrant holders and
option holders of SANUWAVE will receive warrants and options of RME in exchange for their warrants
and options in SANUWAVE; and
WHEREAS, the parties desire the transactions described in this Agreement to qualify as a
tax-free reorganization under Section 368(a)(2)(E) of the Code and related sections thereunder.
NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Merger.
Subject to the terms and conditions of this Agreement, the parties to this Agreement hereby
agree that at the Effective Time MERGER SUB shall be merged with and into SANUWAVE upon the terms
and conditions set forth herein and in accordance with the provisions of the General Corporation
Law of the State of Delaware (
DGCL
). It is the intention of the parties hereto that the
transactions described in this Agreement qualify as a tax-free reorganization under Section
368(a)(2)(E) of the Code and related sections thereunder.
1.2 Effective Time.
Subject to the terms of this Agreement, RME, MERGER SUB and SANUWAVE will cause the Merger to
be consummated by causing, on the Closing Date, a certificate of merger (the
Certificate of
Merger
) to be executed in accordance with the relevant provisions of the DGCL and filed with the
Delaware Secretary of State. The Merger shall become effective on the later of (a) the time at
which the Certificate of Merger is duly filed with the Delaware Secretary of State, or (b) such
other time as is agreed upon by the parties and specified in the Certificate of Merger (the
Effective Time
).
1.3 Closing.
The closing of the Merger shall take place at 10:00 a.m. on a date to be agreed upon by the
parties, and if such date is not agreed upon by the parties, the Closing shall occur on the third
(3rd) Business Day after satisfaction or waiver of all of the conditions set forth in
Article
VIII
(other than those conditions that by their nature are to be satisfied at the Closing, but
subject to the fulfillment or waiver of those conditions), at the offices of Smith, Gambrell &
Russell, LLP, 1230 Peachtree Street, N.E., Atlanta, Georgia 30309, or such other location as shall
be agreed upon by the parties.
2
ARTICLE II
CONVERSION OF SECURITIES
2.1 Terms of Merger.
In accordance with the provisions of this Agreement and the requirements of applicable Law,
MERGER SUB shall be merged with and into SANUWAVE as of the Effective Time. SANUWAVE shall be the
surviving corporation (hereinafter sometimes the
Surviving Corporation
) and the separate
existence of MERGER SUB shall cease when the Merger shall become effective. Consummation of the
Merger shall be upon the following terms and subject to the conditions set forth herein:
(a)
Private Placement
. Immediately prior to the Effective Time, the Private Placement
Offering will be closed and (i) instructions will be given to the escrow agent to release the funds
held in escrow for the purchase of the SANUWAVE Common Stock and the warrants, pursuant to the
Private Placement Offering; and (ii) SANUWAVE Common Stock and warrants will be issued pursuant to
the Private Placement Offering.
(b)
Corporate Existence
.
(1) Commencing at the Effective Time, (i) the Surviving Corporation shall continue its
corporate existence as a Delaware corporation; (ii) the Surviving Corporation shall
thereupon and thereafter possess all rights, privileges, powers, franchises and property
(real, personal and mixed) of each of SANUWAVE and MERGER SUB; (iii) all debts due to either
of SANUWAVE or MERGER SUB, on whatever account, all causes of action and all other things
belonging to either of SANUWAVE or MERGER SUB shall be taken and deemed to be transferred to
and shall be vested in the Surviving Corporation by virtue of the Merger without further act
or deed of any Person; and (iv) all rights of creditors and all Liens, if any, upon any
property of either of SANUWAVE or MERGER SUB shall be preserved unimpaired, such Liens shall
continue to be limited to the property affected by such Liens immediately prior to the
Effective Time, and all debts, liabilities and duties of SANUWAVE and MERGER SUB shall
thenceforth attach to the Surviving Corporation.
(2) At the Effective Time, (i) the Certificate of Incorporation and the Bylaws of
SANUWAVE, as existing immediately prior to the Effective Time, shall be and remain the
Certificate of Incorporation and Bylaws of the Surviving Corporation; (ii) the members of
the board of directors of SANUWAVE holding office immediately prior to the Effective Time
shall continue as the members of the board of directors of the Surviving Corporation; and
(iii) until the board of directors of the Surviving Corporation shall otherwise determine,
all persons who hold officer positions in SANUWAVE immediately prior to the Effective Time
shall continue to hold the same officer positions in the Surviving Corporation.
3
(c)
Conversion of Securities
. As of the Effective Time and without any action on the
part of RME, MERGER SUB, SANUWAVE or the holders of any of the securities of any of such
corporations, each of the following shall occur:
(1) Except for (i) the SANUWAVE Common Stock purchased pursuant to the Private
Placement Offering and (ii) the Restricted Stock, each share of SANUWAVE Common Stock issued
and outstanding immediately prior to the Effective Time and each share of SANUWAVE Preferred
Stock issued and outstanding immediately prior to the Effective Time shall be converted into
(i) 34.2333 shares of RME Common Stock, (ii) five percent (5%) of a Class A Warrant, (iii)
five percent (5%) of a Class B Warrant. All such shares of SANUWAVE Common Stock and
SANUWAVE Preferred Stock shall no longer be outstanding and shall automatically be canceled
and shall cease to exist, and each certificate previously evidencing any such shares shall
thereafter represent the right to receive, upon the delivery of an executed SANUWAVE Lockup
Agreement and upon the surrender, which SANUWAVE will use its reasonable efforts to cause,
of such certificate in accordance with the provisions hereof, (i) certificates evidencing
such number of shares of RME Common Stock, respectively, into which such shares of SANUWAVE
Common Stock and SANUWAVE Preferred Stock were converted, (ii) Class A Warrants for which
such shares are convertible, and (iii) Class B Warrants for which such shares are
convertible. The holders of such certificates previously evidencing shares of SANUWAVE
Common Stock or shares of SANUWAVE Preferred Stock, as applicable, outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to such shares of
SANUWAVE Common Stock or shares of SANUWAVE Preferred Stock, as applicable, except as
otherwise provided herein or by Law. Until surrendered and exchanged as herein provided,
each outstanding certificate which, prior to the Effective Time, represented SANUWAVE Common
Stock or SANUWAVE Preferred Stock, shall be deemed for all corporate purposes to evidence
ownership of the number of shares of RME Common Stock, Class A Warrants and Class B Warrants
into which the shares of SANUWAVE Common Stock or SANUWAVE Preferred Stock represented by
such SANUWAVE certificate shall have been so converted. No dividends or other distributions
declared or made with respect to RME Common Stock after the Effective Time will be paid to
the holder of any certificate that prior to the Effective Time evidenced shares of SANUWAVE
Common Stock or SANUWAVE Preferred Stock until the holder of such certificate (i) surrenders
or exchanges such certificate as herein provided and (ii) executes and delivers the SANUWAVE
Lockup Agreement. Subject to the effect of any applicable abandoned property, escheat or
similar laws, following surrender of any such certificate and the execution and delivery of
the SANUWAVE Lockup Agreement, there will be paid to the holder of the certificates
evidencing shares of RME Common Stock issued in exchange therefor, without interest, (i) the
amount of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such shares of RME Common Stock and (ii) at the appropriate
payment date, the amount of dividends or other distributions, with a record date after the
Effective Time but prior to the surrender and a payment date occurring after surrender,
payable with respect to such shares of RME Common Stock less any withholding taxes which are
required thereon. No party hereto will be liable to any former holder of SANUWAVE Common
Stock or SANUWAVE Preferred Stock for any RME Common
Stock or dividends or distributions thereon in each case delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. In the event any
certificate representing SANUWAVE Common Stock or SANUWAVE Preferred Stock shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the holder of
SANUWAVE Common Stock or SANUWAVE Preferred Stock claiming such certificate to be lost,
stolen or destroyed and an agreement by such holder to indemnify and hold harmless RME and
the Surviving Corporation against any claim that may be made against them with respect to
such certificate, RME will issue in exchange for such lost, stolen or destroyed certificate
RME Common Stock and Warrants to which such holder is entitled pursuant to this Agreement;
4
(2) Each share of SANUWAVE Common Stock purchased in the Private Placement Offering and
each share of Restricted Stock shall be converted into 34.2333 shares of RME Common Stock.
All such shares of SANUWAVE Common Stock shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each certificate previously
evidencing any such shares shall thereafter represent the right to receive, upon the
surrender, which SANUWAVE will use its reasonable efforts to cause, of such certificate in
accordance with the provisions hereof, certificates evidencing such number of shares of RME
Common Stock into which such shares of SANUWAVE Common Stock were converted. The holders of
such certificates previously evidencing shares of SANUWAVE Common Stock outstanding
immediately prior to the Effective Time shall cease to have any rights with respect to such
shares of SANUWAVE Common Stock, except as otherwise provided herein or by Law. Until
surrendered and exchanged as herein provided, each outstanding certificate which, prior to
the Effective Time, represented SANUWAVE Common Stock, shall be deemed for all corporate
purposes to evidence ownership of the number of shares of RME Common Stock into which the
shares of SANUWAVE Common Stock represented by such SANUWAVE certificate shall have been so
converted. No dividends or other distributions declared or made with respect to RME Common
Stock after the Effective Time will be paid to the holder of any certificate that prior to
the Effective Time evidenced shares of SANUWAVE Common Stock until the holder of such
certificate surrenders or exchanges such certificate as herein provided. Subject to the
effect of any applicable abandoned property, escheat or similar laws, following surrender of
any such certificate, there will be paid to the holder of the certificates evidencing shares
of RME Common Stock issued in exchange therefor, without interest, (i) the amount of
dividends or other distributions with a record date after the Effective Time theretofore
paid with respect to such shares of RME Common Stock and (ii) at the appropriate payment
date, the amount of dividends or other distributions, with a record date after the Effective
Time but prior to the surrender and a payment date occurring after surrender, payable with
respect to such shares of RME Common Stock less any withholding taxes which are required
thereon. No party hereto will be liable to any former holder of SANUWAVE Common Stock for
any RME Common Stock or dividends or distributions thereon in each case delivered to a
public official pursuant to any applicable abandoned property, escheat or similar law. In
the event any certificate representing SANUWAVE Common Stock hall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the holder of SANUWAVE Common
Stock claiming such certificate to be lost, stolen or destroyed and an agreement by such
holder to indemnify and hold harmless RME and
the Surviving Corporation against any claim that may be made against them with respect
to such certificate, RME will issue in exchange for such lost, stolen or destroyed
certificate RME Common Stock to which such holder is entitled pursuant to this Agreement;
5
(3) Any shares of capital stock of SANUWAVE held in SANUWAVEs treasury immediately
prior to the Effective Time shall automatically be canceled and extinguished without any
conversion thereof and no payment shall be made with respect thereto; and
(4) Each share of capital stock of MERGER SUB issued and outstanding immediately prior
to the Effective Time shall be converted into one (1) share of SANUWAVE Common Stock, which
shall be owned by RME and which shall be the only outstanding shares of common stock of the
Surviving Corporation from and after the Effective Time. All such shares of capital stock
of MERGER SUB shall no longer be outstanding and shall automatically be canceled and shall
cease to exist, and each certificate previously evidencing any such shares shall thereafter
represent the right to receive, upon the surrender of such certificate in accordance with
the provisions hereof, certificates evidencing such number of shares of SANUWAVE Common
Stock, respectively, into which such shares of capital stock of MERGER SUB were converted.
The holders of such certificates previously evidencing shares of capital stock of MERGER SUB
outstanding immediately prior to the Effective Time shall cease to have any rights with
respect to such shares of capital stock of MERGER SUB except as otherwise provided herein or
by Law.
(d)
Other Matters
.
(1) Upon the effectiveness of the Merger, each outstanding option, warrant or other
right to acquire shares of SANUWAVE Common Stock or shares of SANUWAVE Preferred Stock,
whether or not then exercisable, shall be converted into an option, warrant or right, as
applicable, to purchase 34.2333 shares of RME Common Stock on the same terms as in effect
immediately prior to the Merger and at a price which shall be adjusted proportionately (i.e.
an option to purchase 1 share of SANUWAVE Common Stock for $100 would be adjusted
proportionately to an option to purchase 34.2333 shares of RME Common Stock for $2.92
($100/34.2333) per share).
(2) The fact that any share of SANUWAVE Common Stock or share of SANUWAVE Preferred
Stock which is issued and outstanding immediately prior to the Effective Time is restricted
and/or not yet vested under any SANUWAVE plan under which it was issued shall not affect the
right of the holder thereof to receive the consideration payable to the other holders of
SANUWAVE Common Stock and SANUWAVE Preferred Stock, subject to the provision of any such
plan or this Agreement.
(3) At the Closing, the existing directors of RME shall nominate and elect to the board
of directors of RME the persons designated by SANUWAVE, and the person serving as director
and officer of RME immediately prior to the Closing shall
thereafter resign from his positions with RME, effective as of ten (10) days from
filing the 14F Information Statement with the SEC.
6
(4) Immediately prior to the Effective Time, the currently outstanding warrants to
acquire shares of RME shall be amended to reflect an exercise price of $4.00 per share and
shall be for a term of two (2) years from the Effective Time. The warrants shall not be
exercisable for a period of twelve (12) months from the Effective Time, and shall be
callable at $0.01 per share if RMEs stock closing bid price is $5.00 per share or higher,
with 15,000 shares of average daily volume, for twenty (20) consecutive trading days or in
the event RME consummates a private offering of its common stock. The warrants shall not be
callable unless the warrants are exercisable (except in the event RME consummates a private
offering of its common stock). At the Closing there shall be outstanding not more than
1,500,000 RME Warrants to acquire up to 1,500,000 shares of RME Common Stock.
(5) In accordance with the Stock Repurchase Agreement, at the Closing, RME shall cause
certain RME shareholders to cancel all but one million five hundred thousand (1,500,000)
shares of the outstanding RME Common Stock in exchange for a total of one hundred eighty
thousand dollars ($180,000), payable in cash.
(6) At the Closing, RME will repay all outstanding liabilities and promissory notes,
totaling approximately seventy thousand dollars ($70,000).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF RME AND MERGER SUB
RME and MERGER SUB, jointly and severally, hereby represent and warrant to SANUWAVE, as of the
date hereof, and as of the Closing Date, as follows:
3.1 Existence and Good Standing of RME.
RME is a corporation duly organized, validly existing and in good standing under the laws of
the State of Nevada with all requisite corporate power and authority to own or lease its properties
and to carry on its businesses as are now being conducted. RME is not qualified or licensed to do
business as a foreign corporation in any jurisdiction and is not required to be so qualified or
licensed.
3.2 Existence and Good Standing of MERGER SUB.
MERGER SUB is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware with all requisite corporate power and authority to own or lease its
properties and to carry on its businesses as are now being conducted. MERGER SUB is not qualified
or licensed to do business as a foreign corporation in any jurisdiction and is not required to be
so qualified or licensed.
7
3.3 Authority of RME.
RME has the power and authority to execute and deliver this Agreement and to perform and
consummate the transactions contemplated hereby. The execution, delivery and performance by RME of
this Agreement and consummation of the transactions contemplated herein have been duly authorized
and approved by all necessary corporate actions, including but not limited to duly and validly
authorized action and approval by the board of directors of RME. This Agreement constitutes the
valid and legally binding obligation of RME, enforceable against it in accordance with its terms,
except to the extent that enforcement of the rights and remedies created hereby may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect
relating to creditors rights generally or to general principles of equity.
3.4 Authority of MERGER SUB.
MERGER SUB has the power and authority to execute and deliver this Agreement and to perform
and consummate the transactions contemplated hereby. The execution, delivery and performance by
MERGER SUB of this Agreement and consummation of the transactions contemplated herein have been
duly authorized and approved by all necessary corporate actions, including but not limited to duly
and validly authorized action and approval by the board of directors of MERGER SUB. This Agreement
constitutes the valid and legally binding obligation of MERGER SUB, enforceable against it in
accordance with its terms, except to the extent that enforcement of the rights and remedies created
hereby may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to creditors rights generally or to general principles of equity.
3.5 No Violation.
This Agreement has been duly executed by RME and MERGER SUB and the execution and delivery of
this Agreement and the consummation of the transactions contemplated by this Agreement will not
result in any breach or violation of, or in a default under any terms or provisions of RMEs
Articles of Incorporation or Bylaws (or other governing document), MERGER SUBs Articles of
Incorporation or Bylaws (or other governing document), any Law applicable to RME or MERGER SUB, or
of any other Contract, Order or instrument to which either RME or MERGER SUB is a party or by which
either of them is bound.
3.6 Subsidiaries.
MERGER SUB is a direct, wholly owned subsidiary of RME. Other than MERGER SUB, RME does not
own any interest in any corporations, unincorporated associations, partnerships, limited liability
companies, joint ventures, or any other entity.
8
3.7 Capitalization of RME.
The authorized capital stock of RME consists of 50,000,000 shares of RME Common Stock, $0.001
par value per share, and 5,000,000 shares of RME Preferred Stock, $0.001 par value per share. As
of September 25, 2009:
(a) 1,500,000 shares of RME Common Stock are issued and outstanding, which shares are duly
authorized, validly issued, fully paid and nonassessable, and were issued in accordance with the
registration provisions of the Securities Act and any relevant registration or qualification
provisions of state securities laws or pursuant to valid exemptions therefrom;
(b) no shares of RME Common Stock and no shares of RME Preferred Stock are held in the
treasury of RME, and no shares of RME Common Stock or RME Preferred Stock are held by RME;
(c) no shares of RME Preferred Stock are issued and outstanding; and
(d) an aggregate of one million five hundred thousand (1,500,000) shares of RME Common Stock
are issuable upon exercise of outstanding RME Warrants.
3.8 Capitalization of MERGER SUB.
The authorized capital stock of MERGER SUB consists of 100 shares of MERGER SUB common stock,
$0.001 par value per share. As of September 25, 2009:
(a) 1 share of MERGER SUB Common Stock is issued and outstanding, which share is duly
authorized, validly issued, fully paid and nonassessable, and was issued in accordance with the
registration provisions of the Securities Act and any relevant registration or qualification
provisions of state securities laws or pursuant to valid exemptions therefrom;
(b) no shares of capital stock of MERGER SUB, other than the currently issued share of MERGER
SUB Common Stock, have ever been issued by MERGER SUB; and
(c) no shares of MERGER SUB Common Stock are held in the treasury of MERGER SUB, and no shares
of MERGER SUB Common Stock are held by MERGER SUB.
3.9 Options and Warrants of MERGER SUB.
There are no options, warrants, calls, convertible securities, commitments or agreements of
any character to which MERGER SUB or its sole shareholder are a party or by which MERGER SUB or its
sole shareholder are bound, or are a party, calling for the issuance of shares of capital stock of
MERGER SUB or any securities representing the right to purchase or otherwise receive any such
capital stock of MERGER SUB. MERGER SUB has not declared and is not otherwise obligated to pay,
any dividends, whether in cash, stock or other property.
9
3.10 Shareholders, Options and Warrants of RME.
Schedule 3.10
sets forth a true and complete list of all Persons holding RME Common
Stock and the amount and percentage of RME Common Stock held by each Person.
Schedule 3.10
also sets forth a true and complete list and detailed description of all the RME Warrants. Except
as listed on
Schedule 3.10
, there are no outstanding options, warrants, purchase rights,
redemption rights, contribution rights, conversion rights, exchange rights, preemptive rights, or
other contracts or commitments with respect to any of the RME Common Stock and RME Preferred Stock.
RME has not declared and is not otherwise obligated to pay, any dividends, whether in cash, stock
or other property.
3.11 Officers and Directors.
Cornelius Hofman is the sole officer of RME and MERGER SUB and holds the positions of Chief
Executive Officer, Chief Financial Officers, President, Secretary and Treasurer. Cornelius Hofman
is the sole director of RME and MERGER SUB.
3.12 Banks.
Schedule 3.12
sets forth a true and complete list of: (1) the name of each bank in
which RME has an account or safe deposit box, and (2) the names and addresses of all signatories to
such accounts or safe deposit boxes.
3.13 Title to Assets.
RME has good and marketable title to, or valid and enforceable leasehold interest in, all of
the assets of RME free and clear of all Liens. MERGER SUB does not have any assets.
3.14 Personnel, Compensation and Benefits.
(a) Neither RME nor MERGER SUB has any employees.
(b) Neither RME nor MERGER SUB has any employee benefit plan (as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended) effective as of the date hereof
nor does RME provide benefits to former employees, officers, trustees, or directors of RME or any
Affiliate of RME and neither RME nor MERGER SUB has ever adopted, been party to or had any
liability under any employee benefit plan pursuant to which RME or any Affiliate of RME has or
could have any liability in the future.
3.15 Financial Statements.
(a) The 10-K filed on May 20, 2008, with the SEC sets forth true, correct and complete copies
of the December 31, 2007, audited financial statements of RME (i.e., the balance sheet as of
December 31, 2007, and the related statements of income and cash flows for the year then ended for
RME);
(b) The 10-K filed on March 31, 2009, with the SEC sets forth true, correct and complete
copies of the December 31, 2008, audited financial statements of RME (i.e., the
balance sheet as of December 31, 2008, and the related statements of income and cash flows for
the year then ended for RME).
10
(c) The 10-Q filed on August 7, 2009, with the SEC sets forth true, correct and complete
copies of the June 30, 2009, financial statements of RME (i.e., the balance sheet as of June 30,
2009, and the related statements of income and cash flows for the period then ended for RME) (the
RME Interim Financials
).
Except as set forth on
Schedule 3.15
, the December 31, 2007 financial statements, the
December 31, 2008, financial statements, and the RME Interim Financials, have been prepared in
accordance with GAAP consistently applied, and present fairly, in all material respects, the
financial condition, the results of operations, cash flows and ownership of RMEs business as of
the dates and for the periods indicated therein, and are consistent in all material respects with
the books and records of RME (which books and records are correct and complete in all material
respects). Since June 30, 2009, there has been no material adverse change in the business, assets,
financial condition or results of operations of RME.
3.16 Property.
Neither RME nor MERGER SUB owns any property, whether real or personal, tangible or
intangible, having a value equal to or greater than one thousand dollars ($1,000).
3.17 Consents Required.
No consent, approval or authorization of, or any prior notice to, any third party or
Governmental Authority is required in connection with the execution and delivery by RME or MERGER
SUB of this Agreement or the consummation of the transactions contemplated hereby.
3.18 Indebtedness.
Schedule 3.18
sets forth a true, correct and complete list of the individual
components (indicating the amount and the Person to whom such Indebtedness is owed) of all the
Indebtedness outstanding with respect to RME or MERGER SUB.
3.19 Contracts.
Other than the agreements listed on
Schedule 3.18
(Indebtedness) and the two warrants
listed on
Schedule 3.10
(Shareholders, Options, and Warrants of RME), neither RME nor
MERGER SUB is a party to any Contracts, whether or not terminated or currently in force and effect,
pursuant to which either RME or MERGER SUB could have any liabilities in the future.
3.20 Compliance with Laws.
RME is now, and has been, in compliance with all Laws and Orders. MERGER SUB is now, and has
been, in compliance with all Laws and Orders.
11
3.21 Litigation.
Neither RME nor MERGER SUB is a party to nor, to the knowledge of either of their respective
officers and directors, threatened to be made a party to, any civil, criminal, administrative,
arbitration or other such Proceeding (including without limitations unfair labor practice matters,
labor organization activities, environmental matters and civil rights violations). There are no
Proceedings pending or threatened that question the validity of this Agreement or any of the
transactions contemplated hereby or thereby or that otherwise relate to or may affect RMEs
business or assets.
3.22 Taxes.
(a) All Tax Returns required to be filed by RME have been accurately prepared in all material
respects and timely filed, and all Taxes for which RME may be held liable (other than the Taxes
referred to in the next sentence) have been paid or accrued within the prescribed period or any
extension thereof. All Taxes required to be withheld by RME have been collected and withheld, and
have been either paid to the respective Governmental Agency, set aside in accounts for such
purpose, or accrued, reserved against, and entered upon the books and records of the employer.
(b) There are no Tax Liens upon any property of RME except for Liens for current Taxes not yet
due and payable.
(c) RME is not a foreign person within the meaning of Code Section 1445 and it will furnish
SANUWAVE with an affidavit that satisfies the requirements of Code Section 1445(b)(2) upon the
request of SANUWAVE.
(d) Copies of all Tax Returns required to be filed by RME in the last five (5) fiscal years
have been delivered to SANUWAVE.
3.23 Insurance Policies.
RME does not have any insurance policies. MERGER SUB does not have any insurance policies.
3.24 Operations.
RME does not, and since January 1, 2007, has not engaged in any business operations. MERGER
SUB has never engaged in any business operations.
3.25 Permits.
RME does not have any Permits. MERGER SUB does not have any Permits.
3.26 Undisclosed Liabilities.
Neither RME nor MERGER SUB has any liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due, whether known or
unknown, regardless of when asserted) arising out of transactions or events entered into prior
to the Effective Time, or any action or inaction, or any state of facts existing, with respect to
or based upon transactions or events occurring prior to the Effective Time.
12
3.27 Absence of Changes.
Except as set forth on
Schedule 3.27
, since June 30, 2009, there has not been any
material adverse change in the condition (financial or otherwise), assets, liabilities, properties,
earnings, business or prospects of RME or MERGER SUB, except for expenses incurred in connection
with preparation and performance of this Agreement.
3.28 Accuracy of Information.
No representation or warranty by RME or MERGER SUB contained in this Agreement and no
statement contained in any certificate or other instrument delivered or to be delivered to SANUWAVE
pursuant hereto or in connection with the transactions contemplated hereby (including without
limitation all Schedules and Exhibits hereto) contains or will contain any untrue statement of
material fact or omits or will omit to state any material fact necessary in order to make the
statements contained herein or therein not misleading.
3.29 Improper Payments.
Neither RME, MERGER SUB, nor any person acting on behalf of RME or MERGER SUB has made any
payment or otherwise transmitted anything of value, directly or indirectly, to (i) any official or
any government or agency or political subdivision thereof for the purpose of influencing any
decision affecting the business of RME or MERGER SUB, (ii) any customer, supplier or competitor of
RME or employee of such customer, supplier or competitor, for the purpose of obtaining, retaining
or directing business for RME, or (iii) any political party or any candidate for elective political
office, nor has any fund or other asset of RME or MERGER SUB been maintained that was not fully and
accurately recorded on the books of account of RME or MERGER SUB.
3.30 Copies of Documents.
RME and MERGER SUB have made available for inspection and copying by SANUWAVE and its duly
authorized representatives, and will continue to do so at all times, true and correct copies of all
documents that it has filed with the SEC and all other Governmental Agencies which are material to
the terms and conditions contained in this Agreement.
3.31 SEC Filings.
RME has filed all RME SEC Reports. As of their respective filing dates or, if amended, as of
the date of the last such amendment filed, the RME SEC Reports, including any final registration
statements, prospectus, report, schedule, form or definitive proxy statement (i) complied as to
form in all material respects with the requirements of the Securities Act and the Exchange Act, as
the case may be, and (ii) did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading.
To the Knowledge of RME, as of the date of this Agreement, (i) none of the RME SEC Reports is
the subject of an SEC review or outstanding SEC investigation, and (ii) there are no outstanding or
unresolved comments in comment letters received from the SEC staff with respect to RME SEC Reports.
13
3.32 SarbanesOxley Compliance.
RME is in compliance with the provisions of the SarbanesOxley Act of 2002 applicable to it,
including Section 404 thereof, and the certifications provided pursuant to Sections 302 and 906
thereof were accurate when made.
3.33 Valid Issuance of Securities.
The shares of RME Common Stock, when issued, sold and delivered pursuant to the Merger and in
accordance with the terms of this Agreement, will be duly and validly issued, fully paid and
nonassessable, and will be free of restrictions on transfer other than (i) contractual restrictions
on transfer contemplated by this Agreement and the Transaction Documents; and (ii) applicable state
and federal securities laws.
3.34 Related Party Transactions.
Other than RMEs promissory notes with David N. Nemelka and Cornelius Hoffman listed on
Schedule 3.18
(Indebtedness), no shareholder, employee, officer or director of RME or
MERGER SUB or member of his or her immediate family is indebted to RME or MERGER SUB, nor is RME or
MERGER SUB indebted (or committed to make loans or extend or guarantee credit) to any of them.
Except as set forth on
Schedule 3.18
(Indebtedness), no member of the immediate family of
any officer, director or shareholder of RME or MERGER SUB is directly or indirectly interested in
any contract with RME or MERGER SUB.
3.35 Foreign Assets Control Regulations.
The issuance of the shares in the Merger by RME will not violate the Trading with the Enemy
Act, as amended, or any of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive
order relating thereto. Without limiting the foregoing, RME (i) is not or will not become a
blocked person described in Section 1 of Executive Order 13224 of September 23, 2001 Blocking
Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support
Terrorism (66 Fed. Reg. 49049 (2001) and (ii) does not knowingly engage or will not engage in any
dealings or transactions, or be otherwise associated, with any such person.
3.36 Private Offering by RME.
Since January 1, 2007, neither RME nor anyone acting on its behalf has offered the shares of
the RME Common Stock or any similar securities for sale to, or solicited any offer to buy any of
the same from, or otherwise approached or negotiated in respect thereof with, any person other than
the shareholders of SANUWAVE, each of which has been offered the RME Common Stock in a private sale
for investment. Neither RME nor anyone acting on its behalf
has taken, or will take, any action that would subject the issuance of the shares in the
Merger to the registration requirements of Section 5 of the Securities Act.
14
3.37 Brokers and Finders.
RME has not employed any broker, finder or agent in connection with the transactions
contemplated herein and has not otherwise agreed to pay any brokerage fees, commissions or finders
fees to any person.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SANUWAVE
SANUWAVE hereby represents and warrants to RME as of the date hereof, and as of the Closing
Date, as follows:
4.1 Existence and Good Standing of SANUWAVE.
SANUWAVE is a corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with all requisite corporate power and authority to own or lease its
properties and to carry on its businesses as are now being conducted. SANUWAVE is qualified or
licensed to do business and is in good standing as a foreign corporation in each of the
jurisdictions where the nature of its business requires it to be so qualified, except where the
failure to be so qualified has not or would not result in, or is not reasonably expected to result
in, a material adverse effect.
4.2 Authority of SANUWAVE.
SANUWAVE has the power and authority to execute and deliver this Agreement and to perform and
consummate the transactions contemplated hereby. The execution, delivery and performance by
SANUWAVE of this Agreement and consummation of the transactions contemplated herein have been duly
authorized and approved by all necessary corporate actions, including but not limited to duly and
validly authorized action and approval by the board of directors of SANUWAVE. This Agreement
constitutes the valid and legally binding obligation of SANUWAVE, enforceable against it in
accordance with its terms, except to the extent that enforcement of the rights and remedies created
hereby may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to creditors rights generally or to general principles of equity.
4.3 No Violation.
This Agreement has been duly executed by SANUWAVE and the execution and delivery of this
Agreement and the consummation of the transactions contemplated by this Agreement will not result
in any breach or violation of, or in a default under any terms or provisions of SANUWAVEs
Certificate of Incorporation or Bylaws (or other governing document), any statute applicable to
SANUWAVE, or of any other Contract, or Order to which SANUWAVE is a party or by which it is bound.
15
4.4 Subsidiaries.
Except as set forth on
Schedule 4.4
, SANUWAVE does not own any interest in any
corporations, unincorporated associations, partnerships, limited liability companies, joint
ventures, or any other entity.
4.5 Capitalization of SANUWAVE.
The authorized capital stock of SANUWAVE consists of 750,000 shares of SANUWAVE Common Stock,
$0.01 par value per share, and 750,000 shares of SANUWAVE Preferred Stock, $0.01 par value per
share. As of September 24, 2009:
(a) excluding the shares of SANUWAVE Common Stock purchased pursuant to the Private Placement
Offering (which shall not exceed 20,000 shares of SANUWAVE Common Stock), 17,036.25 shares of
SANUWAVE Common Stock are issued and outstanding, which shares are duly authorized, validly issued,
fully paid and nonassessable;
(b) 286,850 shares of SANUWAVE Preferred Stock are issued and outstanding, which shares are
duly authorized, validly issued, fully paid and nonassessable;
(c) no shares of SANUWAVE Common Stock and no shares of SANUWAVE Preferred Stock are held in
the treasury of SANUWAVE, and no shares of SANUWAVE Common Stock or SANUWAVE Preferred Stock are
held by SANUWAVE; and
(d) excluding the warrants issued pursuant to the Private Placement Offering (which shall not
exceed 40,000 warrants to purchase shares of SANUWAVE Common Stock), an aggregate of 58,617.52
shares of SANUWAVE Common Stock are issuable upon exercise of outstanding SANUWAVE
Warrants/Options.
4.6 Shareholders, Options and Warrants.
SANUWAVE has made available to RME and MERGER SUB a true and complete list of all Persons
holding SANUWAVE Common Stock and SANUWAVE Preferred Stock and the amount and percentage of
SANUWAVE Common Stock and SANUWAVE Preferred Stock held by each Person. SANUWAVE has made
available to RME and MERGER SUB a true and complete list and detailed description of all the
SANUWAVE Warrants/Options. SANUWAVE has not declared and is not otherwise obligated to pay, any
dividends, whether in cash, stock or other property.
4.7 Officers and Directors.
Schedule 4.7
sets forth a true and complete list of the officers and directors of
SANUWAVE.
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4.8 Title to Assets.
SANUWAVE has good and marketable title to, or valid and enforceable leasehold interest in, all
of the assets of SANUWAVE free and clear of all Liens other than Permitted Liens.
4.9 Personnel, Compensation and Benefits.
(a) SANUWAVE is not a party to any union contracts or collective bargaining agreements.
(b)
Schedule 4.9
sets forth a true and complete list of all employment contracts to
which SANUWAVE is a party. Each SANUWAVE employee has entered into a non-compete and
confidentiality agreement substantially in the form previously provided to RME.
(c) SANUWAVE has made available to RME a current, accurate and complete copy (or, to the
extent no such copy exists, an accurate description) of each SANUWAVE employee benefit plan (as
defined in
Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended)
effective as of the date hereof.
4.10 Financial Statements.
RME has previously been provided with true, correct and complete copies of:
(a) the December 31, 2007, audited financial statements of SANUWAVE (i.e., the balance sheet
as of December 31, 2007, and the related statements of income and cash flows for the year then
ended for SANUWAVE);
(b) the December 31, 2008, audited financial statements of SANUWAVE (i.e., the balance sheet
as of December 31, 2008, and the related statements of income and cash flows for the year then
ended for SANUWAVE).
(c) the June 30, 2009, financials (i.e., the balance sheet as of June 30, 2009, and the
related statements of income and cash flows for the period then ended for SANUWAVE) (the
SANUWAVE
Interim Financials
).
Except as set forth on
Schedule 4.10
, the December 31, 2007 financial statements, the
December 31, 2008 financial statements, and the SANUWAVE Interim Financials, have been prepared in
accordance with GAAP consistently applied, and present fairly, in all material respects, the
financial condition, the results of operations, cash flows and ownership of SANUWAVEs business as
of the dates and for the periods indicated therein, and are consistent in all material respects
with the books and records of SANUWAVE (which books and records are correct and complete in all
material respects). Since June 30, 2009, there has been no material adverse change in the
business, assets, financial condition or results of operations of SANUWAVE.
17
4.11 Consents Required.
Schedule 4.11
sets forth a complete and accurate list of all consent, approval or
authorization of, or any notice to, any third party or Governmental Authority required in
connection with the execution and delivery by SANUWAVE of this Agreement or the consummation of the
transactions contemplated hereby or thereby.
4.12 Indebtedness.
Schedule 4.12
sets forth a true, correct and complete list of all the Indebtedness
outstanding with respect to SANUWAVE, other than such Indebtedness as is shown on the SANUWAVE
Interim Financials.
4.13 Leases and Contracts.
As of the date hereof,
Schedule 4.13
sets forth all Contracts of the type described
below (the
Listed Contracts
):
(i) each Material Contract with any supplier to SANUWAVE pursuant to which
SANUWAVE is obligated to pay ten thousand dollars ($10,000) to such supplier to
purchase goods or services in a twelve (12) month period;
(ii) each Material Contract with a customer of SANUWAVE pursuant to which a
customer is obligated to purchase a minimum of ten thousand dollars ($10,000) of
goods or services from SANUWAVE in a twelve (12) month period;
(iii) each Material Contract to which SANUWAVE is a party that is reasonably
expected to result in payment on the part of SANUWAVE in excess of ten thousand
dollars ($10,000) or the provision of goods or services by SANUWAVE valued in excess
of twenty-five thousand dollars ($25,000), in either case during any twelve (12)
month period;
(iv) each Material Contract related to the lease of real property; and
(v) all other Contracts that are material to the operation of SANUWAVEs
business.
Each Listed Contract is, in all material respects, (i) in full force and effect and is a valid
and binding obligation of SANUWAVE and (ii) enforceable against SANUWAVE and the other parties
thereto, in accordance with its terms (except that the enforcement thereof may be limited by
(A) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar Laws
now or hereafter in effect relating to creditors rights generally and (B) general principles of
equity, regardless of whether enforceability is considered in a proceeding in equity or at law).
As of the date hereof, SANUWAVE is not and, to SANUWAVEs Knowledge, no other party is, in material
breach of, or default under, any Listed Contract.
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4.14 Compliance with Laws.
SANUWAVE is now, and has been since January 1, 2007, in material compliance with all Laws and
Orders.
4.15 Litigation.
Except for those items listed on
Schedule 4.15
, SANUWAVE is not a party to nor, to
SANUWAVEs Knowledge, has it been threatened to be made a party to, any civil, criminal,
administrative, arbitration or other such Proceeding (including without limitations unfair labor
practice matters, labor organization activities, environmental matters and civil rights
violations). There are no Proceedings pending or threatened that question the validity of this
Agreement or any of the transactions contemplated hereby or thereby or that otherwise relate to or
may affect SANUWAVEs business or assets.
4.16 Taxes.
(a) All Tax Returns required to be filed by SANUWAVE have been accurately prepared in all
material respects and timely filed, and all Taxes for which SANUWAVE may be held liable (other than
the Taxes referred to in the next sentence) have been paid or accrued within the prescribed period
or any extension thereof. All Taxes required to be withheld by SANUWAVE have been collected and
withheld, and have been either paid to the respective Governmental Agency, set aside in accounts
for such purpose, or accrued, reserved against, and entered upon the books and records of the
employer.
(b) There are no Tax Liens upon any property of SANUWAVE except for Liens for current Taxes
not yet due and payable.
(c) Copies of all Tax Returns required to be filed by SANUWAVE in the last three (3) fiscal
years have been delivered to RME.
4.17 Permits.
Schedule 4.17
sets forth a complete and accurate list of all of SANUWAVEs Permits
material to the operation of SANUWAVEs business.
4.18 Undisclosed Liabilities.
SANUWAVE has no liabilities (whether accrued, absolute, contingent, unliquidated or otherwise,
whether due or to become due, whether known or unknown, regardless of when asserted) arising out of
transactions or events entered into prior to the Effective Time, or any action or inaction, or any
state of facts existing, with respect to or based upon transactions or events occurring prior to
the Effective Time, which liabilities would be required to be set forth on a balance sheet of
SANUWAVE prepared in accordance with GAAP, except liabilities that have arisen after the date of
the SANUWAVE Interim Financial Statements in the ordinary course of business (none of which could
reasonably result in a material adverse effect).
19
4.19 Absence of Changes.
Since June 30, 2009, there has not been any material adverse change in the condition
(financial or otherwise), assets, liabilities, properties, earnings, business or prospects of
SANUWAVE, except for expenses incurred in connection with preparation and performance of this
Agreement.
4.20 Accuracy of Information.
No representation or warranty by SANUWAVE contained in this Agreement and no statement
contained in any certificate or other instrument delivered or to be delivered to RME pursuant
hereto or in connection with the transactions contemplated hereby (including without limitation all
Schedules and Exhibits hereto) contains or will contain any untrue statement of material fact or
omits or will omit to state any material fact necessary in order to make the statements contained
herein or therein not misleading.
4.21 Improper Payments.
Neither SANUWAVE, nor any person acting on behalf of SANUWAVE has made any payment or
otherwise transmitted anything of value, directly or indirectly, to (i) any official or any
government or agency or political subdivision thereof for the purpose of influencing any decision
affecting the business of SANUWAVE, (ii) any customer, supplier or competitor of SANUWAVE or
employee of such customer, supplier or competitor, for the purpose of obtaining, retaining or
directing business for SANUWAVE, or (iii) any political party or any candidate for elective
political office nor has any fund or other asset of SANUWAVE been maintained that was not fully and
accurately recorded on the books of account of SANUWAVE.
4.22 Copies of Documents.
SANUWAVE has made available for inspection and copying by RME and its duly authorized
representatives, and to the extent required by Law will continue to do so at all times, true and
correct copies of all material documents that it has filed with any Governmental or Regulatory
Agency and that is material to the terms and conditions contained in this Agreement. Furthermore,
all filings by SANUWAVE with a Governmental Agency, including but not limited to the Internal
Revenue Service, have contained information which is true and correct in all material respects and
did not contain any untrue statement of a material fact or omit to state any material fact
necessary to make the statements made therein not misleading or which could have any material
adverse effect upon the assets, properties, financial condition or operations of SANUWAVE or
adversely affect the objectives of this Agreement.
4.23 Brokers and Finders.
SANUWAVE has not employed any broker, finder or agent in connection with the transactions
contemplated herein and has not otherwise agreed to pay any brokerage fees, commissions or finders
fees to any person.
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ARTICLE V
CONDUCT AND TRANSACTIONS PRIOR TO THE
EFFECTIVE TIME OF THE MERGER
5.1 Conduct and Transactions of RME and MERGER SUB.
During the period from the date hereof to the Closing Date, RME and MERGER SUB shall each:
(a) Conduct its operations in the ordinary course of business, including but not limited to,
paying all obligations as they mature, complying with all applicable tax laws, filing all tax
returns (which shall be complete and accurate) required to be filed and paying all taxes due.
(b) Maintain its records and books of account in a manner that fairly and correctly reflects
its income, expenses, assets and liabilities.
(c) Make all required filings under the Securities Act and the Exchange Act.
(d) Neither RME nor MERGER SUB shall, during such period, except in the ordinary course of
business, without the prior written consent of SANUWAVE:
(1) Except as otherwise contemplated or required by this Agreement, sell, dispose of or
encumber any of its properties or assets;
(2) Except as otherwise contemplated or required by this Agreement, declare or pay any
dividends on shares of its capital stock or make any other distribution of assets to the
holders thereof;
(3) Except as otherwise contemplated or required by this Agreement, issue, reissue or
sell, or issue options or rights to subscribe to, or enter into any contract or commitment
to issue, reissue or sell, any shares of its capital stock or acquire or agree to acquire
any shares of its capital stock;
(4) Except as otherwise contemplated and required by this Agreement, amend its Articles
of Incorporation or Bylaws or merge or consolidate with or into any other corporation or
sell all or substantially all of its assets or change in any manner the rights of its
capital stock or other securities;
(5) Except as contemplated or required by this Agreement, pay or incur any obligation
or liability, direct or contingent, of more than one thousand dollars ($1,000);
(6) Incur any Indebtedness for borrowed money, assume, guarantee, endorse or otherwise
become responsible for obligations of any other party, or make loans or advances to any
other party;
(7) Make any material change in its insurance coverage;
21
(8) Increase in any manner the compensation, direct or indirect, of any of its
officers, directors or executive employees;
(9) Except in accordance with existing employment contracts, enter into any agreement
or make any commitment to any labor union or organization; or
(10) Make any capital expenditures.
(e) RME and MERGER SUB each agree it shall not, through the Effective Time:
(1) solicit any offers to buy any securities of RME or MERGER SUB, as applicable;
(2) discuss with any party looking toward such an offer or solicitation;
(3) enter into any agreement with any party looking toward such an offer or
solicitation; or
(4) enter into any agreement with any party with respect to the sale of RME capital
stock, MERGER SUB capital stock or with respect to any merger, consolidation, or similar
transaction.
5.2 Conduct and Transactions of SANUWAVE.
During the period from the date hereof to the date of Closing, SANUWAVE shall:
(a) Conduct the operations of SANUWAVE in the ordinary course of business.
(b) SANUWAVE shall not during such period, except in the ordinary course of business, without
the prior written consent of RME:
(1) Declare or pay any dividends on shares of its capital stock or make any other
distribution of assets to the holders thereof;
(2) Except as otherwise contemplated and required by this Agreement, amend its
Certificate of Incorporation or Bylaws or merge or consolidate with or into any other
corporation or sell all or substantially all of its assets.
(3) Will not issue any stock, warrants, options or other rights to acquire capital
stock of SANUWAVE in excess of the amounts represented in
Section 4.5
.
22
ARTICLE VI
RIGHTS OF INSPECTION
During the period from the date of this Agreement to the Closing Date, RME, MERGER SUB and
SANUWAVE agree to use their best efforts to give the other parties, including its
representatives and agents, full access to the premises, books and records of each of the
entities, and to furnish the other parties with such financial and operating data and other
information including, but not limited to, copies of all legal documents and instruments referred
to on any Schedule or Exhibit hereto, with respect to the business and properties of RME, MERGER
SUB or SANUWAVE, as the case may be, as another party shall from time to time request; provided,
however, if there are any such investigations: (1) they shall be conducted in such manner as not to
unreasonably interfere with the operation of the business of the other parties and (2) such right
of inspection shall not affect in any way whatsoever any of the representations or warranties given
by the respective parties hereunder. In the event of termination of this Agreement, RME, MERGER
SUB and SANUWAVE will each return to the other parties all documents, work papers and other
materials obtained from the other parties in connection with the transactions contemplated hereby,
and will take such other steps necessary to protect the confidentiality of such material.
ARTICLE VII
CLOSING
7.1 Closing Deliveries of SANUWAVE.
(a)
Third Party Consents
. Copies of all consents, notices and approvals listed on
Schedule 4.11
shall have been provided to RME at or prior to the Closing.
(b)
SANUWAVE Closing Certificate
. A closing certificate executed on behalf of
SANUWAVE confirming the matters referred to in
Sections 9.1
and
9.2
.
(c)
SANUWAVE Resolutions
. Certified copy of the resolutions of the board of directors
and shareholders of SANUWAVE approving the transactions contemplated by this Agreement (the
SANUWAVE Resolutions
).
(d)
Good Standing Certificates
. Certificates, dated not more than ten (10) Business
Days prior to the Closing Date, of any state of the United States or any other jurisdiction where
SANUWAVE is qualified to do business providing that SANUWAVE is in good standing.
(e)
SANUWAVE Secretarys Certificate
. A Certificate from the secretary of SANUWAVE,
dated as of the Closing Date, certifying to: (i) the certificate of incorporation and bylaws of
SANUWAVE; (ii) the SANUWAVE Resolutions; and (iii) the incumbency and signatures of the officers of
SANUWAVE signing this Agreement or any other certificate or document delivered in connection
herewith.
(f)
SANUWAVE Lockup Agreements
. Duly executed copies of the SANUWAVE Lockup
Agreements.
(g)
Other Documents
. All other previously undelivered documents, instruments or
writings required to be delivered by SANUWAVE to RME or MERGER SUB at or prior to the Closing
pursuant to this Agreement and such other documents and instruments as RME or MERGER SUB or its
counsel reasonably shall deem necessary to consummate the transactions contemplated hereby.
23
7.2 Closing Deliveries of RME and MERGER SUB.
(a)
RME Closing Certificate
. A closing certificate executed on behalf of RME
confirming the matters referred to in
Sections 8.1
and
8.2
.
(b)
MERGER SUB Closing Certificate
. A closing certificate executed on behalf of
MERGER SUB confirming the matters referred to in
Sections 8.1
and
8.2
.
(c)
RME Resolutions
. Certified copy of the resolutions of the board of directors of
RME approving the transactions contemplated by this Agreement (the
RME Resolutions
).
(d)
MERGER SUB Resolutions
. Certified copy of the resolutions of the board of
directors and shareholders of MERGER SUB approving the transactions contemplated by this Agreement
(the
MERGER SUB Resolutions
).
(e)
Good Standing Certificates
. Certificates, dated not more than ten (10) Business
Days prior to the Closing Date, of any state of the United States or any other jurisdiction where
RME or MERGER SUB is qualified to do business providing that RME and MERGER SUB, as applicable, are
in good standing.
(f)
RME Secretarys Certificate
. A Certificate from the secretary of RME, dated as of
the Closing Date, certifying to: (i) the articles of incorporation and bylaws of RME; (ii) the RME
Resolutions; and (iii) the incumbency and signatures of the officers of RME signing this Agreement
or any other certificate or document delivered in connection herewith.
(g)
MERGER SUB Secretarys Certificate
. A Certificate from the secretary of MERGER
SUB, dated as of the Closing Date, certifying to: (i) the articles of incorporation and bylaws of
MERGER SUB; (ii) the MERGER SUB Resolutions; and (iii) the incumbency and signatures of the
officers of MERGER SUB signing this Agreement or any other certificate or document delivered in
connection herewith.
(h)
Indemnification
. A duly executed and authorized copy of the Indemnification
Agreement to SANUWAVE, in the form attached hereto as
Exhibit A
.
(i)
Resignations
. The resignation of Cornelius Hofman from all officer and director
positions with RME and MERGER SUB.
(j)
Warrant Amendments
. Amendments to the currently outstanding warrants to acquire
shares of RME in accordance with
Section 2.
1(d)(4)
.
(k)
RME Common Stock Outstanding
. Duly executed copies of the Stock Repurchase
Agreements.
(l)
Nemelka Lockup Agreements
. Duly executed copies of the Nemelka Lockup Agreements.
24
(m)
Filings
. A copy of the 10-Q filed by RME with the SEC for the quarter ended June
30, 2009, which complies with applicable requirements.
(n)
Authorization for Issuance of Stock
. SANUWAVE shall have received, in form and
substance satisfactory to counsel for SANUWAVE, (i) a letter instructing and authorizing the
Registrar and Transfer Agent for the shares of RME Common Stock to issue stock certificates with
the appropriate legend relating to the restricted nature of the shares under the Securities Act and
representing ownership of RME Common Stock to SANUWAVE shareholders in accordance with the terms of
this Agreement, and (ii) a letter from said Registrar and Transfer Agent acknowledging receipt of
the letter of instruction and stating to the effect that the Registrar and Transfer Agent holds
adequate supplies of stock certificates necessary to comply with the letter of instruction and the
terms and conditions of this Agreement.
(o)
Other Documents
. All other previously undelivered documents, instruments or
writings required to be delivered by RME or MERGER SUB to SANUWAVE at or prior to the Closing
pursuant to this Agreement and such other documents and instruments as SANUWAVE or its counsel
reasonably shall deem necessary to consummate the transactions contemplated hereby.
ARTICLE VIII
CONDITIONS PRECEDENT TO SANUWAVES OBLIGATION
The obligation of SANUWAVE to perform this Agreement is subject to the satisfaction of the
following conditions on or before the Closing unless waived in writing by SANUWAVE.
8.1 Representations and Warranties True.
The representations and warranties of RME and MERGER SUB contained in this Agreement or in any
schedule, certificate or document delivered pursuant to the provisions hereof or in connection with
the transactions contemplated hereby shall be true and correct at and as of the Closing Date as
though such representations and warranties were made at and as of such time.
8.2 Performance of Obligations.
RME and MERGER SUB shall have performed and complied with all agreements and conditions
required by this Agreement to be performed or complied with by them prior to the Closing and RME
and MERGER SUB shall be ready and able to perform and comply with their obligations at the Closing.
8.3 Changes in Financial Condition of RME and MERGER SUB.
There shall not have occurred any material adverse change in the financial condition or in the
operations of the business of either RME or MERGER SUB, except expenditures in furtherance of this
Agreement.
25
8.4 Investment Representation Statement.
SANUWAVE shall received executed copies of the Investment Representation Statement,
substantially in the form of
Exhibit B
, by holders of one hundred percent (100%) of
SANUWAVEs outstanding shares and one hundred percent (100%) of the holders of the SANUWAVE
Warrants/Options (other than employee options).
8.5 Shareholder Consent.
SANUWAVE shall have received the consent of the holders (as of the Record Date) of one hundred
percent (100%) of the SANUWAVE Common Stock and one hundred percent (100%) of the SANUWAVE
Preferred Stock to the Merger.
8.6 Statutory Requirements.
All statutory requirements for the valid consummation by RME and MERGER SUB of the
transactions contemplated by this Agreement shall have been fulfilled.
8.7 Absence of Pending Litigation.
There shall be no litigation, proceeding or investigation pending or threatened against RME or
MERGER SUB.
8.8 Delivery of Materials.
RME and MERGER SUB shall have delivered to SANUWAVE each of the materials required to be
delivered by RME and MERGER SUB under
Section 7.2
hereof.
ARTICLE IX
CONDITIONS PRECEDENT TO RMES OBLIGATION
The obligation of RME to perform this Agreement is subject to the satisfaction of the
following conditions on or before the Closing unless waived in writing by RME.
9.1 Representations and Warranties True.
The representations and warranties of SANUWAVE contained in this Agreement or in any schedule,
certificate or document delivered pursuant to the provisions hereof or in connection with the
transactions contemplated hereby shall be true and correct at and as of the Closing Date as though
such representations and warranties were made at and as of such time.
9.2 Performance of Obligations.
SANUWAVE shall have performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to the Closing and SANUWAVE shall be ready
and able to perform and comply with its obligations at the Closing.
26
9.3 Changes in Financial Condition of SANUWAVE.
There shall not have occurred any material adverse change in the financial condition or in the
operations of the business of SANUWAVE, except expenditures in furtherance of this Agreement.
9.4 Statutory Requirements.
All statutory requirements for the valid consummation by SANUWAVE of the transactions
contemplated by this Agreement shall have been fulfilled.
9.5 Absence of Pending Litigation.
There shall be no litigation, proceeding or investigation pending or threatened against
SANUWAVE which questions the validity or legality of this Agreement or of any action taken or to be
taken by SANUWAVE pursuant to or in connection with the provisions of this Agreement.
9.6 Delivery of Materials.
SANUWAVE shall have delivered to RME and MERGER SUB each of the materials required to be
delivered by SANUWAVE under
Section 7.1
hereof.
ARTICLE X
COVENANTS AND FURTHER ASSURANCE
10.1
The parties covenant and agree that they shall, from time to time, execute and deliver or
cause to be executed and delivered all such further instruments of conveyance, transfer,
assignments, receipts and other instruments, and shall take or cause to be taken such further or
other actions as the other party or parties to this Agreement may reasonably deem necessary in
order to carry out the purposes and intent of this Agreement. RME agrees to have filed with the
SEC a Current Report Form 8-K within the prescribed period therein reflecting the terms of the
Merger with the required financial statements of SANUWAVE.
10.2
SANUWAVE, RME and MERGER SUB all covenant and agree to use their best efforts to obtain
the shareholder approval required for the consummation of the Merger and the transactions
contemplated by this Agreement within ten (10) days of the execution of this Agreement.
10.3
SANUWAVE and RME each covenant and agree to file the Current Report Form 8-K with the SEC
within four (4) Business Days of the execution of this Agreement.
10.4
SANUWAVE and RME each covenant and agree to file the 14F Information Statement within
five (5) Business Days of the filing of the Current Report Form 8-K.
27
ARTICLE XI
TERMINATION OF AGREEMENT
AND ABANDONMENT OF REORGANIZATION
11.1 Termination.
This Agreement may be terminated prior to the Closing as follows:
(a) at the election of RME, in the event that SANUWAVE shall have materially breached any
representation, warranty, covenant or agreement contained in this Agreement or in any document or
other paper delivered pursuant to this Agreement;
(b) at the election of SANUWAVE, in the event that RME or MERGER SUB shall have materially
breached any representation, warranty, covenant or agreement contained in this Agreement or in any
document or other paper delivered pursuant to this Agreement;
(c) at the election of RME or SANUWAVE, if any legal proceeding is commenced or threatened by
any Governmental Authority directed against the consummation of the Closing or any other
transaction contemplated under this Agreement and either of RME or SANUWAVE, as the case may be,
reasonably and in good faith deems it impractical or inadvisable to proceed in view of such legal
proceeding or threat thereof;
(d) at any time on or prior to the Closing Date, by mutual written consent of the parties
hereto;
(e) at the election of SANUWAVE, in the event that one or more shareholders of SANUWAVE
exercises its appraisal rights pursuant to Section 262 of the DGCL; or
(f) at any time after September 30, 2009, at the election of either RME or SANUWAVE, provided
the party so terminating (and its Affiliates) is not in default under this Agreement.
11.2 Post Termination Obligations.
If this Agreement is terminated pursuant to
Section 11.1
, this Agreement shall become
void and of no further force and effect, except for the provisions of
Sections 13.8
(Expenses), and none of the parties hereto shall have any liability in respect of such termination
except that any party shall be liable to the extent that failure to satisfy the conditions of
Articles VIII
or
IX
results from the violation or breach of any of the
representations, warranties, covenants or agreements of such party under this Agreement.
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ARTICLE XII
ISSUANCE OF SHARES; FRACTIONAL SHARES
12.1 Issuance of Share Certificates.
At the Closing, RME shall issue a letter to the transfer agent of RME with a copy of the
resolution of the Board of Directors of RME authorizing and directing the issuance of RME
Common Stock as required by this Agreement. Any fractional shares of RME Common Stock
issuable as a result of this exchange shall be rounded up to the next whole number of shares.
12.2 Restrictions on Shares Issued to SANUWAVE Stockholders.
SANUWAVE stockholders will receive shares of RME Common Stock in connection with the Merger
which have not been registered under the Securities Act by virtue of the exemption provided in
Regulation D adopted pursuant to the Securities Act and/or Section 4(2) of the Securities Act, the
certificates for those shares of RME Common Stock issued pursuant to the Merger will contain
substantially the following legend:
The shares represented by this certificate have not been registered under the Securities
Act of 1933, as amended. The shares have been acquired for investment and may not be sold
or offered for sale in the absence of an effective Registration Statement for the shares
under the Securities Act of 1933, as amended, or an opinion of counsel to the Corporation
that such registration is not required.
ARTICLE XIII
MISCELLANEOUS
13.1 Amendment.
This Agreement may be amended by the parties at any time before or after the approval of the
shareholders of MERGER SUB or SANUWAVE; provided, however, that after any such time, there shall
not be made any amendment that by Law requires further approval by the shareholders of MERGER SUB
or SANUWAVE without the further approval of such shareholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties.
13.2 Representations and Warranties.
None of the representations and warranties in this Agreement or in any schedule, instrument or
other document delivered pursuant to this Agreement shall survive the Effective Time. The
foregoing sentence shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
29
13.3 Notices.
All notices, requests, demands, tenders or other communications required or permitted
hereunder must be in writing and are deemed to have been duly given if (a) delivered personally,
(b) mailed, certified or registered mail, return receipt requested, postage prepaid, receipt
acknowledged, (c) sent by Federal Express or other nationally recognized overnight courier service
or overnight express U.S. Mail, postage prepaid, or (d) sent by facsimile or e-mail transmission,
followed with an original sent in accordance with (a), (b) or (c) above, as follows:
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If to RME
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If to SANUWAVE
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Rub Music Enterprises, Inc.
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Sanuwave, Inc.
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5555 North Star Ridge Way
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11680 Great Oaks Way, Suite 350
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Star, Idaho 83669
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Alpharetta, Georgia 30022
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Attn: Barry Jenkins
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With copies to (which shall not
constitute notice):
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With copies to (which shall not
constitute notice):
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Cletha A. Walstrand, Esq.
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John C. Ethridge, Jr., Esq.
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Attorney at Law
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Smith, Gambrell & Russell, LLP
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1322 West Pachua Circle
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Promenade II, Suite 3100
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Ivans, Utah 84738
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1230 Peachtree Street, N.E.
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Atlanta, Georgia 30309-3592
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Notices personally delivered or transmitted by facsimile (with confirmation of delivery) are
deemed to have been given on the date so delivered or transmitted;
provided
, that if the
confirmation of delivery sets forth a delivery time later than 5:00PM on any Business Day, then the
facsimile will be deemed delivered on the succeeding Business Day. Notices mailed are deemed to
have been given on the date three (3) Business Days after the date posted, and notices sent in
accordance with (c) above are deemed to have been given on the next Business Day after delivery to
the courier service or U.S. Mail (in time for next day delivery). The parties may change their
address for receipt of Notices by delivery of a Notice of change of address in accordance with the
terms of this
Section 13.3
.
13.4 Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument. In the execution
of this Agreement, facsimile or scanned and emailed manual signatures shall be fully effective for
all purposes.
13.5 Entire Agreement; No Third Party Beneficiaries.
This Agreement and the Schedules and Exhibits attached hereto and the Transaction Documents,
represent the entire agreement of the undersigned regarding the subject matter hereof, and
supersedes all prior written or oral understandings or agreements between the parties. This
Agreement is not intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.
30
13.6 Severability.
Any term or provision of this Agreement that is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or in any other
jurisdiction. Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable Law in an acceptable manner to the end that the transactions are
fulfilled to the extent possible.
13.7 Expenses.
Each party shall bear its own expenses incurred in connection with the negotiation, execution,
closing, and performance of this Agreement, including counsel fees and accountant fees.
13.8 Captions and Section Headings.
Captions and section headings used herein are for convenience only and shall not control or
affect the meaning or construction of any provision of this Agreement.
13.9 Governing Law.
This Agreement shall be governed by and construed and interpreted in accordance with the laws
of the State of Delaware excluding its conflicts of laws provisions.
13.10 Enforcement and Interpretation.
The parties agree that irreparable damage would occur in the event that any of the provisions
of this Agreement were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to interpret or enforce specifically the
terms and provisions of this Agreement in any court of the United States located in the State of
Delaware or in Delaware state court, this being in addition to any other remedy to which they are
entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit
itself to the exclusive personal jurisdiction of any Federal court located in the State of Delaware
or any Delaware state court in the event any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat
such personal jurisdiction by motion or other request for leave from any such court, and (c) agrees
that it will not bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a Federal or state court sitting in the
State of Delaware.
13.11 Time of Essence.
Each of the parties hereto hereby agrees that, with regard to all dates and time periods set
forth or referred to in this Agreement, time is of the essence.
31
13.12 Extension; Waiver.
At any time prior to the Effective Time, the parties may (a) extend the time for the
performance of any of the obligations or other acts of the other parties, (b) waive any
inaccuracies in the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) waive compliance by the
other parties with any of the agreements or conditions contained in this Agreement. Any agreement
on the part of a party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. The failure of any party to this Agreement
to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of
those rights.
13.13 Assignment.
Neither this Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of Law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
[Signature page follows]
32
IN WITNESS WHEREOF
, the parties hereto have executed this Agreement as of the date first
written above.
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RUB MUSIC ENTERPRISES, INC.
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By:
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/s/
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Name:
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Cornelius Hofman
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Title:
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President
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RME DELAWARE MERGER SUB, INC.
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By:
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/s/
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Name:
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Cornelius Hofman
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Title:
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President
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SANUWAVE, INC.
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By:
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/s/
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Name:
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Christopher M. Cashman
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Title:
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President and CEO
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Signature page to the Agreement and Plan of Merger
ANNEX A
Affiliate
of a Person shall mean any Person controlling, controlled by, or under common
control with, such Person.
Agreement
has the meaning set forth in the forepart of this Agreement.
Business Day
means a day other than a Saturday, a Sunday or a day on which banks in New
York, New York or Atlanta, Georgia are permitted or required to close.
Certificate of Merger
has the meaning set forth in
Section 1.2
.
Class A Warrant
means a warrant to purchase a share of RME Common Stock at a purchase price
of $4 per share, in accordance with the Class A Warrant Agreement attached hereto as
Exhibit
C
.
Class B Warrant
means a warrant to purchase a share of RME Common Stock at a purchase price
of $8 per share, in accordance with the Class B Warrant Agreement attached hereto as
Exhibit
D
.
Closing
has the meaning set forth in
Section 1.3
.
Closing Date
means the date on which the Closing occurs.
Code
means the U.S. Internal Revenue Code of 1986, as amended (together with the rules and
regulations promulgated thereunder).
Contract
means any agreement, arrangement, lease, license, evidence of Indebtedness,
mortgage, indenture, security agreement or other contract (whether written or oral).
DGCL
has the meanings set forth in
Section 1.1
.
Effective Time
has the meanings set forth in
Section 1.2
.
Exchange Act
means the Security Exchange Act of 1934, as amended (together with the rules
and regulations promulgated thereunder).
GAAP
means generally accepted accounting principles in the United States.
Governmental Authority
means any: (i) federal, state, county, city, town, village, district,
tribal or other jurisdiction of any nature; (ii) federal, state, local, municipal, foreign, tribal
or other government; (iii) governmental or quasigovernmental authority of any nature (including any
governmental agency, board, branch, bureau, commission, department, official, or entity); (iv)
court, tribunal or judicial body or arbitral or alternative dispute resolution entity with
jurisdiction or authority; or (v) an entity exercising, or entitled to exercise, any
administrative, executive, juridical, legislative, police, regulatory or taxing authority or power
of any nature.
Indebtedness
of any Person means all obligations of such Person (i) for borrowed money, (ii)
evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price
of goods or services (other than trade payables or accruals incurred in the ordinary course of
business), (iv) under capital leases and (v) in the nature of guarantees of the obligations
described in clauses (i) through (iv) above of any other Person.
Knowledge of RME
means the knowledge of a fact or other matter by an officer or director of
RME. For purposes of this definition, an individual will be deemed to have knowledge of a
particular fact or other matter if such individual (i) is actually aware of such fact or other
matter after reasonable inquiry or (ii) in the absence of reasonable inquiry, would have been aware
of such fact or other matter if reasonable inquiry had been made.
Law
means, as to any Person, all laws, statutes, codes, ordinances, rules, regulations,
Permits, and other pronouncements having the force of law of the United States and of each
jurisdiction in the United States applicable to such Person or any of its assets, properties or
business and shall include the Laws of any domestic or foreign state, district, county, city or
other political subdivision of any Governmental Authority.
Liens
means any and all liens, security interests, pledges, assessments, capital call
requirements, charges, commitments, encumbrances, escrows, levies, pledges, restrictions (including
restrictions on use, voting, transfer, or receipt of income), rights of first offer or refusal,
co-sale rights (whether tag along, drag along or other), third party claims, options, voting trusts
or agreements, proxies, marital or community property interests or any other type of preferential
arrangement, including the lien or retained security title of a conditional vendor, or other claims
or charges of any nature whatsoever, including any restriction on the exercise of any attributes of
ownership.
Listed Contracts
has the meaning set forth in
Section 4.13
.
Material Contract
means a contract to which SANUWAVE is a party relating to SANUWAVEs
business that is material to SANUWAVEs business.
Merger
has the meaning set forth in the recitals of this Agreement.
MERGER SUB
has the meaning set forth in the forepart of this Agreement.
MERGER SUB Common Stock
has the meaning set forth in the recitals of this Agreement.
MERGER SUB Resolutions
has the meaning set forth in
Section 7.2(d)
.
Nemelka Lockup Agreements
means, collectively, (i) that certain lock-up agreement, dated
September 25, 2009, between RME and David N. Nemelka and (ii) that certain lock-up agreement, dated
September 25, 2009, between RME and McKinley Capital 401(k) Roth Plan.
2
Order
means any decision or award, decree, injunction, judgment, order, quasijudicial
decision or award, ruling, or writ of any domestic or foreign federal, national, state or local or
other court, arbitrator (with binding effect), tribunal, administrative agency or authority.
Permit
means any permit, license, approval, consent, or authorization issued by a
Governmental Authority.
Permitted Liens
means (a) liens shown on a balance sheet as securing specified liabilities
or obligations and liens incurred in connection with the purchase of property and/or assets, if
such purchase was effected after the date of the last balance sheet, with respect to which no
default exists; (b) minor imperfections of title, if any, none of which are substantial in amount,
detract from the value or impair the use of the property subject thereto, or impair the operations
of SANUWAVE, and which have arisen only in the ordinary course of business and consistent with past
practice since the date of the last balance sheet; (c) liens for current Taxes not yet due or
delinquent; and (d) such minor title defects, failure to have valid leasehold interest in, or
objections, liens, claims, charges, security interests or other encumbrances of any nature
whatsoever, if any, as individually or in the aggregate do not materially impair the value of the
property subject to such Lien or the use of the property in the conduct of the business of the
Person.
Person
shall mean and include any individual, corporation, partnership, firm, association,
joint venture, trust or other entity, or any government, regulatory, administrative or political
subdivision or agency, department or instrumentality thereof.
Private Placement Offering
means the issuance of up to 20,000 units (as defined in the
subscription agreement) in a private placement to accredited investors on the terms and
conditions set forth in that certain form of Sanuwave, Inc. subscription agreement.
Proceeding
means any complaint, action, lawsuit, hearing, investigation, charge, audit,
claim or demand.
Record Date
means the close of business on the day on which the board of directors of
SANUWAVE adopts the resolution approving this Agreement.
Restricted Stock
means the SANUWAVE Common Stock subject to forfeiture in certain events
including, among others, the failure of SANUWAVE to consummate a share exchange or reverse merger
with a public shell company on or before October 31, 2009, or the failure of the recipient to
remain employed by SANUWAVE during specified vesting periods.
RME
has the meaning set forth in the forepart of this Agreement.
RME Common Stock
has the meaning set forth in the recitals of this Agreement.
RME Interim Financials
has the meaning set forth in
Section 3.15
.
RME Preferred Stock
has the meaning set forth in the recitals of this Agreement.
3
RME Resolutions
has the meaning set forth in
Section 7.2(c)
.
RME SEC Reports
means each form, report, schedule, statement and other document required to
be filed by RME since December 18, 2007 under the Exchange Act or the Securities Act.
RME Warrants
has the meaning set forth in the recitals of this Agreement.
SANUWAVE
has the meaning set forth in the forepart of this Agreement.
SANUWAVE Common Stock
has the meaning set forth in the recitals of this Agreement.
SANUWAVE Interim Financials
has the meaning set forth in
Section 4.10(c)
.
SANUWAVE Lockup Agreements
means those certain lock-up agreements, by and between SANUWAVE
and each shareholder of SANUWAVE as of September 24, 2009.
SANUWAVE Preferred Stock
has the meaning set forth in the recitals of this Agreement.
SANUWAVE Resolutions
has the meaning set forth in
Section 7.1(c)
.
SANUWAVE Warrants/Options
has the meaning set forth in the recitals of this Agreement.
SANUWAVEs Knowledge
means the knowledge of a fact or other matter by the CEO or CFO of
SANUWAVE. For purposes of this definition, an individual will be deemed to have knowledge of a
particular fact or other matter if such individual (i) is actually aware of such fact or other
matter after reasonable inquiry or (ii) in the absence of reasonable inquiry, would have been aware
of such fact or other matter if reasonable inquiry had been made.
SEC
means the United States Securities and Exchange Commission and any successor thereto.
Securities Act
means the Securities Act of 1933, as amended (together with the rules and
regulations promulgated thereunder
Stock Repurchase Agreements
means those certain stock repurchase agreements between RME and
certain shareholders of RME, pursuant to which RME redeems some or all of the RME Common Stock held
by such shareholders.
Surviving Corporation
has the meaning set forth in
Section 2.1
.
4
Tax
means (a) any foreign, United States federal, state or local net income, alternative or
add on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, environmental or windfall profit tax, custom, duty or other
tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any
interest, penalty, addition to tax or additional amount imposed by any Law or taxing authority, (b)
any liability for the payment of any amounts of any of the foregoing types as a result of being a
member of an affiliated, consolidated, combined or unitary group, or being a party to any agreement
or arrangement whereby liability for payment of such amounts was determined or taken into account
with reference to the liability of any other entity, and (c) any liability for the payment of any
amounts as a result of being a party to any Tax sharing agreements or arrangements (whether or not
written) or with respect to the payment of any amounts of any of the foregoing types as a result of
any express or implied obligation to indemnify any other Person.
Tax Return
means any return, declaration, report, claim for refund, or information return or
statement or other form relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
Transaction Documents
means the SANUWAVE Lockup Agreements and the Nemelka Lockup
Agreements.
5
EXHIBIT A
INDEMNIFICATION AGREEMENT TO SANUWAVE
See attached.
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
In connection with my approval of the merger of Sanuwave, Inc. with a wholly owned subsidiary
of Rub Music Enterprises, Inc., a Nevada corporation, (the
Company
) and the resulting acquisition
of common stock, par value $.001, of the Company (the
Securities
), the undersigned represents to
the Company the following:
Investment
.
I am aware of the Companys business affairs and financial condition. I am purchasing the
Securities for investment for my own account only and not with a view to, or for resale in
connection with, any distribution thereof within the meaning of the Securities Act. The
Securities have not been registered under the Securities Act by reason of a specific
exemption therefrom, which exemption depends on, among other things, the bona fide nature of
the investment intent as expressed herein. In this connection I understand that the Company
is relying in part upon the truth and accuracy of, and my compliance with, the
representations set forth herein in order to determine the availability of such exemption
and my eligibility to acquire the Securities.
I have examined or have had an opportunity to examine, before the date hereof, such
documents and information relevant to this transaction as may have been requested from the
Company, in that connection, I have taken all steps necessary to evaluate the merits and
risks of this offering.
I have had an opportunity to ask questions of and receive answers from officers of the
Company, or a person or persons acting on its behalf, concerning the terms and conditions of
this investment, and all such questions have been answered to my full satisfaction.
Restrictions on Transfer Under Securities Act
.
I further acknowledge and understand that the Securities must be held indefinitely unless
they are subsequently registered under the Securities Act and registered and/or qualified
under applicable state securities laws or unless an exemption from such registration and/or
qualification is available. Moreover, I understand that the Company is under no obligation
to register the Securities. In addition, I understand that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the Securities
unless they are registered or unless the Company receives an opinion of counsel reasonably
satisfactory to the Company that such registration is not required.
Sales Under Rule 144
.
I am aware of the adoption of Rule 144 by the SEC promulgated under the Securities Act,
which in substance permits limited public resale of securities acquired in a non public
offering subject to the satisfaction of certain conditions, including: (i) the availability
of certain current public information about the Company, (ii) the resale being made through
a broker in an unsolicited brokers transaction or in transactions directly with a
market maker, and (iv) the amount of securities sold during any three-month period not
exceeding specified limitations (generally 1% of the total shares outstanding).
Limitations on Rule 144
.
I further acknowledge and understand that the Company is currently, but at any time I wish
to sell the Securities may not be, satisfying the public information requirement of Rule
144, and, in such case, I may be precluded from selling the Securities under Rule 144 even
if the minimum holding period under Rule 144 had been satisfied.
Accredited Investor
.
I am either:
(A) an accredited investor as defined by Regulation D as set forth below;
According to Rule 501(a) of Regulation D, accredited investor means any person who comes
within any of the following categories, or who the Company reasonable believes comes within
any of the following categories, at the time of the sale of the Shares to that person:
Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or
other institution as defined in section 3(a)(5)(A) of the Act whether acting in its
individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of
the Securities Exchange Act of 1934; an insurance company as defined in section 2(13) of the
Act; an investment company registered under the Investment Company Act of 1940 or a business
development company as defined in section 2(a)(48) of that Act; a Small business Investment
Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of
the Small Business Investment Act of 1958; any plan established and maintained by a State,
its political subdivisions, or any agency or instrumentality of a State or its political
subdivisions, for the benefit of its employees, if such plan has total assets in excess of
$5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in
section 3(21) of such Act, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee benefit plan has total assets
in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are accredited investors;
Any private business development company as defined in section 202(a)(22) of the Investment
Advisers Act of 1940;
Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation,
Massachusetts or similar business trust, or partnership, not formed for the specific purpose
of acquiring the securities offered, with total assets in excess of $5,000,000;
2
Any director, executive officer, or general partner of the issuer of the securities being
offered or sold, or any director, executive officer, or general partner of that issuer;
Any natural person whose individual net worth, or joint net worth with that persons spouse,
at the time of his purchase exceeds $1,000,000;
Any natural person who had individual income in excess of $200,000 in each of the two most
recent years or joint income with that persons spouse in excess of $300,000 in each of
those years and has a reasonable expectation of reaching the same income level in the
current year;
Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of
acquiring the securities offered, whose purchase is directed by a sophisticated person as
described in section 30.506(b)(2)(ii); and
Any entity in which all of the equity owners are accredited investors.
OR
(B) not an accredited investor, but I have such knowledge and experience in financial and
business matters that I am capable of evaluating the merits and risks of an investment in
the Securities.
In Witness Whereof, the undersigned has executed this Investor Representation Statement with
the intent and knowledge that the Company will rely on the truth and completeness of the
representations and warrantees contained herein.
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DATE:
, 2009
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If PURCHASER is/are individual(s), sign here:
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Signature:
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Print Name:
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If PURCHASER is an entity, sign here:
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Entity Name:
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Signature:
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Print Name:
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Title:
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3
EXHIBIT C
CLASS A WARRANT AGREEMENT
See attached.
EXHIBIT D
CLASS B WARRANT AGREEMENT
See attached.
Exhibit 99.1
SANUWAVE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
SANUWAVE, INC. AND SUBSIDIARIES
CONTENTS
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Pages
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Report of Independent Registered Accounting Firm
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1
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Consolidated Financial Statements
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Balance Sheets
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2
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Statements of Income and Comprehensive Loss
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3
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Statements of Stockholders Equity (Deficit)
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4
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Statements of Cash Flows
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5
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Notes to Consolidated Financial Statements
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6-27
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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Board of Directors and Stockholders of
SANUWAVE, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
SANUWAVE, INC. AND SUBSIDIARIES
as of December 31, 2008 and 2007, and the related consolidated statements of income and
comprehensive loss, stockholders equity (deficit), and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The Company is not required to have, nor were we engaged to perform an audit of internal
controls over financial reporting. Our audit included consideration of internal controls over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal controls over financial reporting. Accordingly, we express no such opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of SANUWAVE, Inc. and Subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the consolidated financial statements, the
Company incurred a net loss of approximately $9,409,000 and $12,074,000 during the years ended
December 31, 2008 and 2007, respectively, and, as of those dates, had a working capital deficiency
of approximately $418,000 and $500,000, respectively. As described more fully in Note (14) to the
consolidated financial statements, the Company is economically dependent upon future capital
contributions or financing to fund ongoing operations. This condition raises substantial doubt
about the Companys ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of the uncertainty.
/s/ HLB Gross Collins, P.C.
Atlanta, Georgia
April 6, 2009, except as to
Note 1, 2, 3, 4, 12, 14, and 16, as to
which the date is August 25, 2009
SANUWAVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
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2008
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2007
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ASSETS
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CURRENT ASSETS
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Cash
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$
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543,626
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$
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693,033
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Accounts receivable trade, net of allowance for doubtful
accounts of $64,490 in 2008 and $90,353 in 2007 (Note 1)
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52,414
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110,402
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Inventory (Note 3)
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684,750
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691,857
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Prepaid expenses
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106,617
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328,969
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Current assets related to discontinued operations (Note 2)
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1,285,017
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2,207,794
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TOTAL CURRENT ASSETS
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2,672,424
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4,032,055
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PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation (Note 4)
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279,791
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439,556
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OTHER ASSETS
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81,017
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|
|
|
141,769
|
|
INTANGIBLE ASSETS, at cost, less accumulated amortization (Note 5)
|
|
|
2,454,051
|
|
|
|
2,760,807
|
|
NON-CURRENT ASSETS RELATED TO
DISCONTINUED OPERATIONS (Note 2 and 4)
|
|
|
1,011,734
|
|
|
|
2,565,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,499,017
|
|
|
$
|
9,939,334
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
975,811
|
|
|
$
|
1,059,460
|
|
Payroll and related
|
|
|
820,397
|
|
|
|
635,122
|
|
Accrued expenses (Note 6)
|
|
|
448,242
|
|
|
|
469,839
|
|
Liabilities related to discontinued operations (Note 2)
|
|
|
845,593
|
|
|
|
2,367,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
3,090,043
|
|
|
|
4,531,637
|
|
|
|
|
|
|
|
|
|
|
NOTES PAYABLE, RELATED PARTIES (Note 9)
|
|
|
6,006,815
|
|
|
|
4,624,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
9,096,858
|
|
|
|
9,156,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE PARTICIPATING PREFERRED STOCK, par value $.01
per share, entitled to $100 per share in liquidation, 750,000 shares
authorized, 283,250 and 226,500 shares issued and outstanding
at December 31, 2008 and 2007, respectively
|
|
|
2,833
|
|
|
|
2,265
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK, par value $.01,
750,000 shares authorized,8,863.25 and 7,972.75 shares issued and outstanding
at December 31, 2008 and 2007, respectively
|
|
|
89
|
|
|
|
80
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
30,103,124
|
|
|
|
23,804,866
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
(196,646
|
)
|
|
|
74,009
|
|
RETAINED EARNINGS (DEFICIT)
|
|
|
(32,507,241
|
)
|
|
|
(23,098,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
(2,597,841
|
)
|
|
|
782,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
|
$
|
6,499,017
|
|
|
$
|
9,939,334
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 2 -
SANUWAVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
1,045,858
|
|
|
$
|
1,199,779
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
352,723
|
|
|
|
256,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
693,135
|
|
|
|
943,591
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,675,631
|
|
|
|
1,965,432
|
|
General and administrative
|
|
|
7,801,416
|
|
|
|
9,827,927
|
|
Depreciation
|
|
|
276,724
|
|
|
|
161,352
|
|
Amortization
|
|
|
306,756
|
|
|
|
319,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
12,060,527
|
|
|
|
12,273,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(11,367,392
|
)
|
|
|
(11,330,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(306,843
|
)
|
|
|
(270,315
|
)
|
Loss on foreign currency exchange
|
|
|
(52,528
|
)
|
|
|
(17,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER EXPENSE
|
|
|
(359,371
|
)
|
|
|
(288,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(11,726,763
|
)
|
|
|
(11,618,294
|
)
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT (Note 7)
|
|
|
333,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(11,393,045
|
)
|
|
|
(11,618,294
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income tax (Note 2)
|
|
|
1,984,127
|
|
|
|
(455,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(9,408,918
|
)
|
|
|
(12,073,661
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(270,655
|
)
|
|
|
62,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE LOSS
|
|
$
|
(9,679,573
|
)
|
|
$
|
(12,010,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations basic
|
|
$
|
(1,402.74
|
)
|
|
$
|
(1,460.69
|
)
|
|
|
|
|
|
|
|
Net loss from continuing operations diluted
|
|
$
|
(1,402.74
|
)
|
|
$
|
(1,460.69
|
)
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations basic
|
|
$
|
244.29
|
|
|
$
|
(57.25
|
)
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations diluted
|
|
$
|
244.29
|
|
|
$
|
(57.25
|
)
|
|
|
|
|
|
|
|
Net loss basic
|
|
$
|
(1,158.45
|
)
|
|
$
|
(1,517.94
|
)
|
|
|
|
|
|
|
|
Net loss diluted
|
|
$
|
(1,158.45
|
)
|
|
$
|
(1,517.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
8,122
|
|
|
|
7,954
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
|
|
8,122
|
|
|
|
7,954
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 3 -
SANUWAVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Additional Paid-
|
|
|
Retained Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
in Capital
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2006
|
|
|
115,000
|
|
|
$
|
1,150
|
|
|
|
7,765.25
|
|
|
$
|
78
|
|
|
$
|
12,470,750
|
|
|
$
|
(11,024,662
|
)
|
|
$
|
11,216
|
|
|
$
|
1,458,532
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,073,661
|
)
|
|
|
|
|
|
|
(12,073,661
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,483
|
|
|
|
|
|
|
|
|
|
|
|
164,483
|
|
Shares issued
|
|
|
111,500
|
|
|
|
1,115
|
|
|
|
207.50
|
|
|
|
2
|
|
|
|
11,169,633
|
|
|
|
|
|
|
|
|
|
|
|
11,170,750
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,793
|
|
|
|
62,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2007
|
|
|
226,500
|
|
|
|
2,265
|
|
|
|
7,972.75
|
|
|
|
80
|
|
|
|
23,804,866
|
|
|
|
(23,098,323
|
)
|
|
|
74,009
|
|
|
|
782,897
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,408,918
|
)
|
|
|
|
|
|
|
(9,408,918
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534,785
|
|
|
|
|
|
|
|
|
|
|
|
534,785
|
|
Shares issued
|
|
|
56,750
|
|
|
|
568
|
|
|
|
890.50
|
|
|
|
9
|
|
|
|
5,763,473
|
|
|
|
|
|
|
|
|
|
|
|
5,764,050
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(270,655
|
)
|
|
|
(270,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008
|
|
|
283,250
|
|
|
$
|
2,833
|
|
|
|
8,863.25
|
|
|
$
|
89
|
|
|
$
|
30,103,124
|
|
|
$
|
(32,507,241
|
)
|
|
$
|
(196,646
|
)
|
|
$
|
(2,597,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 4 -
SANUWAVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(11,393,045
|
)
|
|
$
|
(11,618,294
|
)
|
Adjustments to reconcile net loss to net cash
used by operating activities
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
306,756
|
|
|
|
319,165
|
|
Accrued interest
|
|
|
307,015
|
|
|
|
269,306
|
|
Depreciation
|
|
|
276,724
|
|
|
|
161,352
|
|
Bad debt recovery
|
|
|
(31,861
|
)
|
|
|
10,748
|
|
Stock-based compensation
|
|
|
534,785
|
|
|
|
164,483
|
|
Change in assets (increase) / decrease
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
89,851
|
|
|
|
(7,613
|
)
|
Inventory
|
|
|
7,107
|
|
|
|
(520,703
|
)
|
Prepaid expenses
|
|
|
222,352
|
|
|
|
(129,570
|
)
|
Other assets
|
|
|
60,752
|
|
|
|
(14,910
|
)
|
Change in liabilities increase / (decrease)
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
80,030
|
|
|
|
(1,239,913
|
)
|
|
|
|
|
|
|
|
NET CASH USED BY CONTINUING OPERATIONS
|
|
|
(9,539,534
|
)
|
|
|
(12,605,949
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
|
|
|
2,530,132
|
|
|
|
2,138,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED BY OPERATING ACTIVITIES
|
|
|
(7,009,402
|
)
|
|
|
(10,467,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(116,962
|
)
|
|
|
(335,247
|
)
|
|
|
|
|
|
|
|
NET CASH USED BY CONTINUING OPERATIONS
|
|
|
(116,962
|
)
|
|
|
(335,247
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
|
|
|
408,562
|
|
|
|
74,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
|
|
|
291,600
|
|
|
|
(261,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Proceeds from notes payable, related parties
|
|
|
1,075,000
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
89,050
|
|
|
|
20,750
|
|
Proceeds from sale of preferred stock
|
|
|
5,675,000
|
|
|
|
11,150,000
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
6,839,050
|
|
|
|
11,170,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
|
|
|
(270,655
|
)
|
|
|
62,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(149,407
|
)
|
|
|
504,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF YEAR
|
|
|
693,033
|
|
|
|
188,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF YEAR
|
|
$
|
543,626
|
|
|
$
|
693,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISLOSURE OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
398
|
|
|
$
|
865
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 5 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies
|
Description of the business SANUWAVE, Inc. and Subsidiaries (the Company) is a
global medical technology company focused on the development and utilization of Pulsed
Acoustic Cellular Expression (PACE) technology for advanced wound care, orthopedic\spine,
plastic\cosmetic, and cardiac conditions. Headquartered in Alpharetta, Georgia with
international offices in Lengwil, Switzerland and Tokyo, Japan, the Company designs,
manufactures, markets, and services the Companys industry leading products worldwide.
Operations outside of the United States are subject to risk inherent in operating under
different legal systems and various political and economic environments. Among the risks
are changes in existing tax laws, possible limitations on foreign investments and income
repatriation, government price or foreign exchange controls, and restrictions on currency
exchange. The Company does not engage in hedging activities to mitigate its exposure to
fluctuations in foreign currency exchange rates. During the year ended December 31, 2008
and 2007, the Company reported approximately $1,011,000 and $178,000, respectively, in net
losses from foreign subsidiaries. Total assets of foreign operations were approximately
$1,533,000 and $2,405,000 at December 31, 2008 and 2007, respectively.
The significant accounting policies followed by the Company are summarized below:
Foreign currency translation The functional currencies of the Companys foreign
operations are the local currencies. The financial statements of the Companys foreign
subsidiaries have been translated into United States dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. All balance
sheet accounts have been translated using the exchange rates in effect at the balance sheet
date. Income statement amounts have been translated using the average exchange rate for the
year. Translation adjustments are reported as cumulative translation adjustments and are
shown as a separate component of accumulated other comprehensive income (loss) in the
consolidated statements of stockholders equity. Transactions in currencies other than the
United States dollar during the year are converted into the United States dollar at exchange
rates on the transaction date. Transaction gains and losses are recognized in the current
net loss.
Principles of consolidation The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Estimates These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America. Because a
precise determination of assets and liabilities, and correspondingly revenues and expenses,
depend on future events, the preparation of consolidated financial statements for any period
necessarily involves the use of estimates and assumptions. Actual amounts may differ from
these estimates. These consolidated financial statements have, in managements opinion,
been properly prepared within reasonable limits of materiality and within the framework of
the accounting policies summarized herein. Significant estimates include the recording of
allowances for doubtful accounts, estimated useful life of property and equipment, accrued
expenses, and the determination of the valuation of allowances for deferred taxes.
- 6 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies (continued)
|
Cash For purposes of the consolidated financial statements, liquid instruments with
an original maturity of 90 days or less are considered cash.
Concentration of credit risk Management routinely assesses the financial strength of
its customers and, as a consequence, believes accounts receivable are stated at the net
realizable value and credit risk exposure is limited. The Company maintains its cash in
bank accounts which at times may exceed federally insured limits. The Company does not
believe it is exposed to any significant credit risk in such accounts.
Accounts receivable Accounts receivable are stated at the amount management expects
to collect from outstanding balances. Management provides for probable uncollectible
amounts through a charge to earnings based on its assessment of the current status of
individual accounts. Balances that are still outstanding after management has used
reasonable collection efforts are written off through a charge to the valuation allowance.
At December 31, 2008 and 2007, the allowances for doubtful accounts were $64,490 and
$90,353, respectively. Receivables are considered past due on average if greater than 30
days old. The following is a summary of accounts receivable allowances:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Balance at beginning of year
|
|
$
|
90,353
|
|
|
$
|
85,605
|
|
Less: reserve adjustments
|
|
|
(28,191
|
)
|
|
|
(1,631
|
)
|
Less: write-offs
|
|
|
(3,226
|
)
|
|
|
(164
|
)
|
Add: foreign currency translation
|
|
|
5,554
|
|
|
|
6,543
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
64,490
|
|
|
$
|
90,353
|
|
|
|
|
|
|
|
|
Inventory Inventory consists of finished medical equipment and parts and is stated at
the lower of cost or market. Cost has been determined on a weighted average basis. Market
is based upon realizable value less allowance for selling and distribution expenses.
Depreciation of property and equipment The straight-line method of depreciation is
used for computing depreciation on all property and equipment. Depreciation is based on
estimated useful lives as follows: OssaTron devices, 3 to 5 years; vehicles and equipment, 3
to 5 years; leasehold improvements, 3 years; software, 2 years; and furniture and fixtures,
3 years.
Impairment of long-lived assets The Company reviews long-lived assets, other than
goodwill and other intangible assets with indefinite lives, for impairment whenever facts
and circumstances indicate that the carrying amounts of the assets may not be recoverable.
An impairment loss is recognized only if the carrying amount of the asset is not recoverable
and exceeds its fair value. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the assets carrying value is not recoverable, an
impairment charge is recognized for the amount by which the carrying amount of the asset
exceeds its fair value. The Company determines fair value by using a combination of
comparable market values and discounted cash flows, as appropriate.
- 7 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies (continued)
|
Intangible assets Intangible assets are recorded at cost. Intangible assets subject
to amortization include patents. Patents are amortized on a straight-line basis over the
average remaining life of 11.4 years.
Fair value of financial instruments The book values of trade accounts receivable,
trade accounts payable, and other financial instruments approximate their fair values,
principally because of the short-term maturities of these instruments. The fair value of
the Companys long-term debt is estimated based on current rates offered to the Company for
debt of similar terms and maturities.
Revenue recognition Sales of medical devices including related accessories are
recognized when shipped to the customer. Fees from services performed are recognized when
the procedure is performed.
Shipping and handling costs Shipping charges billed to customers are included in
revenue. Shipping and handling costs have been recorded in cost of revenues.
Deferred income taxes Deferred income taxes are provided for transactions which are
reported in different years for financial statement purposes than for income tax purposes.
The Company has adopted Financial Accounting Standards Board Statement No. 109 as its method
of computing deferred income taxes. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be realized.
The Company evaluates the realizability of its deferred tax assets by assessing its
valuation allowance and by adjusting the amount of such allowance, if necessary.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48
provides guidance for how uncertain tax provisions should be recognized, measured, presented
and disclosed in the consolidated financial statements. FIN 48 requires the evaluation of
tax positions taken or expected to be taken in the course of preparing the Companys tax
returns to determine whether the tax positions would more-likely-than-not be sustained if
challenged by the applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold would be recorded as a tax benefit or expense in the current
year.
Effective January 1, 2007, the Company adopted FIN No. 48 Accounting for Uncertainty
in Income Taxes. FIN 48 specifies the way public companies are to account for
uncertainties in income tax reporting, and prescribes a methodology for recognizing,
reversing, and measuring the tax benefits of a tax position taken, or expected to be taken,
in a tax return. The adoption of FIN 48 did not have a material effect on the Company.
- 8 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies (continued)
|
Earnings (loss) per share The Company has adopted SFAS No. 128, Earnings per
Share, which requires disclosure on the financial statements of basic and diluted
earnings (loss) per share. The Company calculates basic net income (loss) per share by
dividing net income (loss) by the weighted average number of common shares outstanding
during the period. The Company calculates diluted net income (loss) per share in a similar
manner, but include the dilutive effect of stock options and nonvested restricted shares
(units) as measured under the treasury stock method. Share-based payment awards that are
contingently issuable upon the achievement of a specified market or performance condition
are included in the diluted net income (loss) per share calculation in the period in which
the condition is satisfied. To the extent that securities are antidilutive, they are
excluded from the calculation of diluted net income (loss) per share (Note 8).
Comprehensive income The Company has adopted SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting comprehensive income (loss) and
its components in a financial statement. Comprehensive income (loss) as defined includes
all changes in equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income (loss), which are excluded from net income
(loss), include foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities.
Stock-based compensation The Company uses the fair value method of accounting
prescribed by SFAS No. 123(R), Accounting for Stock-Based Compensation, for its employee
stock option program. Under SFAS No. 123(R), stock-based compensation cost is measured at
the grant date based on the fair value of the award and is recognized as expense over the
applicable vesting period of the stock award (generally four years) using the straight-line
method.
Advertising costs Advertising costs are expensed in the period incurred. Advertising
expense for the years ended December 31, 2008 and 2007, was $79,014 and $55,903,
respectively.
Research and Development Research and development costs are expensed as incurred.
- 9 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies (continued)
|
Discontinued
operations The Company accounts for long-lived assets in accordance with
the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to
separately report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
On October 31, 2008, the Company discontinued the OssaTron mobile service business and
sold certain assets for a total cash consideration of $400,000 to a minority shareholder of
the Company. As a result of the sale, the Company recorded a gain of approximately
$106,000. The long-lived assets and other assets and liabilities related to the OssaTron
mobile service business have been designated as held-for-sale.
On June 3, 2009, the Company sold the net assets and liabilities of the veterinary
business. In accordance with SFAS No. 144, the long-lived assets and other assets and
liabilities related to the business have been designated as held-for-sale.
As required by SFAS No. 144, the results of operations from these businesses have been
reported as discontinued operations in the consolidated statements of income and
comprehensive loss. All of the assets and liabilities related to these discontinued
operations have been reclassified to current assets, non-current assets, and current
liabilities related to discontinued operations, as applicable.
The results of operations for these businesses allocated to discontinued operations
were those results the Company believes will be eliminated from the ongoing operations of
the entity as a result of the disposal transactions. The Company identified such results
via a line item review of the statement of operations for SANUWAVE, Inc and Subsidiaries.
The income tax rate used for the tax effect of the discontinued operations is based on the
effective tax rate for the Company.
- 10 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies (continued)
|
Recent pronouncements In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, established a framework for
measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS
157 is effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. In December 2007, the FASB released a proposed FASB Staff
Position (FSP FAS 157-b-Effective Date of FASB Statement No. 157) which, if adopted as
proposed, would delay the effective date of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). In February 2008, the FASB
issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (the
FSP). The FSP delayed, for one year, the effective date of FAS 157 for all nonfinancial
assets and liabilities, except those that are recognized or disclosed in the consolidated
financial statements on at least an annual basis. The implementation of SFAS No. 157 for
financial assets and financial liabilities, effective January 1, 2008, did not have a
material impact on the Company.
In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations.
SFAS 141(R) changes the accounting for business combinations including the measurement of
acquirer shares issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for preacquisition gain and loss contingencies, the
recognition of capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition related
transaction costs and the recognition of changes in the acquirers income tax valuation
allowance. SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, except for certain tax adjustments for the prior business
combinations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160
changes the accounting for noncontrolling (minority) interests in consolidated financial
statements including the requirements to classify noncontrolling interests as a component of
consolidated stockholders equity, and the elimination of minority interest accounting in
results of operations with earnings attributable to noncontrolling interest reported as part
of consolidated earnings. Additionally, SFAS 160 revises the accounting for both increases
and decreases in a parents controlling ownership interest. SFAS 160 is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company
does not expect SFAS 160 to have a material effect on its consolidated financial statements.
- 11 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies (continued)
|
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161
changes the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008. The Company
is currently evaluating the impact of SFAS 161 and does not expect it to have a material
effect on its consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company is currently evaluating the impact of FSP 142-3.
In May 2008, the FASB issued SFAS No. 162, The Hierarch of Generally Accepted
Accounting Principles (SFAS 162). SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements that are presented in conformity with U.S. GAAP for
nongovernmental entities. SFAS 162 is effective 60 days following the Securities and
Exchange Commissions approval of the Public Company Accounting Oversight Board auditing
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. The Company does not expect SFAS 162 to have a material
effect on its consolidated financial statements.
At the November 24, 2008 meeting, the FASB ratified the consensus reached in EITF Issue
No. 08-6, Equity Method Investment Accounting Considerations (EITF 08-6). Because of
the significant changes to the guidance on subsidiary acquisitions and subsidiary equity
transactions and the increased use of fair value measurements as a result of SFAS 141(R) and
SFAS 160, questions have arisen regarding the application of that accounting guidance to
equity method investments. EITF 08-6 provides guidance for entities that acquire or hold
investments accounted for under the equity method. This issue is effective for transactions
occurring in fiscal years and interim periods beginning on or after December 15, 2008.
Early adoption is not permitted. The Company is currently evaluating the impact, if any, of
this statement on its consolidated financial statements.
- 12 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(1)
|
|
Summary of significant accounting policies (continued)
|
On April 9, 2009, the FASB issued three Staff Positions (FSP): (1) FSP FAS 157-4,
which provides guidance on determining fair value when market activity has decreased; (2)
FSP FAS 115-2 and FAS 124-2, which addresses other-than-temporary impairments for debt
securities; and (3) FSP FAS 107-1 and APB 28-1, which discusses fair value disclosures for
financial instruments in interim periods. These FSPs are effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted. The Company is currently
evaluating the impact, if any, of these FSPs on its consolidated financial statements.
Reclassifications Certain accounts in the prior-year consolidated financial
statements have been reclassified for comparative purposes to conform with the presentation
in the current-year consolidated financial statements.
(2)
|
|
Discontinued operations
|
On October 31, 2008, the Company discontinued its OssaTron mobile service business.
The Company sold certain assets for a total cash consideration of $400,000 to a minority
shareholder of the Company and recorded a gain of approximately $106,000.
On June 3, 2009, the Company sold its veterinary business for a total cash
consideration of $3,500,000. As a result of the sale, the Company recorded a gain of
approximately $2,492,300.
Accordingly, the Companys consolidated financial statements have been prepared with
the net assets, results of operations, and cash flows of these businesses displayed
separately as discontinued operations.
- 13 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(2)
|
|
Discontinued operations (continued)
|
The operating results of the discontinued operations are summarized as follows for the
years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
$
|
5,779,988
|
|
|
$
|
6,609,173
|
|
Cost of revenues
|
|
|
1,067,467
|
|
|
|
1,245,034
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,712,521
|
|
|
|
5,364,139
|
|
|
|
|
|
|
|
|
|
|
Operating income (expenses)
|
|
|
|
|
|
|
|
|
Facility fee adjustment
|
|
|
1,291,583
|
|
|
|
|
|
Depreciation expense
|
|
|
(1,176,931
|
)
|
|
|
(1,676,269
|
)
|
Other operating expenses
|
|
|
(2,705,438
|
)
|
|
|
(3,808,708
|
)
|
|
|
|
|
|
|
|
Total operating income (expenses)
|
|
|
(2,590,786
|
)
|
|
|
(5,484,977
|
)
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,121,735
|
|
|
|
(120,838
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
196,110
|
|
|
|
(334,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
before income taxes
|
|
|
2,317,845
|
|
|
|
(455,367
|
)
|
Income tax expense
|
|
|
333,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations,
net of income tax
|
|
$
|
1,984,127
|
|
|
$
|
(455,367
|
)
|
|
|
|
|
|
|
|
- 14 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(2)
|
|
Discontinued operations (continued)
|
As of December 31, 2008 and 2007, the Companys assets and liabilities related to
discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Cash
|
|
$
|
127,001
|
|
|
$
|
156,190
|
|
Accounts receivable trade, net
|
|
|
581,200
|
|
|
|
1,240,537
|
|
Inventory
|
|
|
558,543
|
|
|
|
784,078
|
|
Prepaid expenses and other current assets
|
|
|
18,273
|
|
|
|
26,989
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,285,017
|
|
|
|
2,207,794
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,011,734
|
|
|
|
2,565,147
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
2,296,751
|
|
|
|
4,772,941
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(845,593
|
)
|
|
|
(2,367,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets of discontinued operations
|
|
$
|
1,451,158
|
|
|
$
|
2,405,725
|
|
|
|
|
|
|
|
|
Inventory consists of the following at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Inventory finished goods
|
|
$
|
294,039
|
|
|
$
|
258,393
|
|
Inventory parts
|
|
|
390,711
|
|
|
|
433,464
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
684,750
|
|
|
$
|
691,857
|
|
|
|
|
|
|
|
|
Inventory related to discontinued operations (Note 2) consists of the following at
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Inventory finished goods
|
|
$
|
258,035
|
|
|
$
|
345,589
|
|
Inventory parts
|
|
|
300,508
|
|
|
|
438,489
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
558,543
|
|
|
$
|
784,078
|
|
|
|
|
|
|
|
|
- 15 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(4)
|
|
Property and equipment
|
Property and equipment consists of the following at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Cost
|
|
|
|
|
|
|
|
|
Machines and equipment
|
|
$
|
204,711
|
|
|
$
|
143,786
|
|
Office and computer equipment
|
|
|
353,098
|
|
|
|
339,187
|
|
Leasehold improvements
|
|
|
91,590
|
|
|
|
90,191
|
|
Furniture and fixtures
|
|
|
34,915
|
|
|
|
33,258
|
|
Software
|
|
|
40,233
|
|
|
|
33,043
|
|
Other assets
|
|
|
21,688
|
|
|
|
4,191
|
|
|
|
|
|
|
|
|
Total
|
|
|
746,235
|
|
|
|
643,656
|
|
Accumulated depreciation
|
|
|
(466,444
|
)
|
|
|
(204,100
|
)
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
279,791
|
|
|
$
|
439,556
|
|
|
|
|
|
|
|
|
The aggregate depreciation charged to operations was $276,724 and $161,352 for the
years ended December 31, 2008 and 2007, respectively. The depreciation policies followed by
the Company are described in Note (1).
Property and equipment related to discontinued operations (Note 2) consists of the
following at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Cost
|
|
|
|
|
|
|
|
|
OssaTron devices
|
|
$
|
4,837,165
|
|
|
$
|
6,027,699
|
|
Vehicles and equipment
|
|
|
376,511
|
|
|
|
582,414
|
|
Furniture and fixtures
|
|
|
9,765
|
|
|
|
7,935
|
|
Software
|
|
|
4,238
|
|
|
|
3,444
|
|
Office and computer equipment
|
|
|
1,941
|
|
|
|
1,578
|
|
Other assets
|
|
|
8,520
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,238,140
|
|
|
|
6,623,070
|
|
Accumulated depreciation
|
|
|
(4,226,406
|
)
|
|
|
(4,057,923
|
)
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
1,011,734
|
|
|
$
|
2,565,147
|
|
|
|
|
|
|
|
|
The aggregate depreciation charged to discontinued operations was $1,176,931 and
$1,676,269 for the years ended December 31, 2008 and 2007, respectively. The depreciation
policies followed by the Company are described in Note (1).
- 16 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
Intangible assets consist of the following at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Cost
|
|
|
|
|
|
|
|
|
Patents, at cost
|
|
$
|
3,502,135
|
|
|
$
|
3,502,135
|
|
Less accumulated amortization
|
|
|
(1,048,084
|
)
|
|
|
(741,328
|
)
|
Net intangible assets
|
|
$
|
2,454,051
|
|
|
$
|
2,760,807
|
|
|
|
|
|
|
|
|
The aggregate amortization charged to amortization expense was $306,756 and $319,165
for the years ended December 31, 2008 and 2007, respectively. The amortization policies
followed by the Company are described in Note (1).
Amortization expense for the future years is summarized as follows:
|
|
|
|
|
Years ending December 31,
|
|
Amount
|
|
|
|
|
|
|
2009
|
|
$
|
306,756
|
|
2010
|
|
|
306,756
|
|
2011
|
|
|
306,756
|
|
2012
|
|
|
306,756
|
|
2013
|
|
|
306,756
|
|
2014 and thereafter
|
|
|
920,271
|
|
|
|
|
|
Total
|
|
$
|
2,454,051
|
|
|
|
|
|
The weighted average amortization for intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
3,502,135
|
|
|
|
11.4
|
|
- 17 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
Accrued expenses consist of the following at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Accrued clinical site payments
|
|
$
|
195,773
|
|
|
$
|
|
|
Accrued professional fees
|
|
|
103,160
|
|
|
|
288,827
|
|
Accrued other
|
|
|
149,309
|
|
|
|
181,012
|
|
|
|
|
|
|
|
|
|
|
$
|
448,242
|
|
|
$
|
469,839
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided for temporary differences between the carrying
amounts and tax bases of assets and liabilities. Deferred taxes are classified as current
or noncurrent based on the financial statement classification of the related asset or
liability giving rise to the temporary difference. For those deferred tax assets or
liabilities (such as the tax effect of the net operating loss carryforward) which do not
relate to a financial statement asset or liability, the classification is based on the
expected reversal date of the temporary difference.
The income tax provision (benefit) consists of the following at December 31, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,770,299
|
)
|
|
|
(2,623,671
|
)
|
State
|
|
|
(304,374
|
)
|
|
|
(288,264
|
)
|
Foreign
|
|
|
(194,144
|
)
|
|
|
(34,098
|
)
|
Change in valuation allowance
|
|
|
3,268,817
|
|
|
|
2,946,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
- 18 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(7)
|
|
Income taxes (continued)
|
The tax effects of temporary differences that give rise to the deferred tax assets
(liabilities) at December 31, 2008 and 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
10,804,862
|
|
|
$
|
8,048,857
|
|
Excess of tax basis over book value of
intangible assets
|
|
|
401,600
|
|
|
|
397,572
|
|
Stock-based compensation
|
|
|
337,628
|
|
|
|
62,068
|
|
Other
|
|
|
21,201
|
|
|
|
15,069
|
|
Valuation allowance
|
|
|
(11,529,998
|
)
|
|
|
(8,261,181
|
)
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
35,293
|
|
|
|
262,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Excess of book value over tax basis of
property and equipment
|
|
|
35,293
|
|
|
|
262,385
|
|
|
|
|
|
|
|
|
Deferred tax, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The difference between the amount of reported income tax benefit and the tax benefit
determined by applying the federal statutory tax rate of 35% to the pre-tax income from
continuing operations is attributable primarily to the increase in the valuation allowance
of $3,268,817 and $4,286,107 for 2008 and 2007, respectively. The schedule of federal net
operating loss carryforwards at December 31, 2008 will expire as follows:
|
|
|
|
|
Years ending December 31,
|
|
Amount
|
|
2025
|
|
$
|
1,376,740
|
|
2026
|
|
|
9,428,700
|
|
2027
|
|
|
10,291,249
|
|
2028
|
|
|
6,788,977
|
|
|
|
|
|
Total
|
|
$
|
27,885,666
|
|
|
|
|
|
- 19 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(8)
|
|
Earnings (loss) per share
|
The Company reports basic and diluted earnings per share in accordance with SFAS No.
128, Earnings Per Share (SFAS No. 128). Basic earnings per share excludes the dilutive
effects of options and warrants. Diluted earnings per share includes only the dilutive
effects of common stock equivalents such as stock options and warrants.
The following table sets forth the computation of basic and diluted earnings per share
pursuant to SFAS 128.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(11,393,045
|
)
|
|
$
|
(11,618,294
|
)
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
1,984,127
|
|
|
$
|
(455,367
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,408,918
|
)
|
|
$
|
(12,073,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
weighted average shares outstanding during
the period
|
|
|
8,122
|
|
|
|
7,954
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per
share adjusted weighted average shares
and assumed conversions
|
|
|
8,122
|
|
|
|
7,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per share basic
|
|
$
|
(1,402.74
|
)
|
|
$
|
(1,460.69
|
)
|
|
|
|
|
|
|
|
Net loss from continuing operations per share diluted
|
|
$
|
(1,402.74
|
)
|
|
$
|
(1,460.69
|
)
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations per
share basic
|
|
$
|
244.29
|
|
|
$
|
(57.25
|
)
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations per
share diluted
|
|
$
|
244.29
|
|
|
$
|
(57.25
|
)
|
|
|
|
|
|
|
|
Net loss per share basic
|
|
$
|
(1,158.45
|
)
|
|
$
|
(1,517.94
|
)
|
|
|
|
|
|
|
|
Net loss per share diluted
|
|
$
|
(1,158.45
|
)
|
|
$
|
(1,517.94
|
)
|
|
|
|
|
|
|
|
As a result of the net loss for the years ended December 31, 2008 and 2007,
respectively, all potentially dilutive shares were anti-dilutive and therefore excluded from
the computation of diluted net loss per share. The anti-dilutive common shares totaled
295,954 shares and 178,151 shares for the years ended December 31, 2008 and 2007,
respectively.
- 20 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(9)
|
|
Notes payable, related parties
|
The notes payable consists of the following at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Notes payable, unsecured, bearing interest
at 6% to HealthTronics, a common
shareholder of the Company. The notes were
issued in conjunction with the Companys
purchase of the orthopedic division of
HealthTronics on August 1, 2005. Quarterly
interest through June 30, 2010, is accrued
and added to the principal balance.
Interest is paid quarterly in arrears
beginning September 30, 2010. All
remaining unpaid accrued interest and
principal is due August 1, 2015. Accrued
interest totaled $911,564 and $624,800 at
December 31, 2008 and 2007, respectively.
|
|
$
|
4,911,564
|
|
|
$
|
4,624,800
|
|
|
|
|
|
|
|
|
|
|
Notes payable, unsecured, bearing interest
at 15% to Prides Capital and NightWatch
Capital, preferred shareholders of the
Company. Quarterly interest through
December 31, 2008, is accrued and added to
the principal balance. Interest is paid
quarterly in arrears beginning December 31,
2008, if elected by the Holder. As of
December 31, 2008, the Holder has not
elected to have interest paid. All
remaining unpaid accrued interest and
principal is due September 30, 2011.
Accrued interest totaled $20,251 at
December 31, 2008. All or any portion of
the unpaid principal can be converted into
preferred stock with a conversion price of
$100 per share.
|
|
|
1,095,251
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,006,815
|
|
|
|
4,624,800
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current portion
|
|
$
|
6,006,815
|
|
|
$
|
4,624,800
|
|
|
|
|
|
|
|
|
- 21 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(9)
|
|
Notes payable, related parties (continued)
|
Maturities on long-term notes payable are as follows:
|
|
|
|
|
Years ending December 31,
|
|
Amount
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
2010
|
|
|
|
|
2011
|
|
|
1,095,251
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
2014 and thereafter
|
|
|
4,911,564
|
|
|
|
|
|
Total
|
|
$
|
6,006,815
|
|
|
|
|
|
Interest expense on related parties notes payable totaled $307,015 and $269,306 for the
years ended December 31, 2008 and 2007, respectively.
On December 21, 2007, the number of authorized shares of common stock was increased
from 275,000 to 750,000 shares.
In October, 2008, the Company sold 890.50 shares of common stock at $100 per share to
an existing shareholder for total cash proceeds of $89,050.
(11)
|
|
Convertible participating preferred stock
|
During the year ended December 31, 2008 and 2007, the Company issued 56,750 and 111,500
shares of Series A convertible participating preferred stock at $100 per share for a total
cash proceeds of $5,675,000 and $11,150,000, respectively. On December 21, 2007, the number
of authorized shares of preferred stock was increased from 200,000 to 750,000 shares.
Conversion
Each share of Series A convertible participating preferred stock, at the option of the
holder, is convertible into a number of duly authorized, validly issued, fully paid and
non-assessable shares of common stock as determined by multiplying the number of shares of
Series A convertible participating preferred stock being converted by the applicable
conversion rate. The conversion rate in effect at any time is determined by dividing the
preferred stock issue price plus an amount equal to the per share value of all accrued and
unpaid dividends by the conversion price in effect at that time.
- 22 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(11)
|
|
Convertible participating preferred stock (continued)
|
Dividends
The holders of the Series A convertible participating preferred stock are entitled to
receive dividends when and if declared by the Board of Directors. Dividends on preferred
stock are in preference to and prior to any payment of any dividends on common stock and are
non cumulative. As of December 31, 2008 and 2007, no dividends had been declared.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company, the holders
of the Series A convertible participating preferred stock are entitled to receive prior to,
and in preference to, any distribution to the common stockholders, an amount equal to the
greater of $100 per share plus accrued but unpaid dividends, or such amount per share as
would have been payable had all shares of the Series A convertible participating preferred
stock been converted to common stock immediately prior to such event of liquidation,
dissolution or winding up. In the event that upon liquidation or dissolution, the assets
and funds of the Company are insufficient to permit the payment to preferred stockholders of
the full preferential amounts, then the entire assets and funds of the Company legally
available for distribution are to be distributed ratably among the holders of the shares of
Series A convertible participating preferred stock in proportion to the full preferential
amount each is otherwise entitled to receive.
After the distributions described above have been paid in full, the remaining assets of
the Company available for distribution shall be distributed pro-rata to the holders of the
shares of common stock.
Voting rights
Each Series A convertible participating preferred stockholder is entitled to the number
of votes equal to the number of shares of common stock into which such holders shares are
convertible.
(12)
|
|
Commitments and contingencies
|
The Company leases office and warehouse space. Rent expense for the years ended
December 31, 2008 and 2007, was $615,678 and $522,867, respectively. Minimum future lease
payments under noncancellable operating leases consist of the following:
|
|
|
|
|
Years ending December 31,
|
|
Amount
|
|
|
|
|
|
|
2009
|
|
$
|
273,394
|
|
2010
|
|
|
69,303
|
|
|
|
|
|
Total
|
|
$
|
342,697
|
|
|
|
|
|
- 23 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(12)
|
|
Commitments and contingencies (continued)
|
The Company is involved in various legal matters that have arisen in the ordinary
course of business. While the ultimate outcome of these matters is not presently
determinable, it is the opinion of management that the resolution will not have a material
adverse effect on the financial position or results of operations of the Company.
The Company sponsors a 401k plan that covers all employees who meet the eligibility
requirements. The Company matches 50% of employee contributions up to 6% of their
compensation. The Company contributed $78,717 and $65,490 to the plan for the years ended
December 31, 2008 and 2007, respectively.
As shown in the accompanying consolidated financial statements, the Company incurred a
net loss of approximately $9,409,000 and $12,074,000 during the years ended December 31,
2008 and 2007, respectively. At December 31, 2008 and 2007, the Companys current
liabilities exceeded its current assets by approximately $418,000 and $500,000,
respectively. Those factors create an uncertainty about the Companys ability to continue
as a going concern. Management of the Company believes the Companys current investors
and/or potential additional investors, as well as possible asset sales, will provide the
necessary funding for the Company (Note 16). The consolidated financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a
going concern. The Company is economically dependent upon future capital contributions or
financing to fund ongoing operations. For the years ended December 31, 2008 and 2007, an
additional 56,750 and 111,500, respectively, shares of Series A convertible participating
preferred stock were issued to existing stockholders for total cash proceeds of $5,675,000
and $11,150,000, respectively (Note 11). During 2008, the Company obtained cash infusions
totaling $1,075,000 in the form of notes payable from related parties (Note 9). The notes
payable can be converted into additional shares of convertible participating preferred stock
with all or any portion of the unpaid principal at a conversion price of $100 per share.
- 24 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(15)
|
|
Stock-based compensation
|
During 2006, the Company approved the 2006 Stock Incentive Plan (the Plan) and
certain Nonstatutory Stock Option Agreements with key employees. The Nonstatutory Stock
Option Agreements have terms substantially the same as the Plan. As of December 31, 2008,
the Plan reserved approximately 41,000 shares of $.01 par value common stock for grant. The
Plan permits granting of awards to selected employees and directors of the Company in the
form of options to purchase shares of common stock. Options granted may include
Nonstatutory Options as well as Non-qualified Incentive Stock Options. The Plan is
currently administered by the Board of Directors. The Plan gives broad powers to the Board
of Directors to administer and interpret the particular form and conditions of each option.
The stock options granted were nonstatutory options which, under the Plan, vest equally over
a four year period, and have a 10-year term. The options were granted to employees at an
exercise price of $100 per share, which was deemed to be the fair market value of the common
stock on the date of the grant. It is the Companys policy to issue new stock certificates
to satisfy stock option exercises.
Using the Black-Scholes option pricing model, management has determined that the
options have a weighted average fair value per share of $48.51 at December 31, 2008 and
$48.48 at December 31, 2007, resulting in a total compensation cost of $2,181,774 and
$700,567 in 2008 and 2007, respectively. Compensation cost will be recognized over the
weighted average four year service period. For the years ended December 31, 2008 and 2007,
the Company recognized $534,785 and $164,483, respectively, as compensation cost and
recorded a related deferred tax benefit of $337,628 and $62,068, respectively. The
remaining $1,287,052 and $340,630, respectively, of compensation cost will be recognized
over the next three years at an average rate of approximately $430,000 and $110,000 per
year, respectively.
The assumptions used and the calculated fair value of options is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Expected life in years
|
|
|
6.0
|
|
|
|
6.0
|
|
Risk free interest rate
|
|
|
3.29
|
%
|
|
|
4.62
|
%
|
Weighted average volatility
|
|
|
46.30
|
%
|
|
|
46.30
|
%
|
Expected dividiend yield (1)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company has not paid dividends on its common stock and does not expect
to pay dividends on its common stock in the near future.
|
- 25 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
(15)
|
|
Stock-based compensation (continued)
|
A summary of option activity as of December 31, 2008 and 2007, and the changes during
the years ended December 31, 2008 and 2007, is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding as of December 31, 2006
|
|
|
14,394
|
|
|
$
|
100
|
|
Granted
|
|
|
725
|
|
|
|
100
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(561
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007
|
|
|
14,558
|
|
|
|
100
|
|
Granted
|
|
|
30,496
|
|
|
|
100
|
|
Exercised
|
|
|
(890
|
)
|
|
|
100
|
|
Forfeited or expired
|
|
|
(3,238
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
40,926
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
25,726
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual term for outstanding and exercisable stock
options is 9.0 years as of December 31, 2008, and 9.5 years as of December 31, 2007.
A summary of the Companys nonvested options as of December 31, 2008 and 2007, and
changes during the years ended December 31, 2008 and 2007, is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Nonvested options, December 31, 2006
|
|
|
11,480
|
|
|
$
|
468,254
|
|
Granted
|
|
|
725
|
|
|
|
36,859
|
|
Vested
|
|
|
(3,235
|
)
|
|
|
(145,071
|
)
|
Forfeited or expired
|
|
|
(421
|
)
|
|
|
(19,412
|
)
|
|
|
|
|
|
|
|
Nonvested options, December 31, 2007
|
|
|
8,549
|
|
|
|
340,630
|
|
Granted
|
|
|
30,496
|
|
|
|
1,481,207
|
|
Vested
|
|
|
(20,875
|
)
|
|
|
(377,615
|
)
|
Forfeited or expired
|
|
|
(2,970
|
)
|
|
|
(157,170
|
)
|
|
|
|
|
|
|
|
Nonvested options, December 31, 2008
|
|
|
15,200
|
|
|
$
|
1,287,052
|
|
|
|
|
|
|
|
|
- 26 -
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007
For the period January 1, 2009 through May 31, 2009, the Company issued additional
notes payable, related parties to Prides Capital for $2,125,000. The terms are the same as
the notes payable, related parties issued in 2008 (Note 9).
On June 3, 2009, the Company sold its veterinary business for a total cash
consideration of $3,500,000. As a result of the sale, the Company recorded a gain of
approximately $2,492,300 (Note 2).
(17)
|
|
Segmented information
|
Subsequent to discontinuing the OssaTron mobile service business and selling the
veterinary business line (Note 2), the Company has only one line of business and
substantially all assets are located in the United States.
- 27 -
SANUWAVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,139,068
|
|
|
$
|
543,626
|
|
Accounts receivable trade, net of allowance for doubtful accounts
of $31,411 in 2009 and $64,490 in 2008
|
|
|
89,324
|
|
|
|
52,414
|
|
Inventory (Note 6)
|
|
|
579,807
|
|
|
|
684,750
|
|
Prepaid expenses
|
|
|
125,576
|
|
|
|
106,617
|
|
Due from Pulse Veterinary Technologies, LLC
|
|
|
217,834
|
|
|
|
|
|
Current assets related to discontinued operations (Note 5)
|
|
|
168,509
|
|
|
|
1,285,017
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
4,320,118
|
|
|
|
2,672,424
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Note 7)
|
|
|
183,440
|
|
|
|
279,791
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
81,447
|
|
|
|
81,017
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, at cost, less accumulated amortization (Note 8)
|
|
|
2,300,673
|
|
|
|
2,454,051
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS RELATED TO DISCONTINUED OPERATIONS (Note 5)
|
|
|
924,971
|
|
|
|
1,011,734
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
7,810,649
|
|
|
$
|
6,499,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
582,024
|
|
|
$
|
975,811
|
|
Payroll and related
|
|
|
660,297
|
|
|
|
820,397
|
|
Accrued expenses
|
|
|
349,987
|
|
|
|
448,242
|
|
Liabilities related to discontinued operations (Note 5)
|
|
|
656,261
|
|
|
|
845,593
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
2,248,569
|
|
|
|
3,090,043
|
|
|
|
|
|
|
|
|
|
|
NOTES PAYABLE, RELATED PARTIES (Note 10)
|
|
|
8,462,457
|
|
|
|
6,006,815
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
10,711,026
|
|
|
|
9,096,858
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY (DEFICIT)
|
CONVERTIBLE PARTICIPATING PREFERRED STOCK
|
|
|
2,869
|
|
|
|
2,833
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
53
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
30,370,516
|
|
|
|
30,103,124
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
|
(16,112
|
)
|
|
|
(196,646
|
)
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS (DEFICIT)
|
|
|
(33,257,703
|
)
|
|
|
(32,507,241
|
)
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
(2,900,377
|
)
|
|
|
(2,597,841
|
)
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
|
$
|
7,810,649
|
|
|
$
|
6,499,017
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
SANUWAVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
437,797
|
|
|
$
|
695,228
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
98,663
|
|
|
|
221,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
339,134
|
|
|
|
473,493
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,622,284
|
|
|
|
1,530,667
|
|
General and administrative
|
|
|
1,903,166
|
|
|
|
4,091,339
|
|
Depreciation
|
|
|
103,846
|
|
|
|
123,571
|
|
Amortization
|
|
|
153,378
|
|
|
|
153,378
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
3,782,674
|
|
|
|
5,898,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(3,443,540
|
)
|
|
|
(5,425,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE
|
|
|
|
|
|
|
|
|
Loss on sale of assets
|
|
|
(13,651
|
)
|
|
|
|
|
Interest expense
|
|
|
(329,076
|
)
|
|
|
(140,490
|
)
|
Loss on foreign currency exchange
|
|
|
(37,774
|
)
|
|
|
(25,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER EXPENSE
|
|
|
(380,501
|
)
|
|
|
(165,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(3,824,041
|
)
|
|
|
(5,590,958
|
)
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(3,824,041
|
)
|
|
|
(5,590,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax
|
|
|
581,306
|
|
|
|
119,128
|
|
Gain on sale of veterinary division, net of tax
|
|
|
2,492,273
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME FROM DISCONTINUED OPERATIONS
|
|
|
3,073,579
|
|
|
|
119,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(750,462
|
)
|
|
|
(5,471,830
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(45,702
|
)
|
|
|
83,002
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE LOSS
|
|
$
|
(796,164
|
)
|
|
$
|
(5,388,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations basic
|
|
$
|
(499.02
|
)
|
|
$
|
(701.24
|
)
|
|
|
|
|
|
|
|
Net loss from continuing operations diluted
|
|
$
|
(499.02
|
)
|
|
$
|
(701.24
|
)
|
|
|
|
|
|
|
|
Net income from discontinued operations basic
|
|
$
|
401.09
|
|
|
$
|
14.94
|
|
|
|
|
|
|
|
|
Net income from discontinued operations diluted
|
|
$
|
401.09
|
|
|
$
|
14.94
|
|
|
|
|
|
|
|
|
Net loss basic
|
|
$
|
(97.93
|
)
|
|
$
|
(686.30
|
)
|
|
|
|
|
|
|
|
Net loss diluted
|
|
$
|
(97.93
|
)
|
|
$
|
(686.30
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
7,663
|
|
|
|
7,973
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
7,663
|
|
|
|
7,973
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
SANUWAVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(3,824,041
|
)
|
|
$
|
(5,590,958
|
)
|
Adjustments to reconcile net loss to net cash
used by operating activities
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
153,378
|
|
|
|
153,378
|
|
Accrued interest
|
|
|
330,642
|
|
|
|
140,427
|
|
Depreciation
|
|
|
103,846
|
|
|
|
123,571
|
|
Bad debt recovery
|
|
|
(33,400
|
)
|
|
|
(2,163
|
)
|
Loss on sale of property and equipment
|
|
|
13,651
|
|
|
|
|
|
Stock-based compensation
|
|
|
267,392
|
|
|
|
267,392
|
|
Changes in assets (increase)/decrease
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
(3,509
|
)
|
|
|
(29,850
|
)
|
Due from Pulse Veterinary Technologies, LLC
|
|
|
(157,009
|
)
|
|
|
|
|
Inventory
|
|
|
104,943
|
|
|
|
(44,080
|
)
|
Prepaid expenses
|
|
|
(18,959
|
)
|
|
|
226,912
|
|
Other assets
|
|
|
(430
|
)
|
|
|
44,632
|
|
Changes in liabilities increase/(decrease)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(698,787
|
)
|
|
|
(237,393
|
)
|
Payroll and related
|
|
|
(160,100
|
)
|
|
|
(256,532
|
)
|
Accrued expenses
|
|
|
(98,257
|
)
|
|
|
(225,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED BY CONTINUING OPERATIONS
|
|
|
(4,020,640
|
)
|
|
|
(5,430,250
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
|
|
|
1,018,506
|
|
|
|
1,186,448
|
|
|
|
|
|
|
|
|
NET CASH USED BY OPERATING ACTIVITIES
|
|
|
(3,002,134
|
)
|
|
|
(4,243,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(22,281
|
)
|
|
|
(117,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED BY CONTINUING OPERATIONS
|
|
|
(22,281
|
)
|
|
|
(117,103
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
|
|
|
3,540,559
|
|
|
|
14,979
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
|
|
|
3,518,278
|
|
|
|
(102,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Proceeds from notes payable, related parties
|
|
|
2,125,000
|
|
|
|
|
|
Proceeds from sale of preferred stock
|
|
|
|
|
|
|
4,328,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
2,125,000
|
|
|
|
4,328,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
|
|
|
(45,702
|
)
|
|
|
83,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
2,595,442
|
|
|
|
65,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
|
543,626
|
|
|
|
693,033
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
3,139,068
|
|
|
$
|
758,109
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
1.
|
|
Nature of the Business
|
SANUWAVE, Inc. and subsidiaries (the Company) is a global medical technology company focused
on the development and utilization of Pulsed Acoustic Cellular Expression (PACE) technology for
advanced woundcare, orthopedic/spine, plastic/cosmetic and cardiac conditions.
2.
|
|
Basis of Presentation and Principles of Consolidation
|
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting principles for interim
financial information. Accordingly, these financial statements do not include all the information
and footnotes required by U.S. generally accepted accounting principles for complete financial
statements. 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 six-month period ended June 30, 2009 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending December 31, 2009.
3.
|
|
Recent Accounting Pronouncements
|
On April 9, 2009, the FASB issued three Staff Positions (FSP): (1) FSP FAS 157-4, which
provides guidance on determining fair value when market activity has decreased; (2) FSP FAS 115-2
and FAS 124-2, which addresses other-than-temporary impairments for debt securities; and (3) FSP
FAS 107-1 and APB 28-1, which discusses fair value disclosures for financial instruments in interim
periods. These FSPs are effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted. The implementation of these FSPs, effective January 1, 2009, did not
have a material impact on the Company.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No.
162 (FAS 168). The Codification will become the source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of FAS 168, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other nongrandfathered non-SEC accounting literature not included in
the Codification will become nonauthoritative. FAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We do not expect that the
adoption of FAS 168 will have a material impact on our consolidated financial position or results
of operations.
In May 2009, the FASB issued Statement No. 165, Subsequent Events (FAS 165). FAS 165
establishes general standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated subsequent events and the
basis for that date. FAS 165 was effective for interim or annual financial periods ending after
June 15, 2009. We adopted FAS 165 during the second quarter of 2009 and its application did not
affect our consolidated financial position, results of operations, or cash flows. We evaluated
subsequent events through September 25, 2009, the date that the unaudited condensed consolidated
financial statements were issued.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
4.
|
|
Earnings (Loss) Per Share
|
The Company has adopted SFAS No. 128, Earnings per Share, which requires disclosure on the
financial statements of basic and diluted earnings (loss) per share. The Company calculates
basic net income (loss) per share by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. The Company calculates diluted net income (loss) per
share in a similar manner, but include the dilutive effect of stock options and nonvested
restricted shares (units) as measured under the treasury stock method. Share-based payment awards
that are contingently issuable upon the achievement of a specified market or performance condition
are included in the diluted net income (loss) per share calculation in the period in which the
condition is satisfied. To the extent that securities are anti-dilutive, they are excluded from
the calculation of diluted net income (loss) per share.
As a result of the net loss for the six months ended June 30, 2009 and 2008, respectively, all
potentially dilutive shares were anti-dilutive and therefore excluded from the computation of
diluted net loss per share. The anti-dilutive common shares totaled 329,861 shares and 277,714
shares for the six months ended June 30, 2009 and 2008, respectively.
5.
|
|
Discontinued operations
|
On October 31, 2008, the Company discontinued its OssaTron mobile service business. The
Company sold certain assets for a total cash consideration of $400,000 to a minority shareholder of
the Company and recorded a gain of approximately $106,000.
On June 3, 2009, the Company sold its veterinary business for a total cash consideration of
$3,500,000. As a result of the sale, the Company recorded a gain of approximately $2,492,300.
Accordingly, the Companys condensed consolidated financial statements have been prepared with
the net assets, results of operations, and cash flows of these businesses displayed separately as
discontinued operations.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
5.
|
|
Discontinued operations (continued)
|
The operating results of the discontinued operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,458,107
|
|
|
$
|
3,049,500
|
|
Cost of revenues
|
|
|
372,547
|
|
|
|
659,004
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,085,560
|
|
|
|
2,390,496
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
2,917
|
|
|
|
672,632
|
|
Other operating expenses
|
|
|
503,873
|
|
|
|
1,566,200
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
506,790
|
|
|
|
2,238,832
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
578,770
|
|
|
|
151,664
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
2,536
|
|
|
|
(32,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
before income taxes
|
|
|
581,306
|
|
|
|
119,128
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations,
net of income tax
|
|
$
|
581,306
|
|
|
$
|
119,128
|
|
|
|
|
|
|
|
|
The Companys assets and liabilities related to discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
127,001
|
|
Accounts receivable trade, net
|
|
|
|
|
|
|
581,200
|
|
Inventory
|
|
|
168,509
|
|
|
|
558,543
|
|
Prepaid expenses and other assets
|
|
|
|
|
|
|
18,273
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
168,509
|
|
|
|
1,285,017
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
924,971
|
|
|
|
1,011,734
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,093,480
|
|
|
|
2,296,751
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(656,261
|
)
|
|
|
(845,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets of discontined operations
|
|
$
|
437,219
|
|
|
$
|
1,451,158
|
|
|
|
|
|
|
|
|
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Continuing Operations
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
Inventory finished goods
|
|
$
|
464,809
|
|
|
$
|
294,039
|
|
Inventory parts
|
|
|
114,998
|
|
|
|
390,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
579,807
|
|
|
$
|
684,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Discontinued Operations
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
Inventory finished goods
|
|
$
|
|
|
|
$
|
258,035
|
|
Inventory parts
|
|
|
168,509
|
|
|
|
300,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
168,509
|
|
|
$
|
558,543
|
|
|
|
|
|
|
|
|
7.
|
|
Property and equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Cost
|
|
|
|
|
|
|
|
|
Machines and equipment
|
|
$
|
199,520
|
|
|
$
|
204,711
|
|
Office and computer equipment
|
|
|
311,791
|
|
|
|
353,098
|
|
Leasehold improvements
|
|
|
67,421
|
|
|
|
91,590
|
|
Furniture and fixtures
|
|
|
24,613
|
|
|
|
34,915
|
|
Software
|
|
|
40,232
|
|
|
|
40,233
|
|
Other assets
|
|
|
4,369
|
|
|
|
21,688
|
|
|
|
|
|
|
|
|
Total
|
|
|
647,946
|
|
|
|
746,235
|
|
Accumulated depreciation
|
|
|
(464,506
|
)
|
|
|
(466,444
|
)
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
183,440
|
|
|
$
|
279,791
|
|
|
|
|
|
|
|
|
The aggregate depreciation charged to operations was $103,846 and $123,571 for the six months
ended June 30, 2009 and 2008, respectively.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
7.
|
|
Property and equipment (continued)
|
Property and equipment related to discontinued operations (Note 5) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Cost
|
|
|
|
|
|
|
|
|
OssaTron devices
|
|
$
|
4,837,165
|
|
|
$
|
4,837,165
|
|
Vehicles and equipment
|
|
|
38,897
|
|
|
|
376,511
|
|
Furniture and fixtures
|
|
|
|
|
|
|
9,765
|
|
Software
|
|
|
|
|
|
|
4,238
|
|
Office and computer equipment
|
|
|
|
|
|
|
1,941
|
|
Other assets
|
|
|
|
|
|
|
8,520
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,876,062
|
|
|
|
5,238,140
|
|
Accumulated depreciation
|
|
|
(3,951,091
|
)
|
|
|
(4,226,406
|
)
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
924,971
|
|
|
$
|
1,011,734
|
|
|
|
|
|
|
|
|
The aggregate depreciation charged to discontinued operations was $2,917 and $672,632 for the
six months ended June 30, 2009 and 2008, respectively.
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
Patents, at cost
|
|
$
|
3,502,135
|
|
|
$
|
3,502,135
|
|
Less accumulated amortization
|
|
|
(1,201,462
|
)
|
|
|
(1,048,084
|
)
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
2,300,673
|
|
|
$
|
2,454,051
|
|
|
|
|
|
|
|
|
The aggregate amortization charged to amortization expense was $153,378 and $153,378 for the
six months ended June 30, 2009 and 2008, respectively.
Deferred income taxes are provided for temporary differences between the carrying amounts and
tax bases of assets and liabilities. Deferred taxes are classified as current or noncurrent based
on the financial statement classification of the related asset or liability giving rise to the
temporary difference. For those deferred tax assets or
liabilities (such as the tax effect of the net operating loss carryforward) which do not
relate to a financial statement asset or liability, the classification is based on the expected
reversal date of the temporary difference.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
10.
|
|
Notes payable, related parties
|
The notes payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Notes payable, unsecured, bearing interest at
6% to HealthTronics, a
common shareholder
of the Company. The notes were issued in
conjunction with the Companys purchase of
the orthopedic division of HealthTronics on
August 1, 2005. Quarterly interest through
June 30, 2010, is accrued and added to the
principal balance. Interest is paid quarterly in
arrears beginning September 30, 2010. All
remaining unpaid accrued interest and
principal is due August 1, 2015. Accrued
interest totaled $1,059,884 and $911,564 at
June 30, 2009 and December 31, 2008, respectively.
|
|
$
|
5,059,884
|
|
|
$
|
4,911,564
|
|
|
|
|
|
|
|
|
|
|
Notes payable, unsecured, bearing interest at
15% to Prides Capital and NightWatch Capital,
preferred shareholders of the Company.
Quarterly interest through June 30, 2009
is accrued and added to the principal balance.
Interest is paid quarterly in arrears beginning
December 31, 2008, if elected by the holder.
As of June 30, 2009, the holder has not
elected to have interest paid. All remaining
unpaid accrued interest and principal is due
September 30, 2011. Accrued interest totaled
$202,573 and $20,251 at June 30, 2009 and
December 31, 2008, respectively. All or any
portion of the unpaid principal can be
converted into preferred stock with a
conversion price of $100 per share.
|
|
|
3,402,573
|
|
|
|
1,095,251
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,462,457
|
|
|
|
6,006,815
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current portion
|
|
$
|
8,462,457
|
|
|
$
|
6,006,815
|
|
|
|
|
|
|
|
|
Interest expense on related parties notes payable totaled was $330,642 and $140,427 for the
six months ended June 30, 2009 and 2008, respectively.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
11.
|
|
Convertible participating preferred stock
|
During the six months ended June 30, 2008, the Company issued 43,280 shares of Series A
convertible participating preferred stock at $100 per share for a total cash proceeds of
$4,328,000. The Company did not issue any Series A convertible participating preferred stock
during the six months ended June 30, 2009 for cash consideration.
Conversion
Each share of Series A convertible participating preferred stock, at the option of the holder,
is convertible into a number of duly authorized, validly issued, fully paid and non-assessable
shares of common stock as determined by multiplying the number of shares of Series A convertible
participating preferred stock being converted by the applicable conversion rate. The conversion
rate in effect at any time is determined by dividing the preferred stock issue price plus an amount
equal to the per share value of all accrued and unpaid dividends by the conversion price in effect
at that time.
Dividends
The holders of the Series A convertible participating preferred stock are entitled to receive
dividends when and if declared by the Board of Directors. Dividends on preferred stock are in
preference to and prior to any payment of any dividend on common stock and are not cumulative. As
of June 30, 2009 and December 31, 2008, no dividends had been declared.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company, the holders of the
Series A convertible participating preferred stock are entitled to receive prior to, and in
preference to, any distribution to the common stockholders, an amount equal to the greater of $100
per share plus accrued but unpaid dividends, or such amount per share as would have been payable
had all shares of the Series A convertible participating preferred stock been converted to common
stock immediately prior to such event of liquidation, dissolution or winding up. In the event that
upon liquidation or dissolution, the assets and funds of the Company are insufficient to permit the
payment to preferred stockholders of the full preferential amounts, then the entire assets and
funds of the Company legally available for distribution are to be distributed ratably among the
holders of the shares of Series A convertible participating preferred stock in proportion to the
full preferential amount each is otherwise entitled to receive.
After the distributions described above have been paid in full, the remaining assets of the
Company available for distribution shall be distributed pro-rata to the holders of the shares of
common stock.
Voting rights
Each Series A convertible participating preferred stockholder is entitled to the number of
votes equal to the number of shares of common stock into which such holders shares are
convertible.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
12.
|
|
Commitments and Contingencies
|
The Company leases office and warehouse space. Rent expense was $295,934 and $315,440 for the
six months ended June 30, 2009 and 2008, respectively.
The Company is involved in various legal matters that have arisen in the ordinary course of
business. While the ultimate outcome of these matters is not presently determinable, it is the
opinion of management that the resolution will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
The Company sponsors a 401k plan that covers all employees who meet the eligibility
requirements. The Company matches 50% of employee contributions up to 6% of their compensation.
The Company contributed $34,360 and $38,861 to the plan for the six months ended June 30, 2009 and
2008, respectively.
As shown in the accompanying consolidated financial statements, the Company incurred a net loss of
$750,462 and $5,471,830 for the six months ended June 30, 2009 and 2008, respectively. The Company
incurred a
net loss from continuing operations of $3,824,041 and $5,590,958 for the six months ended June
30, 2009 and 2008,
respectively. These operating losses create an uncertainty about the Companys ability to continue
as a going
concern. Management of the Company believes the Companys current investors and/or potential
additional investors, as well as possible asset sales, will provide the necessary funding for the
Company. The consolidated financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern. The Company is economically
dependent upon future capital contributions or financing to fund ongoing operations. During the
six months ended June 30, 2009, the Company obtained cash infusions totaling $2,125,000 in the form
of notes payable, from related parties (Note 10). The notes payable can be converted into
additional shares of convertible participating preferred stock with all or any portion of the
unpaid principal at a conversion price of $100 per share. In addition, on June 3, 2009 the Company
sold its veterinary business for a total cash consideration of $3,500,000 (Note 5).
15.
|
|
Stock-based compensation
|
During 2006, the Company approved the 2006 Stock Incentive Plan (the Plan) and certain
Nonstatutory Stock Option Agreements with key employees. The Nonstatutory Stock Option Agreements
have terms substantially the same as the Plan. The Plan permits granting of awards to selected
employees and directors of the Company in the form of options to purchase shares of common stock.
Options granted may include Nonstatutory Options as well as Non-qualified Incentive Stock Options.
The Plan is currently administered by the Board of Directors. The Plan gives broad powers to the
Board of Directors to administer and interpret the particular form and conditions of each option.
The stock options granted were nonstatutory options which, under the Plan, vest equally over a four
year period, and have a 10-year term. The options were granted to employees at an exercise price
of $100 per share,
which was deemed to be the fair market value of the common stock on the date of the grant. It
is the Companys policy to issue new stock certificates to satisfy stock option exercises.
Using the Black-Scholes option pricing model, management has determined that the options have
a
weighted average fair value per share of $48.51 at June 30, 2009 and $48.48 at June 30, 2008.
Compensation cost will be recognized over the weighted average four year service period. For the
six months ended June 30, 2009 and 2008, the Company recognized $267,392 and $267,392 as
compensation cost, respectively. There were no stock options granted for the six months ended June
30, 2009.
SANUWAVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
In September, 2009, SANUWAVE sold 17,720 units in the Company to a group of accredited
investors for $1,819,844. The unit consists of one share of the Companys common stock, one
warrant to purchase an additional share of the Company for $136.93 per share and one warrant to
purchase an additional share of the Company for $273.87 per share.
On September 25, 2009, Rub Music Enterprises, Inc. (RME) and RME Delaware Merger Sub, Inc.,
a
Nevada corporation and wholly-owned subsidiary of the Company (the Merger Sub), entered into a
reverse
merger agreement (the Merger Agreement) with SANUWAVE and the stockholders of SANUWAVE. Pursuant
to the Merger Agreement, the Merger Sub merged with and into SANUWAVE, with SANUWAVE as the
surviving entity (the Merger). In connection with the Merger, RME acquired 100% of the
outstanding capital stock of SANUWAVE and the stockholders of SANUWAVE received 11,009,657 shares
of the RMEs common stock, warrants to purchase 1,106,627 shares of RMEs common stock at $4.00 per
share, and warrants to purchase an additional 1,106,627 shares of RMEs common stock at $8.00 per
share. In addition, in connection with the Merger, certain stockholders of RME agreed to cancel
all of their shares of common stock of RME, except for 1,500,000 shares of common stock, for an
aggregate price of $180,000 (the Share Repurchase). At the time of the Merger, RME had
1,500,000 warrants outstanding to purchase RMEs common stock at $4.00 per share.
As a result of the Merger and Share Repurchase, the stockholders of SANUWAVE control
approximately 88% of RMEs outstanding common stock, holding 11,009,657 of the 12,509,657
outstanding shares, and SANUWAVE is considered the accounting acquirer in this Merger. RME was a
shell company (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended (the Exchange Act) immediately prior to the Merger. As a result of the Merger, RMEs
operations are now focused in global medical technology. Consequently, RME believes that the
Merger has caused RME to cease being a shell company as it no longer has nominal operations.
UNAUDITED CONDENSED COMBINED PROFORMA BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
Rub Music
|
|
|
|
|
|
|
|
|
|
|
Rub Music
|
|
|
|
Enterprises, Inc.
|
|
|
SANUWAVE, Inc.
|
|
|
|
|
|
|
Enterprises, Inc.
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Proforma
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
Adjustments
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
348
|
|
|
$
|
3,139,068
|
(1)
|
|
$
|
1,820,000
|
|
|
$
|
4,709,416
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
(180,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
|
(70,000
|
)
|
|
|
|
|
Accounts receivable trade, net of allowance
|
|
|
|
|
|
|
89,324
|
|
|
|
|
|
|
|
89,324
|
|
Inventory
|
|
|
|
|
|
|
579,807
|
|
|
|
|
|
|
|
579,807
|
|
Prepaid expenses
|
|
|
|
|
|
|
125,576
|
|
|
|
|
|
|
|
125,576
|
|
Due from Pulse Veterinary Technologies, LLC
|
|
|
|
|
|
|
217,834
|
|
|
|
|
|
|
|
217,834
|
|
Current assets related to discontinued operations
|
|
|
|
|
|
|
168,509
|
|
|
|
|
|
|
|
168,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
348
|
|
|
|
4,320,118
|
|
|
|
1,570,000
|
|
|
|
5,890,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
|
|
|
183,440
|
|
|
|
|
|
|
|
183,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
81,447
|
|
|
|
|
|
|
|
81,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET
|
|
|
|
|
|
|
2,300,673
|
|
|
|
|
|
|
|
2,300,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS RELATED TO DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
924,971
|
|
|
|
|
|
|
|
924,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
348
|
|
|
$
|
7,810,649
|
|
|
$
|
1,570,000
|
|
|
$
|
9,380,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,851
|
|
|
$
|
582,024
|
(4)
|
|
$
|
(18,440
|
)
|
|
$
|
575,435
|
|
Note payable related party
|
|
|
48,000
|
|
|
|
|
(4)
|
|
|
(48,000
|
)
|
|
|
|
|
Accured interest payable related party
|
|
|
3,560
|
|
|
|
|
(4)
|
|
|
(3,560
|
)
|
|
|
|
|
Payroll and related expenses
|
|
|
|
|
|
|
660,297
|
|
|
|
|
|
|
|
660,297
|
|
Accrued expenses
|
|
|
|
|
|
|
349,987
|
|
|
|
|
|
|
|
349,987
|
|
Liabilities related to discontinued operations
|
|
|
|
|
|
|
656,261
|
|
|
|
|
|
|
|
656,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
63,411
|
|
|
|
2,248,569
|
|
|
|
(70,000
|
)
|
|
|
2,241,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES PAYABLE, RELATED PARTIES
|
|
|
|
|
|
|
8,462,457
|
|
|
|
|
|
|
|
8,462,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
63,411
|
|
|
|
10,711,026
|
|
|
|
(70,000
|
)
|
|
|
10,704,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE PARTICIPATING PREFERRED STOCK
|
|
|
|
|
|
|
2,869
|
(1)
|
|
|
(2,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
40,700
|
|
|
|
53
|
(1)
|
|
|
10,957
|
|
|
|
12,510
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
(39,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
(69,331
|
)
|
|
|
30,370,516
|
(1)
|
|
|
1,811,912
|
|
|
|
31,937,865
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
(140,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
(34,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
(16,112
|
)
|
|
|
|
|
|
|
(16,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS (DEFICIT)
|
|
|
39,678
|
|
|
|
(33,257,703
|
)(3)
|
|
|
(39,678
|
)
|
|
|
(33,257,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
|
|
|
(74,110
|
)
|
|
|
|
(3)
|
|
|
74,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
(63,063
|
)
|
|
|
(2,900,377
|
)
|
|
|
1,640,000
|
|
|
|
(1,323,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
|
$
|
348
|
|
|
$
|
7,810,649
|
|
|
$
|
1,570,000
|
|
|
$
|
9,380,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed combined proforma balane sheet
NOTES TO UNAUDITED CONDENSED COMBINED PROFORMA BALANCE SHEET
The unaudited condensed combined proforma balance sheet at June 30, 2009 gives proforma effect to
the merger agreement as if it had occurred on June 30, 2009. The unaudited condensed combined
proforma balance sheet is based on the historical balance sheets of Rub Music Enterprises, Inc. and
SANUWAVE, Inc. at June 30, 2009.
The historical financial information has been adjusted to give effect to pro forma events that are
related and/or directly attributable to the merger and are factually supportable.
This information should be read together with the financials statements of Rub Music Enterprises,
Inc. and the notes thereto and the consolidated financial statements of SANUWAVE, Inc. and the
notes thereto.
The unaudited condensed combined proforma balance sheet is presented for informational purposes
only and is subject to a number of uncertainties and assumptions and does not purport to represent
what the companies actual financial position would have been had the transaction occurred on June
30, 2009 and does not purport to indicate the financial position as of any future date.
1. SANUWAVE, Inc. convertible participating preferred shareholders and common shareholders received
11,009,657 shares of Rub Music Enterprises, Inc. common stock at a par value of $0.001 per share.
SANUWAVE, Inc. sold common stock in September, 2009 for total proceeds of $1,820,000
2. Rub Music Enterprises, Inc. common stock outstanding was repurchased by the company during the
period July 1, 2009 to September 25, 2009 for $180,000 reducing the common stock outstanding from
40,700,000 common shares to 1,500,000 common shares.
3. Effective with the merger, Rub Music Enterprises, Inc. is no longer a development stage company.
4. Effective with the merger, SANUWAVE, Inc. paid $70,000 to Rub Music Enterprises, Inc. for Rub
Music Enterprises, Inc. to pay all outstanding recorded liabilities.