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)
         
Nevada   000-52985   20-1176000
         
(State or other jurisdiction
of incorporation)
  (Commission File Number)   (IRS Employer Identification No.)
     
11680 Great Oaks Way, Suite 350,
Alpharetta, Georgia
   
30022
     
(Address of principal executive offices)   (Zip Code)
Registrant’s 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:
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 


 

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 Company’s common stock, warrants to purchase up to 1,106,627 shares of the Company’s common stock, at $4.00 per share, and warrants to purchase up to an additional 1,106,627 shares of the Company’s 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 Company’s common stock held by such stockholders, such that after the repurchases, 1,500,000 shares of the Company’s 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 Company’s business or the sale or transfer of the Company’s securities prior to the closing of the Reverse Merger. Nemelka’s 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 Company’s 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 Company’s 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 Company’s future financial results, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this report, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Other risks and uncertainties are disclosed in the Company’s prior Securities and Exchange Commission filings. These and many other factors could affect the Company’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. The Company undertakes no obligation to revise or update any forward-looking statements. The following information should be read in conjunction with the financial statements included in this Current Report on Form 8-K.
Except as otherwise indicated by the context, references in this Current Report on Form 8-K to “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 body’s 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 ® 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:
(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 body’s 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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(IMAGE)
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 body’s normal wound healing processes. In addition, diabetic ulcers and pressure ulcers are often slow-to-heal wounds. These wounds often develop due to a patient’s impaired vascular and tissue repair capabilities. These conditions can also inhibit a patient’s 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 patient’s or the caregiver’s daily routines. dermaPACE’s 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. dermaPACE’s non-invasive protocol is designed to elicit the body’s 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 body’s 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:
    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.
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.
    Focus on products with a cost-effective time to market that utilize our experiences and track record in product approvals.
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.
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.
    Maximize the value of our PACE product candidates through control of distribution channels.
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 examiner’s 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.

 

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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 SwiTech’s 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 management’s attention and resources and require us to enter into royalty or license agreements which are not advantageous, if available at all.

 

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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.”

 

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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.

 

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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:
    Class I: general controls, such as labeling and adherence to quality system regulations;
    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
    Class III: special controls and approval of a pre-market approval (“PMA”) application.
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.

 

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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 manufacturer’s 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 panel’s 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 FDA’s 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.

 

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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:
    the QSR, which governs, among other things, how manufacturers design, test, manufacture, exercise quality control over, and document manufacturing of their products;
    labeling and claims regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and
    the Medical Device Reporting regulation, which requires reporting to the FDA certain adverse experiences associated with use of the product.
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 FDA’s 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.

 

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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.

 

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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.

 

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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.

 

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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:
    the FDA or a foreign regulatory authority finds our product candidates ineffective or unsafe;
    we do not receive necessary regulatory approvals;
    we are unable to get our product candidates in commercial quantities at reasonable costs; and
    the patient and physician community does not accept our product candidates.
In addition, our product development program may be curtailed, redirected, eliminated or delayed at any time for many reasons, including:
    adverse or ambiguous results;
    undesirable side effects that delay or extend the trials;
    the inability to locate, recruit, qualify and retain a sufficient number of clinical investigators or patients for our trials; and
    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 physician’s 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:
    obtain and/or maintain protection for our product candidates under the patent laws of the United States and other countries;
    defend and enforce our patents once obtained;
    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
    operate without infringing upon the patents, trademarks, copyrights and proprietary rights of third parties.
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:
    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;
    others will not independently develop similar or alternative technologies or duplicate any of our technologies;
    any of our patent applications will result in issued patents;
    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;
    the patents and the patent applications that have been licensed to us are valid and enforceable;
    we will develop additional proprietary technologies that are patentable;
    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;
    the patents of third parties will not have an adverse effect on our ability to do business; or
    our trade secrets and proprietary rights will remain confidential.
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 party’s 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:
    warning letters;
    fines and other monetary penalties;
    unanticipated expenditures;
    delays in FDA approval and clearance, or FDA refusal to approve or clear a product candidate:
    product recall or seizure;
    interruption of manufacturing or clinical trials;
    operating restrictions;
    injunctions; and
    criminal prosecutions.
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:
    testing;
    manufacturing;
    quality control;
    labeling;
    advertising;
    promotion;
    distribution;
    export;
    reporting to the FDA certain adverse experiences associated with the use of the products; and
    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 FDA’s 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 .
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:
    the product candidate may not prove to be safe or effective;
    the product candidate’s benefits may not outweigh its risks;
    the results from more advanced clinical trials may not confirm the positive results from pre-clinical studies and early clinical trials;
    the FDA or comparable foreign regulatory authorities may interpret data from pre-clinical and clinical testing in different ways than us; and
    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 management’s 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:
    the size of the patient population;
    the nature of the clinical protocol requirements;
    the availability of other treatments or marketed therapies (whether approved or experimental);
    our ability to recruit and manage clinical centers and associated trials;
    the proximity of patients to clinical sites; and
    the patient eligibility criteria for the study.
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:
    unforeseen developments during our pre-clinical activities and clinical trials;
    delays in timing of receipt of required regulatory approvals;
    unanticipated expenditures in research and development or manufacturing activities;
    delayed market acceptance of any approved product;
    unanticipated expenditures in the acquisition and defense of intellectual property rights;
    the failure to develop strategic alliances for the marketing of some of our product candidates;
    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;
    inability to train a sufficient number of physicians to create a demand for any of our approved products;
    lack of financial resources to adequately support our operations;
    difficulties in maintaining commercial scale manufacturing capacity and capability;
    unforeseen problems with our third-party manufacturers, service providers or specialty suppliers of certain raw materials;
    unanticipated difficulties in operating in international markets;
    unanticipated financial resources needed to respond to technological changes and increased competition;
    unforeseen problems in attracting and retaining qualified personnel to market our approved products;
    enactment of new legislation or administrative regulations;
    the application to our business of new court decisions and regulatory interpretations;
    claims that might be brought in excess of our insurance coverage;
    the failure to comply with regulatory guidelines; and
    the uncertainty in industry demand and patient wellness behavior as businesses and individuals suffer from the current economic downturn.
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:
    changes in our industry;
    our ability to obtain additional financing and, if available, the terms and conditions of the financing;
    additions or departures of key personnel;
    sales of our common stock;
    our ability to execute our business plan;
    operating results that fall below expectations;
    period-to-period fluctuations in our operating results;
    new regulatory requirements and changes in the existing regulatory environment; and
    general economic conditions and other external factors.
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:
    investors may have difficulty buying and selling, or obtaining market quotations;
    market visibility for our common stock may be limited; and
    a lack of visibility for our common stock may have a depressive effect on the market for our common stock.
If a public market for our common stock develops, trading will be limited under the SEC’s 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 purchaser’s 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.
MANAGEMENT’S 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 body’s 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:
    wound conditions, including diabetic foot ulcers, pressure sores, burns and other skin eruption conditions;
    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;
    plastic/cosmetic applications such as cellulite smoothing, graft and transplant acceptance, skin tightening, scarring and other potential aesthetic uses; and
    cardiac structures for removing plaque due to atherosclerosis and improving heart muscle performance.
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:
    the scope, rate of progress and cost of our clinical trials;
    future clinical trial results;
    the cost and timing of regulatory approvals;
    the establishment of marketing, sales and distribution;
    the cost and timing associated with establishing reimbursement for our products;
    the timing and results of our pre-clinical research programs;
    the effects of competing technologies and market developments; and
    the industry demand and patient wellness behavior as businesses and individuals suffer from the current economic downturn.
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, SANUWAVE’s 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 SANUWAVE’s 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 option’s 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.

 

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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.

 

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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 SANUWAVE’s 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.

 

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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.

 

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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.

 

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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 Company’s 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.
             
Name   Age   Position Held
Christopher M. Cashman
    42     President, Chief Executive Officer and Director Officer
Barry J. Jenkins
    47     Chief Financial Officer
Thomas H. Robinson
    50     Director
Kevin A. Richardson, II
    41     Director
John F. Nemelka
    43     Director
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 Stuart’s board services practice, which assists corporations identifying and recruiting outside directors. From 1998 to 2000, Mr. Robinson headed Spencer Stuart’s 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.

 

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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.
                                                                         
                                                    Change in              
                                                    Pension Value              
                                                    and              
                                                    Nonqualified              
                                            Non-Equity     Deferred              
Name and                           Stock     Option     Incentive Plan     Compensation     All Other        
Principal           Salary     Bonus     Awards     Awards     Compensation     Earnings     Compensation     Total  
Position   Year     ($)     ($) (1)     ($)     ($)     ($)     ($)     ($) (3)     ($)  
(a)   (b)     (c)     (d)     (e)     (f)     (g)     (h)     (i)     (j)  
Christopher M. Cashman
    2008     $ 305,000                 $ 232,899                 $ 18,101     $ 556,000  
Chief Executive Officer and President
    2007     $ 275,000     $ 137,500           $ 63,434                 $ 17,550     $ 493,484  
 
                                                                       
Barry J. Jenkins
    2008     $ 222,600                 $ 114,815                 $ 17,879     $ 355,294  
Chief Financial Officer
    2007     $ 209,667     $ 84,800           $ 32,986                 $ 17,090     $ 344,543  
 
                                                                       
Cornelius A. Hofman (2)
    2008                                                  
Former Sole Officer and Director
    2007                                                  
     
(1)   Bonuses included for 2007 were earned in 2007, but paid in 2008.
 
(2)   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.
 
(3)   Includes health, dental and disability insurance premiums, and employee 401(k) matching contributions.

 

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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 SANUWAVE’s budget and performance goals established for other management employees. Mr. Cashman is also entitled to participate in SANUWAVE’s employee benefit plans (other than annual bonus and incentive plans). In the event of Mr. Cashman’s 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

 

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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.

 

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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. Cashman’s 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 SANUWAVE’s 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. Cashman’s 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.

 

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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 SANUWAVE’s budget and performance goals established for other management employees. Mr. Jenkins is also entitled to participate in SANUWAVE’s 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.

 

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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 SANUWAVE’s 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, SANUWAVE’s 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 participant’s service with SANUWAVE is terminated by SANUWAVE for cause; (2) 60 days after the participant’s death; or (3) 60 days after the termination of the participant’s service with SANUWAVE for any reason other than cause or the participant’s 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 participant’s 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 SANUWAVE’s 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 SANUWAVE’s 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.

 

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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.
                                                                         
    Option Awards     Stock Awards  
                                                            Equity     Equity  
                                                            Incentive     Incentive Plan  
                    Equity                                     Plan     Awards:  
                    Incentive Plan                                     Awards:     Market or  
                    Awards:                     Number     Market     Number of     Payout Value  
    Number of     Number of     Number of                     of Shares     Value of     Unearned     of Unearned  
    Securities     Securities     Securities                     or Units     Shares or     Shares, Units     Shares, Units  
    Underlying     Underlying     Underlying                     of Stock     Units of     or Other     or Other  
    Unexercised     Unexercised     Unexercised     Option/     Option/     That Have     Stock That     Rights That     Rights That  
    Options/     Options/     Unearned     Warrant     Warrant     Not     Have Not     Have Not     Have Not  
    Warrants (#)     Warrants (#)     Options     Exercise     Expiration     Vested     Vested     Vested     Vested  
Name   Exercisable     Unexercisable     (#)     Price ($)     Date     (#)     ($)     (#)     ($)  
(a)   (b)     (c)     (d)     (e)     (f)     (g)     (h)     (i)     (j)  
Christopher M.
    509,304                 $ 2.92       12/19/2015                          
Cashman
          169,768           $ 2.92       12/19/2015                          
 
          106,637           $ 11.68       12/19/2015                          
 
          106,637           $ 23.37       12/19/2015                          
 
          159,938           $ 35.05       12/19/2015                          
 
                                                                       
Barry J. Jenkins
    167,688                 $ 2.92       10/24/2016                          
 
          167,688           $ 2.92       10/24/2016                          
 
          26,662           $ 11.68       10/24/2016                          
 
          26,662           $ 23.37       10/24/2016                          
 
          39,992           $ 35.05       10/24/2016                          
 
                                                                       
Cornelius A. Hofman
                                                     
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 Company’s 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 Company’s executive officers and directors, and (iii) the Company’s 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. Hofman’s 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.

 

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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 SANUWAVE’s 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 Company’s 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 Company’s 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 Company’s transfer agent.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Although the Company’s 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 Company’s common stock are subject to outstanding options and 3,713,254 shares of the Company’s common stock are subject to outstanding warrants. In addition, as of September 25, 2009, 1,500,000 shares of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s bylaws will not adversely affect any right or protection of any of the Company’s 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 Registrant’s 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 Company’s new independent registered accounting firm. None of the reports for Pritchett, Siler & Hardy, P.C. on the Company’s 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 Company’s audited financial statements contained in its Form 10-Ks for the fiscal years ended December 31, 2008 and 2007.

 

58


 

During the Company’s 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 Company’s 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 Company’s 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.
  (d)   Exhibits.
         
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
       
 
  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.
       
 
  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)

 

63


 

         
Exhibit No.   Description
       
 
  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

 

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
         
TABLE OF CONTENTS
    i  
 
       
AGREEMENT AND PLAN OF MERGER
    1  
 
       
ARTICLE I THE MERGER
    2  
 
       
1.1 Merger
    2  
1.2 Effective Time
    2  
1.3 Closing
    2  
 
       
ARTICLE II CONVERSION OF SECURITIES
    3  
 
       
2.1 Terms of Merger
    3  
 
       
ARTICLE III REPRESENTATIONS AND WARRANTIES OF RME AND MERGER SUB
    7  
 
       
3.1 Existence and Good Standing of RME
    7  
3.2 Existence and Good Standing of MERGER SUB
    7  
3.3 Authority of RME
    8  
3.4 Authority of MERGER SUB
    8  
3.5 No Violation
    8  
3.6 Subsidiaries
    8  
3.7 Capitalization of RME
    9  
3.8 Capitalization of MERGER SUB
    9  
3.9 Options and Warrants of MERGER SUB
    9  
3.10 Shareholders, Options and Warrants of RME
    10  
3.11 Officers and Directors
    10  
3.12 Banks
    10  
3.13 Title to Assets
    10  
3.14 Personnel, Compensation and Benefits
    10  
3.15 Financial Statements
    10  
3.16 Property
    11  
3.17 Consents Required
    11  
3.18 Indebtedness
    11  
3.19 Contracts
    11  
3.20 Compliance with Laws
    11  
3.21 Litigation
    12  
3.22 Taxes
    12  
3.23 Insurance Policies
    12  
3.24 Operations
    12  
3.25 Permits
    12  
3.26 Undisclosed Liabilities
    12  
3.27 Absence of Changes
    13  
3.28 Accuracy of Information
    13  
3.29 Improper Payments
    13  
3.30 Copies of Documents
    13  
3.31 SEC Filings
    13  

 

 


 

         
3.32 SarbanesOxley Compliance
    14  
3.33 Valid Issuance of Securities
    14  
3.34 Related Party Transactions
    14  
3.35 Foreign Assets Control Regulations
    14  
3.36 Private Offering by RME
    14  
3.37 Brokers and Finders
    15  
 
       
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SANUWAVE
    15  
 
       
4.1 Existence and Good Standing of SANUWAVE
    15  
4.2 Authority of SANUWAVE
    15  
4.3 No Violation
    15  
4.4 Subsidiaries
    16  
4.5 Capitalization of SANUWAVE
    16  
4.6 Shareholders, Options and Warrants
    16  
4.7 Officers and Directors
    16  
4.8 Title to Assets
    17  
4.9 Personnel, Compensation and Benefits
    17  
4.10 Financial Statements
    17  
4.11 Consents Required
    18  
4.12 Indebtedness
    18  
4.13 Leases and Contracts
    18  
4.14 Compliance with Laws
    19  
4.15 Litigation
    19  
4.16 Taxes
    19  
4.17 Permits
    19  
4.18 Undisclosed Liabilities
    19  
4.19 Absence of Changes
    20  
4.20 Accuracy of Information
    20  
4.21 Improper Payments
    20  
4.22 Copies of Documents
    20  
4.23 Brokers and Finders
    20  
 
       
ARTICLE V CONDUCT AND TRANSACTIONS PRIOR TO THE EFFECTIVE TIME OF THE MERGER
    21  
 
       
5.1 Conduct and Transactions of RME and MERGER SUB
    21  
5.2 Conduct and Transactions of SANUWAVE
    22  
 
       
ARTICLE VI RIGHTS OF INSPECTION
    23  
 
       
ARTICLE VII CLOSING
    23  
 
       
7.1 Closing Deliveries of SANUWAVE
    23  
7.2 Closing Deliveries of RME and MERGER SUB
    24  
 
       
ARTICLE VIII CONDITIONS PRECEDENT TO SANUWAVE’S OBLIGATION
    25  
 
       
8.1 Representations and Warranties True
    25  
8.2 Performance of Obligations
    25  
8.3 Changes in Financial Condition of RME and MERGER SUB
    25  

 

ii 


 

         
8.4 Consents
    26  
8.5 Statutory Requirements
    26  
8.6 Absence of Pending Litigation
    26  
8.7 Delivery of Materials
    26  
 
       
ARTICLE IX CONDITIONS PRECEDENT TO RME’S OBLIGATION
    26  
 
       
9.1 Representations and Warranties True
    26  
9.2 Performance of Obligations
    26  
9.3 Changes in Financial Condition of SANUWAVE
    27  
9.4 Statutory Requirements
    27  
9.5 Absence of Pending Litigation
    27  
9.6 Delivery of Materials
    27  
 
       
ARTICLE X COVENANTS AND FURTHER ASSURANCE
    27  
 
       
ARTICLE XI TERMINATION OF AGREEMENT AND ABANDONMENT OF REORGANIZATION
    28  
 
       
11.1 Termination
    28  
11.2 Post Termination Obligations
    28  
 
       
ARTICLE XII ISSUANCE OF SHARES; FRACTIONAL SHARES
    29  
 
       
12.1 Issuance of Share Certificates
    29  
12.2 Restrictions on Shares Issued to SANUWAVE Stockholders
    29  
 
       
ARTICLE XIII MISCELLANEOUS
    29  
 
       
13.1 Amendment
    29  
13.2 Representations and Warranties
    29  
13.3 Notices
    30  
13.4 Counterparts
    30  
13.5 Entire Agreement; Not Third Party Beneficiaries
    30  
13.6 Severability
    31  
13.7 Expenses
    31  
13.8 Captions and Section Headings
    31  
13.9 Governing Law
    31  
13.10 Enforcement and Interpretation
    31  
13.11 Time of Essence
    31  
13.12 Extension; Waiver
    32  
13.13 Assignment
    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 SANUWAVE’s 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 RME’s 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 RME’s Articles of Incorporation or Bylaws (or other governing document), MERGER SUB’s 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).

 

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(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 RME’s 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.

 

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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 RME’s 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.

 

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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.

 

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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 RME’s 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.

 

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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 SANUWAVE’s 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.

 

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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 SANUWAVE’s 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.

 

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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 SANUWAVE’s 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 SANUWAVE’s 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 SANUWAVE’s 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 SANUWAVE’s 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 SANUWAVE’s Permits material to the operation of SANUWAVE’s 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).

 

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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;

 

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(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 .

 

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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 Secretary’s 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.

 

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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 Secretary’s 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 Secretary’s 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.

 

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(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 SANUWAVE’S 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.

 

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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 SANUWAVE’s 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 RME’S 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.

 

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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.

 

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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.

 

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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:
         
 
  If to “RME”   If to “SANUWAVE”
 
     
 
  Rub Music Enterprises, Inc.   Sanuwave, Inc.
 
  5555 North Star Ridge Way   11680 Great Oaks Way, Suite 350
 
  Star, Idaho 83669   Alpharetta, Georgia 30022
 
      Attn: Barry Jenkins
 
       
 
  With copies to (which shall not constitute notice):   With copies to (which shall not constitute notice):
 
       
 
  Cletha A. Walstrand, Esq.   John C. Ethridge, Jr., Esq.
 
  Attorney at Law   Smith, Gambrell & Russell, LLP
 
  1322 West Pachua Circle   Promenade II, Suite 3100
 
  Ivans, Utah 84738   1230 Peachtree Street, N.E.
 
      Atlanta, Georgia 30309-3592
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.

 

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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.

 

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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]

 

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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the date first written above.
         
  RUB MUSIC ENTERPRISES, INC.
 
 
  By:   /s/    
    Name:   Cornelius Hofman   
    Title:   President   
 
  RME DELAWARE MERGER SUB, INC.
 
 
  By:   /s/    
    Name:   Cornelius Hofman   
    Title:   President   
 
  SANUWAVE, INC.
 
 
  By:   /s/    
    Name:   Christopher M. Cashman   
    Title:   President and CEO   
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 SANUWAVE’s business that is material to SANUWAVE’s 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.

 

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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.

 

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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.
SANUWAVE’s 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 .

 

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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.

 


 

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 Company’s 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 “broker’s 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 person’s 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 person’s 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.
             
DATE:                                 , 2009   If PURCHASER is/are individual(s), sign here:
 
           
 
  Signature:        
 
           
 
  Print Name:        
 
           
 
           
    If PURCHASER is an entity, sign here:
 
           
 
  Entity Name:        
 
           
 
           
 
           
 
           
 
  Signature:        
 
           
 
  Print Name:        
 
           
 
  Title:        
 
           

 

3


 

EXHIBIT C
CLASS A WARRANT AGREEMENT
See attached.

 

 


 

EXHIBIT D
CLASS B WARRANT AGREEMENT
See attached.

 

 

Exhibit 4.1
RUB MUSIC ENTERPRISES, INC.
Warrant for the Purchase of [            ]
Shares of Common Stock
Par Value $0.001
CLASS A WARRANT AGREEMENT
(this “Agreement”)
THE HOLDER OF THIS WARRANT, BY ACCEPTANCE HEREOF, BOTH WITH RESPECT TO THE WARRANT AND COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANT, AGREES AND ACKNOWLEDGES THAT THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE LAWS OF ANY APPLICABLE STATE, OR (B) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER, AND ITS COUNSEL, TO THE EFFECT THAT THE SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH STATE STATUTES, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT.
This is to certify that, for value received,  _____, (the “Holder”) is entitled to purchase from RUB MUSIC ENTERPRISES, INC. (the “Company”), on the terms and conditions hereinafter set forth, all or any part of [ ] shares (“Warrant Shares”) of the Company’s common stock, par value $0.001 (the “Common Stock”), at the purchase price of $4.00 per share (“Warrant Price”). Upon exercise of this warrant in whole or in part, a certificate for the Warrant Shares so purchased shall be issued and delivered to the Holder. If, at any time prior to the Expiration Date (as defined below), less than the total warrant is exercised, a new warrant of similar tenor shall be issued for the unexercised portion of the warrants represented by this Agreement.
This warrant is granted subject to the following further terms and conditions:
1. This warrant shall vest and be exercisable upon the consummation of the merger of the Company with a wholly-owned subsidiary of a public shell company (the “Public Shell”), whereby the Company is the surviving entity and becomes a wholly-owned subsidiary of the Public Shell (the “Reverse Merger”), and shall expire at 5:00 p.m. Eastern Time on the date that is five years following the consummation of the Reverse Merger (the “Expiration Date”). In order to exercise this warrant with respect to all or any part of the Warrant Shares for which this warrant is at the time exercisable, Holder (or in the case of exercise after Holder’s death, Holder’s executor, administrator, heir or legatee, as the case may be) must take the following actions:
(a) Deliver to the Corporate Secretary of the Company an executed notice of exercise substantially in the form of notice attached to this Agreement (the “Exercise Notice”) in which there is specified the number of Warrant Shares that are to be purchased under the exercised warrant;
(b) Tender payment of the aggregate Warrant Price for the purchased shares in cash or by check made payable to the Company’s order; and
(c) Furnish to the Company appropriate documentation that the person or persons exercising the warrant (if other than Holder) have the right to exercise the warrant.

 

 


 

(d) For purposes of this Agreement, the “Exercise Date” shall be the date on which the executed Exercise Notice shall have been delivered to the Company.
(e) Upon such exercise, the Company shall issue and cause to be delivered, with all reasonable dispatch (and in any event within five business days of such exercise), to or upon the written order of the Holder at its address, and in the name of the Holder, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise, together with such other property (including cash) and securities as may then be deliverable upon such exercise. Such certificate or certificates shall be deemed to have been issued and the Holder shall be deemed to have become a holder of record of such Warrant Shares as of the Exercise Date.
2. The Holder acknowledges that this warrant may not be exercised if the issuance of the Warrant Shares upon such exercise would constitute a violation of any applicable federal or state securities laws, or other law or regulation, and the Warrant Shares have not been and will not be registered as of the date of exercise of this warrant under the Securities Act or the securities laws of any state. The Holder acknowledges that this warrant and the Warrant Shares, when and if issued, are and will be “restricted securities” as defined in Rule 144 promulgated under the Securities Act and must be held indefinitely unless subsequently registered under the Securities Act and any other applicable state registration requirements. Except as provided herein, the Company is under no obligation to register the securities under the Securities Act or under applicable state statutes. In the absence of such a registration or an available exemption from registration, sale of the Warrant Shares may be practicably impossible. The Holder shall confirm to the Company the representations set forth above in connection with the exercise of all or any portion of this warrant.
3. The number of Warrant Shares purchasable upon the exercise of this warrant and the Warrant Price per share shall be subject to adjustment from time to time as follows:
(a) In the event that the Company should at any time, or from time to time, fix a record date for the effectuation of a split, either forward or reverse, subdivision or combination of the outstanding shares of Common Stock, or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”), without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the number of Warrant Shares purchasable hereunder shall be appropriately increased or decreased in proportion to such increase or decrease in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents.
(b) Whenever there is an adjustment in the number of Warrant Shares purchasable upon the exercise of this warrant pursuant to the provisions of Section 3(a), the Warrant Price shall be adjusted to an amount proportionate to the adjustment in the number of Warrant Shares.

 

2


 

(c) If at any time, or from time to time, there shall be a recapitalization of the Common Stock (other than a subdivision or combination, or merger or sale of assets transaction provided for elsewhere in this Section 3) provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this warrant the number of shares of Common Stock, Common Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled upon such recapitalization assuming this warrant was exercised immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this warrant after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Warrant Price then in effect and the number of Warrant Shares issuable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable.
(d) If at any time, or from time to time, the Company shall consolidate with or merge into another corporation, or shall sell, lease, or convey to another corporation the assets of the Company as an entity or substantially as an entity (any one or more of such transactions being a “Corporate Transaction”), provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this warrant the number of shares of Common Stock, Common Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled to receive in such Corporate Transaction assuming this warrant was exercised immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this warrant after the Corporate Transaction to the end that the provisions of this Section 3 (including adjustment of the Warrant Price then in effect and the number of Warrant Shares issuable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable.
4. The Company covenants and agrees that all Warrant Shares which may be delivered upon the exercise of this warrant will, upon delivery, be free from all taxes, liens, and charges with respect to the purchase thereof; provided, that the Company shall have no obligation with respect to any income tax liability of the Holder.
5. The Company agrees at all times to reserve or hold available a sufficient number of shares of Common Stock to cover the number of Warrant Shares issuable upon the exercise of this warrant.
6. This warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company, or to any other rights whatsoever, except the rights herein expressed, and no dividends shall be payable or accrue in respect of this warrant or the Warrant Shares until or unless, and except to the extent that, this warrant shall be exercised.
7. The Company may deem and treat the registered owner of this warrant as the absolute owner hereof for all purposes and shall not be affected by any notice to the contrary.
8. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein.
9. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Georgia, without regard to the principles of conflicts of law thereof.
10. This Agreement shall be binding on and inure to the benefit of the Company and the person to whom a warrant is granted hereunder, and such person’s heirs, executors, administrators, legatees, personal representatives, assignees, and transferees.
11. The Company shall not have any right to redeem any of the Warrants evidenced hereby.

 

3


 

IN WITNESS WHEREOF, the Company has caused this warrant to be executed by the signature of its duly authorized officer, effective this  _____  day of  _____  2009.
         
  RUB MUSIC ENTERPRISES, INC.
 
 
  By:      
    Name:   Barry J. Jenkins   
    Title:   Chief Financial Officer   
The undersigned Holder hereby acknowledges receipt of a copy of the foregoing warrant and acknowledges and agrees to the terms and conditions set forth in the warrant.
         
  By:      

 

4


 

         
Exercise Notice
(to be signed only upon exercise of Warrant)
TO: RUB MUSIC ENTERPRISES, INC.
The Holder of the attached warrant hereby irrevocable elects to exercise the purchase rights represented by the warrant for, and to purchase thereunder,                                           shares of common stock of Rub Music Enterprises, Inc. and herewith makes payment therefor, and requests that the certificate(s) for such shares be delivered to the Holder at:
 
 
 
If acquired without registration under the Securities Act of 1933, as amended (“Securities Act”), the Holder represents that the Common Stock is being acquired without a view to, or for, resale in connection with any distribution thereof without registration or other compliance under the Securities Act and applicable state statutes, and that the Holder has no direct or indirect participation in any such undertaking or in the underwriting of such an undertaking. The Holder understands that the Common Stock has not been registered, but is being acquired by reason of a specific exemption under the Securities Act as well as under certain state statutes for transactions by an issuer not involving any public offering and that any disposition of the Common Stock may, under certain circumstances, be inconsistent with these exemptions. The Holder acknowledges that the Common Stock must be held and may not be sold, transferred, or otherwise disposed of for value unless subsequently registered under the Securities Act or an exemption from such registration is available. The Company is under no obligation to register the Common Stock under the Securities Act or any state securities law, except as provided in the Agreement for the warrant. The certificates representing the Common Stock will bear a legend restricting transfer, except in compliance with applicable federal and state securities statutes.
The Holder agrees and acknowledges that this purported exercise of the warrant is conditioned on, and subject to, any compliance with requirements of applicable federal and state securities laws deemed necessary by the Company.
DATED this  _____  day of                                           ,  _____.
         
 
   
 
Signature
   

 

5

Exhibit 4.2
RUB MUSIC ENTERPRISES, INC.
Warrant for the Purchase of [          ]
Shares of Common Stock
Par Value $0.001
CLASS B WARRANT AGREEMENT
(this “Agreement”)
THE HOLDER OF THIS WARRANT, BY ACCEPTANCE HEREOF, BOTH WITH RESPECT TO THE WARRANT AND COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANT, AGREES AND ACKNOWLEDGES THAT THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE LAWS OF ANY APPLICABLE STATE, OR (B) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER, AND ITS COUNSEL, TO THE EFFECT THAT THE SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH STATE STATUTES, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT.
This is to certify that, for value received,                      , (the “Holder”) is entitled to purchase from RUB MUSIC ENTERPRISES, INC. (the “Company”), on the terms and conditions hereinafter set forth, all or any part of [___] shares (“Warrant Shares”) of the Company’s common stock, par value $0.001 (the “Common Stock”), at the purchase price of $8.00 per share (“Warrant Price”). Upon exercise of this warrant in whole or in part, a certificate for the Warrant Shares so purchased shall be issued and delivered to the Holder. If, at any time prior to the Expiration Date (as defined below), less than the total warrant is exercised, a new warrant of similar tenor shall be issued for the unexercised portion of the warrants represented by this Agreement.
This warrant is granted subject to the following further terms and conditions:
1. This warrant shall vest and be exercisable upon the consummation of the merger of the Company with a wholly-owned subsidiary of a public shell company (the “Public Shell”), whereby the Company is the surviving entity and becomes a wholly-owned subsidiary of the Public Shell (the “Reverse Merger”), and shall expire at 5:00 p.m. Eastern Time on the date that is five years following the consummation of the Reverse Merger (the “Expiration Date”). In order to exercise this warrant with respect to all or any part of the Warrant Shares for which this warrant is at the time exercisable, Holder (or in the case of exercise after Holder’s death, Holder’s executor, administrator, heir or legatee, as the case may be) must take the following actions:
(a) Deliver to the Corporate Secretary of the Company an executed notice of exercise substantially in the form of notice attached to this Agreement (the “Exercise Notice”) in which there is specified the number of Warrant Shares that are to be purchased under the exercised warrant;
(b) Tender payment of the aggregate Warrant Price for the purchased shares in cash or by check made payable to the Company’s order; and

 

 


 

(c) Furnish to the Company appropriate documentation that the person or persons exercising the warrant (if other than Holder) have the right to exercise the warrant.
(d) For purposes of this Agreement, the “Exercise Date” shall be the date on which the executed Exercise Notice shall have been delivered to the Company.
(e) Upon such exercise, the Company shall issue and cause to be delivered, with all reasonable dispatch (and in any event within five business days of such exercise), to or upon the written order of the Holder at its address, and in the name of the Holder, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise, together with such other property (including cash) and securities as may then be deliverable upon such exercise. Such certificate or certificates shall be deemed to have been issued and the Holder shall be deemed to have become a holder of record of such Warrant Shares as of the Exercise Date.
2. The Holder acknowledges that this warrant may not be exercised if the issuance of the Warrant Shares upon such exercise would constitute a violation of any applicable federal or state securities laws, or other law or regulation, and the Warrant Shares have not been and will not be registered as of the date of exercise of this warrant under the Securities Act or the securities laws of any state. The Holder acknowledges that this warrant and the Warrant Shares, when and if issued, are and will be “restricted securities” as defined in Rule 144 promulgated under the Securities Act and must be held indefinitely unless subsequently registered under the Securities Act and any other applicable state registration requirements. Except as provided herein, the Company is under no obligation to register the securities under the Securities Act or under applicable state statutes. In the absence of such a registration or an available exemption from registration, sale of the Warrant Shares may be practicably impossible. The Holder shall confirm to the Company the representations set forth above in connection with the exercise of all or any portion of this warrant.
3. The number of Warrant Shares purchasable upon the exercise of this warrant and the Warrant Price per share shall be subject to adjustment from time to time as follows:
(a) In the event that the Company should at any time, or from time to time, fix a record date for the effectuation of a split, either forward or reverse, subdivision or combination of the outstanding shares of Common Stock, or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”), without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the number of Warrant Shares purchasable hereunder shall be appropriately increased or decreased in proportion to such increase or decrease in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents.
(b) Whenever there is an adjustment in the number of Warrant Shares purchasable upon the exercise of this warrant pursuant to the provisions of Section 3(a), the Warrant Price shall be adjusted to an amount proportionate to the adjustment in the number of Warrant Shares.

 

2


 

(c) If at any time, or from time to time, there shall be a recapitalization of the Common Stock (other than a subdivision or combination, or merger or sale of assets transaction provided for elsewhere in this Section 3) provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this warrant the number of shares of Common Stock, Common Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled upon such recapitalization assuming this warrant was exercised immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this warrant after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Warrant Price then in effect and the number of Warrant Shares issuable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable.
(d) If at any time, or from time to time, the Company shall consolidate with or merge into another corporation, or shall sell, lease, or convey to another corporation the assets of the Company as an entity or substantially as an entity (any one or more of such transactions being a “Corporate Transaction”), provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this warrant the number of shares of Common Stock, Common Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled to receive in such Corporate Transaction assuming this warrant was exercised immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this warrant after the Corporate Transaction to the end that the provisions of this Section 3 (including adjustment of the Warrant Price then in effect and the number of Warrant Shares issuable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable.
4. The Company covenants and agrees that all Warrant Shares which may be delivered upon the exercise of this warrant will, upon delivery, be free from all taxes, liens, and charges with respect to the purchase thereof; provided, that the Company shall have no obligation with respect to any income tax liability of the Holder.
5. The Company agrees at all times to reserve or hold available a sufficient number of shares of Common Stock to cover the number of Warrant Shares issuable upon the exercise of this warrant.
6. This warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company, or to any other rights whatsoever, except the rights herein expressed, and no dividends shall be payable or accrue in respect of this warrant or the Warrant Shares until or unless, and except to the extent that, this warrant shall be exercised.
7. The Company may deem and treat the registered owner of this warrant as the absolute owner hereof for all purposes and shall not be affected by any notice to the contrary.
8. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein.
9. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Georgia, without regard to the principles of conflicts of law thereof.
10. This Agreement shall be binding on and inure to the benefit of the Company and the person to whom a warrant is granted hereunder, and such person’s heirs, executors, administrators, legatees, personal representatives, assignees, and transferees.
11. The Company shall not have any right to redeem any of the Warrants evidenced hereby.

 

3


 

IN WITNESS WHEREOF, the Company has caused this warrant to be executed by the signature of its duly authorized officer, effective this  _____  day of                      2009.
         
  RUB MUSIC ENTERPRISES, INC.
 
 
  By:      
    Name:   Barry J. Jenkins   
    Title:   Chief Financial Officer   
The undersigned Holder hereby acknowledges receipt of a copy of the foregoing warrant and acknowledges and agrees to the terms and conditions set forth in the warrant.
         
  By:      

 

4


 

         
Exercise Notice
(to be signed only upon exercise of Warrant)
TO: RUB MUSIC ENTERPRISES, INC.
The Holder of the attached warrant hereby irrevocable elects to exercise the purchase rights represented by the warrant for, and to purchase thereunder,                                           shares of common stock of Rub Music Enterprises, Inc. and herewith makes payment therefor, and requests that the certificate(s) for such shares be delivered to the Holder at:
 
 
 
If acquired without registration under the Securities Act of 1933, as amended (“Securities Act”), the Holder represents that the Common Stock is being acquired without a view to, or for, resale in connection with any distribution thereof without registration or other compliance under the Securities Act and applicable state statutes, and that the Holder has no direct or indirect participation in any such undertaking or in the underwriting of such an undertaking. The Holder understands that the Common Stock has not been registered, but is being acquired by reason of a specific exemption under the Securities Act as well as under certain state statutes for transactions by an issuer not involving any public offering and that any disposition of the Common Stock may, under certain circumstances, be inconsistent with these exemptions. The Holder acknowledges that the Common Stock must be held and may not be sold, transferred, or otherwise disposed of for value unless subsequently registered under the Securities Act or an exemption from such registration is available. The Company is under no obligation to register the Common Stock under the Securities Act or any state securities law, except as provided in the Agreement for the warrant. The certificates representing the Common Stock will bear a legend restricting transfer, except in compliance with applicable federal and state securities statutes.
The Holder agrees and acknowledges that this purported exercise of the warrant is conditioned on, and subject to, any compliance with requirements of applicable federal and state securities laws deemed necessary by the Company.
DATED this  _____  day of                                           ,  _____.
         
 
   
 
Signature
   

 

5

Exhibit 4.3
RUB MUSIC ENTERPRISES, INC.
Warrant for the Purchase of [           ]
Shares of Common Stock
Par Value $0.001
AMENDED AND RESTATED
CLASS C WARRANT AGREEMENT
(this “Agreement”)
This Amended and Restated Class C Warrant Agreement amends and restates that certain Warrant Agreement, dated July 17, 2009, issued by the Company (defined below) to the Holder (defined below).
THE HOLDER OF THIS WARRANT, BY ACCEPTANCE HEREOF, BOTH WITH RESPECT TO THE WARRANT AND COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANT, AGREES AND ACKNOWLEDGES THAT THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE LAWS OF ANY APPLICABLE STATE, OR (B) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER, AND ITS COUNSEL, TO THE EFFECT THAT THE SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH STATE STATUTES, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT.
This is to certify that, for value received,                                           , (the “Holder”) is entitled to purchase from RUB MUSIC ENTERPRISES, INC. (the “Company”), on the terms and conditions hereinafter set forth, all or any part of [       ] shares (“Warrant Shares”) of the Company’s common stock, par value $0.001 (the “Common Stock”), at the purchase price of $4.00 per share (“Warrant Price”). Upon exercise of this warrant in whole or in part, a certificate for the Warrant Shares so purchased shall be issued and delivered to the Holder. If, at any time prior to the Expiration Date (as defined below), less than the total warrant is exercised, a new warrant of similar tenor shall be issued for the unexercised portion of the warrants represented by this Agreement.
This warrant is granted subject to the following further terms and conditions:
1. This warrant shall vest and be exercisable upon the one year anniversary of the consummation of a merger or acquisition of the Company, or the merger or acquisition of any wholly-owned subsidiary of the Company (the “Merger”), and shall expire at 5:00 p.m. Eastern Time on the date that is two years following the consummation of the Merger (the “Expiration Date”). In order to exercise this warrant with respect to all or any part of the Warrant Shares for which this warrant is at the time exercisable, Holder (or in the case of exercise after Holder’s death, Holder’s executor, administrator, heir or legatee, as the case may be) must take the following actions:
(a) Deliver to the Corporate Secretary of the Company an executed notice of exercise substantially in the form of notice attached to this Agreement (the “Exercise Notice”) in which there is specified the number of Warrant Shares that are to be purchased under the exercised warrant;

 

 


 

(b) Tender payment of the aggregate Warrant Price for the purchased shares in cash or by check made payable to the Company’s order; and
(c) Furnish to the Company appropriate documentation that the person or persons exercising the warrant (if other than Holder) have the right to exercise the warrant.
(d) For purposes of this Agreement, the “Exercise Date” shall be the date on which the executed Exercise Notice shall have been delivered to the Company.
(e) Upon such exercise, the Company shall issue and cause to be delivered, with all reasonable dispatch (and in any event within five business days of such exercise), to or upon the written order of the Holder at its address, and in the name of the Holder, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise, together with such other property (including cash) and securities as may then be deliverable upon such exercise. Such certificate or certificates shall be deemed to have been issued and the Holder shall be deemed to have become a holder of record of such Warrant Shares as of the Exercise Date.
2. The Holder acknowledges that this warrant may not be exercised if the issuance of the Warrant Shares upon such exercise would constitute a violation of any applicable federal or state securities laws, or other law or regulation, and the Warrant Shares have not been and will not be registered as of the date of exercise of this warrant under the Securities Act or the securities laws of any state. The Holder acknowledges that this warrant and the Warrant Shares, when and if issued, are and will be “restricted securities” as defined in Rule 144 promulgated under the Securities Act and must be held indefinitely unless subsequently registered under the Securities Act and any other applicable state registration requirements. Except as provided herein, the Company is under no obligation to register the securities under the Securities Act or under applicable state statutes. In the absence of such a registration or an available exemption from registration, sale of the Warrant Shares may be practicably impossible. The Holder shall confirm to the Company the representations set forth above in connection with the exercise of all or any portion of this warrant.
3. The number of Warrant Shares purchasable upon the exercise of this warrant and the Warrant Price per share shall be subject to adjustment from time to time as follows:
(a) In the event that the Company should at any time, or from time to time, fix a record date for the effectuation of a split, either forward or reverse, subdivision or combination of the outstanding shares of Common Stock, or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”), without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the number of Warrant Shares purchasable hereunder shall be appropriately increased or decreased in proportion to such increase or decrease in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents.
(b) Whenever there is an adjustment in the number of Warrant Shares purchasable upon the exercise of this warrant pursuant to the provisions of Section 3(a), the Warrant Price shall be adjusted to an amount proportionate to the adjustment in the number of Warrant Shares.

 

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(c) If at any time, or from time to time, there shall be a recapitalization of the Common Stock (other than a subdivision or combination, or merger or sale of assets transaction provided for elsewhere in this Section 3) provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this warrant the number of shares of Common Stock, Common Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled upon such recapitalization assuming this warrant was exercised immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this warrant after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Warrant Price then in effect and the number of Warrant Shares issuable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable.
(d) If at any time, or from time to time, the Company shall consolidate with or merge into another corporation, or shall sell, lease, or convey to another corporation the assets of the Company as an entity or substantially as an entity (any one or more of such transactions being a “Corporate Transaction”), provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this warrant the number of shares of Common Stock, Common Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled to receive in such Corporate Transaction assuming this warrant was exercised immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this warrant after the Corporate Transaction to the end that the provisions of this Section 3 (including adjustment of the Warrant Price then in effect and the number of Warrant Shares issuable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable.
4. The Company covenants and agrees that all Warrant Shares which may be delivered upon the exercise of this warrant will, upon delivery, be free from all taxes, liens, and charges with respect to the purchase thereof; provided, that the Company shall have no obligation with respect to any income tax liability of the Holder.
5. This warrant shall be subject to redemption as follows:
(a) If the closing price of the Common Stock on the Trading Market (as defined below) is $5.00 per share or more, with 15,000 shares of average daily volume, for 20 consecutive Trading Days (as defined below), then this warrant, in whole or in part, will be subject to redemption at the option of the Company, at a price of $0.01 per share for each Warrant Share purchasable upon the exercise of this warrant.
(b) If the Company consummates a private offering of its Common Stock, then this warrant will be subject to redemption at the option of the Company, at the rate of one Warrant Share for every $4.00 of gross proceeds received by the Company in such private offering, at a price of $0.01 per share for each Warrant Share purchasable upon the exercise of this warrant.
(c) Any amount of this warrant subject to redemption, as set forth herein (the “Redemption Amount”), may be redeemed by the Company at any time and from time to time, upon not less than 10 nor more than 30 days notice to the Holder.
(d) The Company shall deliver to the Holder a written notice of redemption (the “Redemption Notice”) specifying the date for the redemption (the “Redemption Payment Date”), which date shall be at least 10 but not more than 30 days after the date of the Notice of Redemption (the “Redemption Period”). A Notice of Redemption shall not be effective with respect to any portion of this warrant for which the Holder has previously delivered an Exercise Notice or for exercises elected to be made by the Holder pursuant to Section 1 during the Redemption Period.

 

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(e) The Redemption Amount shall be determined as if the Holder’s exercise elections had been completed immediately prior to the date of the Notice of Redemption. On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder. In the event the Company fails to pay the Redemption Amount on the Redemption Payment Date, then such Notice of Redemption shall be null and void.
(f) “Trading Day” means a day on which the principal Trading Market is open for business. “Trading Market” means the following markets, exchange or bulletin boards on which the Common Stock is listed, traded or quoted for trading on the date in question: the NASDAQ Stock Market, the New York Stock Exchange, the American Stock Exchange or the Over-the-Counter Bulletin Board.
(g) The Company agrees that, notwithstanding the terms of this warrant, the Company shall not redeem any portion of this warrant pursuant to Section 5 (a) of this warrant until the one year anniversary of the consummation of the Merger.
6. The Company agrees at all times to reserve or hold available a sufficient number of shares of Common Stock to cover the number of Warrant Shares issuable upon the exercise of this warrant.
7. This warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company, or to any other rights whatsoever, except the rights herein expressed, and no dividends shall be payable or accrue in respect of this warrant or the Warrant Shares until or unless, and except to the extent that, this warrant shall be exercised.
8. The Company may deem and treat the registered owner of this warrant as the absolute owner hereof for all purposes and shall not be affected by any notice to the contrary.
9. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein.
10. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Georgia, without regard to the principles of conflicts of law thereof.
11. This Agreement shall be binding on and inure to the benefit of the Company and the person to whom a warrant is granted hereunder, and such person’s heirs, executors, administrators, legatees, personal representatives, assignees, and transferees.
IN WITNESS WHEREOF, the Company has caused this warrant to be executed by the signature of its duly authorized officer, effective this  _____  day of                      2009.
         
  RUB MUSIC ENTERPRISES, INC.
 
 
  By:      
    Name:   Cornelius A. Hofman   
    Title:   President   

 

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The undersigned Holder hereby acknowledges receipt of a copy of the foregoing warrant and acknowledges and agrees to the terms and conditions set forth in the warrant.
         
     
  By:      

 

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Exercise Notice
(to be signed only upon exercise of Warrant)
TO: RUB MUSIC ENTERPRISES, INC.
The Holder of the attached warrant hereby irrevocable elects to exercise the purchase rights represented by the warrant for, and to purchase thereunder,                                           shares of common stock of Rub Music Enterprises, Inc. and herewith makes payment therefor, and requests that the certificate(s) for such shares be delivered to the Holder at:
 
 
 
If acquired without registration under the Securities Act of 1933, as amended (“Securities Act”), the Holder represents that the Common Stock is being acquired without a view to, or for, resale in connection with any distribution thereof without registration or other compliance under the Securities Act and applicable state statutes, and that the Holder has no direct or indirect participation in any such undertaking or in the underwriting of such an undertaking. The Holder understands that the Common Stock has not been registered, but is being acquired by reason of a specific exemption under the Securities Act as well as under certain state statutes for transactions by an issuer not involving any public offering and that any disposition of the Common Stock may, under certain circumstances, be inconsistent with these exemptions. The Holder acknowledges that the Common Stock must be held and may not be sold, transferred, or otherwise disposed of for value unless subsequently registered under the Securities Act or an exemption from such registration is available. The Company is under no obligation to register the Common Stock under the Securities Act or any state securities law, except as provided in the Agreement for the warrant. The certificates representing the Common Stock will bear a legend restricting transfer, except in compliance with applicable federal and state securities statutes.
The Holder agrees and acknowledges that this purported exercise of the warrant is conditioned on, and subject to, any compliance with requirements of applicable federal and state securities laws deemed necessary by the Company.
DATED this  _____  day of                                                                ,  _____.
         
 
   
 
Signature
   

 

6

Exhibit 4.4
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. HOLDERS SHOULD BE AWARE THAT THEY ME BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER, TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
AMENDED SENIOR NOTE
     
$100,000   May 31, 2009
This note (this “Note”) amends and restates that certain Senior Secured Note dated May 31, 2009 in the original principal amount of $100,000 (the “Original Note”) made by Sanuwave, Inc., a Delaware corporation (the “Company”), and delivered to Prides Capital Fund I, L.P. or its assignees (together, the “Holders”). This Note is not intended to be, nor shall it be construed as, a novation of the Original Note.
Subject to the terms and conditions of this Note, for good and valuable consideration received, the Company promises to pay to the order of the Holders, the principal amount of One Hundred Thousand and 00/100 Dollars ($100,000) as increased as provided in Section 2 below, and interest thereon as provided herein. The following is a statement of the rights of the Holders and the terms and conditions to which this Note is subject, and to which the Company, by the issuance of this Note, and the Holders, by the acceptance of this Note, agree:
1.  Payments .
1.1 Payment Obligation . Unless paid earlier as provided herein, the Company shall pay all principal and accrued and unpaid interest under this Note on September 30, 2011 (the “Maturity Date”). All payments of principal and/or interest under this Note will be made by electronic wire transfer to an account designated by the Holders.
1.2 Optional Prepayment . All or any portion of the principal and accrued and unpaid interest under this Note may be paid prior to the Maturity Date without the written consent of the Holders upon fifteen (15) days prior written notice to the Holders; provided , however, that any such prepayment shall include accrued interest on the amount so prepaid.

 

 


 

2.  Interest . Interest (computed on the basis of a 360-day year and for the actual number of days in the respective period) shall accrue daily starting effective May 8, 2009 for $100,000 due the Holders. Interest is payable quarterly (on March 31, June 30, September 30 and December 31), commencing on June 30, 2009, on the unpaid principal amount of this Note then outstanding at the rate of fifteen percent (15%) per annum; provided , that the Holders have notified the Company of their election to have such payment made in cash not less than 15 days prior to such payment date and; provided , further , that if such notice is not given, such accrued interest shall be capitalized and added to the principal amount of this Note. Each amount so capitalized shall be considered part of the principal amount outstanding under this Note and shall bear interest as provided in the first sentence of this Section 2 and shall be payable on the Maturity Date.
3.  Optional Conversion .
3.1 Holder’s Option . The Holders shall have the sole right, but not the obligation to convert all or any portion of the unpaid principal amount of this Note into shares of the Company’s Series A convertible participating preferred stock, par value $0.01 per share (the “Preferred Stock”). In the event the Holders elect to convert this Note into Preferred Stock, the Conversion Price shall be set at One Hundred Dollars ($100.00) per share.
3.2 Stock Split or Dividend . In the event that the Company should at any time, or from time to time, fix a record date for the effectuation of a split, either forward or reverse, subdivision or combination of the outstanding shares Preferred Stock, or the determination of holders of Preferred Stock entitled to receive a dividend or other distribution payable in additional to shares of Preferred Stock or other securities or rights convertible into, or entitling the holder thereof to receive, directly or indirectly, additional shares of Preferred Stock (hereinafter referred to as “Preferred Stock Equivalents”), without payment of any consideration by such holder for the additional shares of Preferred Stock or Preferred Stock Equivalents (including the additional shares of Preferred Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the number of shares of Preferred Stock purchasable hereunder shall be appropriately increased or decreased in proportion to such increase or decrease in the aggregate number of shares of Preferred Stock outstanding and those issuable with respect to such Preferred Stock Equivalents. Whenever there is an adjustment in the number of shares of Preferred Stock purchasable upon the conversion of this Note pursuant to the provisions of this Section 3.2, the Conversion Price shall be adjusted to an amount proportionate to the adjustment in the number of shares of Preferred Stock.
3.3 Recapitalization . If at any time, or from time to time, there shall be a recapitalization of the Preferred Stock (other than a subdivision or combination, or merger or sale of assets transaction provided for elsewhere in this Section 3), provision shall be made so that the Holder shall thereafter be entitled to receive upon conversion of this Note the number of shares of Preferred Stock, Preferred Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled upon such recapitalization assuming this Note was converted immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this Note after the recapitalization to the end that the provisions of this Section 3 (included adjustment of the Conversion Price then in effect and the number of shares of Preferred Stock issuable upon conversion) shall be applicable after that event as nearly equivalent as may be practicable.

 

 


 

3.4 Consolidation or Merger . If at any time, or from time to time, the Company shall consolidate with or merge into another corporation, or shall sell, lease, or convey to another corporation the assets of the Company as an entity or substantially as an entity (any one or more of such transactions being a “Corporate Transaction”), provision shall be made so that the Holder shall thereafter be entitled to receive upon conversion of this Note the number of shares of Preferred Stock, Preferred Stock Equivalents or property of the Company or otherwise, to which the Holder would have been entitled to receive in such Corporate Transaction assuming this Note was converted immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the Holder of this Note after the Corporate Transaction to the end that the provisions of this Section 3 (including adjustment of the Conversion Price then in effect and the number of shares of Preferred Stock issuable upon conversion) shall be applicable after that event as nearly equivalent as may be practicable.
4.  Events of Default .
4.1 The occurrence of any of the following events shall be deemed to constitute an “Event of Default” hereunder: (a) the failure of the Company to pay the principal of this Note, together with all accrued interest, on the Maturity Date; (b) the failure of the Company to comply with any provision applicable to it set forth in this Note; (c) the failure of the Company to pay any amount when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) in respect of any indebtedness (other than indebtedness evidenced by this Note) in a principal amount of at least $100,000 and such failure shall continue after the applicable grace period, if any, in the agreement relating to such indebtedness, or any other event shall occur or condition shall exist under any agreement relating to any such indebtedness and shall continue after the applicable grace period, if any, specified in such agreement, if the effect of such event or condition is to accelerate, or to permit the holders thereof to cause, such indebtedness to mature; (d) entry of a judgment against the Company in the amount of $500,000 or more, if thirty (30) days have elapsed and the judgment has not been vacated, satisfied or dismissed, and the enforcement of the judgment has not been stayed pending appeal; and (e) any Liquidation Event (as defined below). As used herein, “Liquidation Event” means the occurrence or institution by or against the Company of (i) any bankruptcy, reorganization, receivership or insolvency proceeding, (ii) any appointment of a receiver or custodian for all or a substantial portion of the property of the Company, (iii) any assignment for the benefit of, or composition or arrangement with, the creditors of the Company (whether or not pursuant to bankruptcy or other insolvency laws), (iv) any sale of all or substantially all of the assets of the Company, or (v) any dissolution, liquidation or other marshalling of the assets and liabilities of the Company.

 

 


 

4.2 If there shall occur (a) any Liquidation Event, the entire unpaid principal and accrued interest on this Note shall automatically become and be forthwith due and payable, without any requirement by the Holders to give notice, present the Note, make demand, protest of give other notice of any kind of character, all of which are hereby expressly waived, anything herein to the contrary notwithstanding, and (b) any Event of Default (other than a Liquidation Event), then the Holders may declare the entire unpaid principal and accrued interest on this Note immediately due and payable, by notice in writing to the Company, whereupon the entire unpaid principal and accrued interest on this Note shall automatically become and be forthwith due and payable, without any further requirement by Holders to present the Note, make demand, protest or give other notice of any kind of character, all of which are hereby expressly waived, anything herein to the contrary notwithstanding.
5.  Expenses; Indemnity .
5.1 The Company shall pay all reasonable out-of-pocket expenses incurred by Holders (including the reasonable fees, costs and disbursements of any counsel for the Holders), in connection with the enforcement of its rights under this Note, including all such out-of-pocket expenses incurred during any workout, restructuring or related negotiations.
5.2 The Company shall indemnify the Holders and each of its partners, directors, officers, employees, agents and advisors (each such person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the reasonable fees, charges and disbursements of any counsel for any Indemnitee), incurred by any Indemnitee or asserted against any Indemnitee by any third party arising out of, in connection with, or as a result of (i) the execution or delivery of this Note or any agreement or instrument contemplated hereby, the performance by the parties of their respective obligations hereunder or the consummation of the transactions contemplated hereby, or (ii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, brought by a third party; provided, that such indemnity shall not be available to any Indemnitee if any of the Indemnitees initiate any such claim, litigation, investigation or proceeding; provided, further, that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee.
5.3 The Company hereby agrees that none of the Indemnitees shall have any liability (whether direct or indirect, in contract, tort or otherwise) to the Company or any of its affiliates or any of their respective officers, directors, employees, agents and advisors, and the Company hereby agrees not to assert any claim against any Indemnitee, for special, indirect, consequential and punitive damages arising out of or otherwise relating to this Note, the actual or proposed use of the proceeds of this Note or any transactions contemplated by this Note.
6.  Assignment . Subject to any legal limitations arising under the securities laws, the Holders have the right to transfer all or any portion of this Note to any other entity. The rights and obligations of the Company will be binding upon and inure to the benefit of the successors, assigns, heirs, administrators and transferees of the parties.

 

 


 

7.  Waiver and Amendment .
7.1 Any amendment or waiver hereto shall be in writing and signed by the Holders and the Company. No failure on the part of the Holder to exercise, and delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right hereunder preclude any other or further exercise thereof or the exercise of any other rights. The remedies herein provided are cumulative and not exclusive of any other remedies provided by law.
7.2 This Note amends the Original Note. This Note is not intended to be, nor shall it be construed as, a novation of the Original Note.
8.  Notices . Any notice shall be deemed to have been duly given if personally delivered or sent by United States mail or by facsimile transmission confirmed by letter: in the case of the Company, at Sanuwave, Inc., 11680 Great Oaks Way, Suite 350, Alpharetta, Georgia 30022, Attention: Chief Financial Officer, Telephone: 678-578-0125, Facsimile: 866-641-1182; and in the case of the Holders, at Prides Capital Fund I, L.P., c/o Prides Capital Partners, LLC, 200 High Street, Suite 700, Boston, Massachusetts 02110, Attention: Hank Lawlor, Telephone: 617-778-9200, Facsimile: 617-778-9299; or in each case, at such other address as is noticed to the respective party in accordance with the terms hereof, and will be deemed given, unless earlier received, (i) if sent by certified or registered mail, return receipt requested, five calendar days after being deposited in the United States mail, postage prepaid, (ii) if sent by United States Express Mail, two calendar days after being deposited in the United States mail, postage prepaid, (iii) if sent by facsimile transmission, on the date sent provided a confirmatory notice was sent by first-class mail, postage prepaid, and (iv) if delivered by hand, on the date of receipt. Any party hereto may by notice so given change its address for future notice hereunder.
9.  Governing Law; Jurisdiction; Waiver of Jury Trial .
9.1 This Note shall be governed by and construed in accordance with the laws of the State of New York.
9.2 The Company hereby irrevocable and unconditionally submits to the nonexclusive jurisdiction of any New York State or Federal court of the United States of America sitting in the Borough of Manhattan, New York City, in any action or proceeding arising out of or relating to this Note or any other note to which it is a party and irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such Federal court. Nothing in this Section 9 shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Note in the courts of any jurisdiction. The Company hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, (a) any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of this Note in any New York State or Federal court, and (b) the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

 

 


 

9.3 THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF THE HOLDERS IN NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
10.  Headings; References . All headings used herein are used for convenience only and will not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.
[SIGNATURE PAGE FOLLOWS]

 

 


 

IN WITNESS WHEREOF, the Company has caused this Note to be issued as of August  _____, 2009.
         
  COMPANY:

SANUWAVE, INC.
 
 
  By:      
    Name:      
    Title:      
The undersigned Holder hereby acknowledges receipt of a copy of the foregoing Note and acknowledges and agrees to the terms and conditions set forth in this Note.
         
  HOLDER:

PRIDES CAPITAL FUND I, L.P.
 
 
  By:      
    Name:      
    Title:      

 

 

Exhibit 4.5
SanuWave, Inc.
Promissory Note due August 1, 2015
     
$2,000,000.00   August 1, 2005
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES OR “BLUE SKY” LAWS AND MAY NOT BE
OFFERED OR SOLD EXCEPT IN COMPLIANCE WITH THE
REQUIREMENTS IMPOSED THEREBY.
FOR VALUE RECEIVED, the undersigned SanuWave, Inc., a Delaware corporation (the “ Borrower ”), hereby promises to pay to Healthtronics, Inc., a Georgia corporation, (or its permitted assignees, collectively, “ Healthtronics ”) at the address specified in Section 7.2.1. hereof, or at such other place as Healthtronics shall from time to time have designated to Borrower in writing, on or before August 1, 2015 (the “ Stated Maturity Date ”), the amount of Two million dollars ($2,000,000.00) (together with increases to such amount pursuant to Section 2.1 hereof, the “ Principal Amount ”), in cash on the terms and conditions set forth in Article 3 hereof, and with interest as provided in Article 2 hereof.
ARTICLE I
GENERAL
1.1 The Note . This Note is as contemplated by the Purchase Agreement, dated as of August 1, 2005, among the Borrower and Healthtronics (the “ Purchase Agreement ”). Terms defined in the Purchase Agreement and not otherwise defined herein are used herein as so defined in those agreements.
1.2 Acceleration . In case an Event of Default (as defined in Section 6.1 hereof) or Change in Control (as defined in Section 4.3.2 hereof) shall occur, the entire Principal Amount of this Note may become or be declared to be due and payable in the manner and with the effect provided herein.
ARTICLE II
INTEREST
2.1 Interest . This Note shall accrue daily interest from the date hereof on the Principal Amount from time to time unpaid at a rate of six percent (6%) per annum. Such interest shall be paid quarterly in arrears on each March 31, June 30, September 30 and December 31 of each calendar year and on the Stated Maturity Date, or if any such day is not a business day, on the next succeeding business day (each an “ Interest Payment Date ”) to the holder of record on the date which is 15 days before the applicable Interest Payment Date.

 

 


 

2.2 Manner of Payment . On and prior to June 30, 2010, all interest on the Principal Amount shall be payable by adding an amount equal to such interest payable on such Interest Payment Date to the then aggregate Principal Amount outstanding on this Note on such Interest Payment Date. On and subsequent to September 30, 2010, all interest on the Principal Amount shall be payable in cash.
ARTICLE III
PAYMENT OF PRINCIPAL AMOUNT
3.1 Payments . The outstanding Principal Amount of this Note will be payable on the Stated Maturity Date in cash.
ARTICLE IV
MANDATORY REDEMPTION
4.1 Change of Control of Borrower . If, after the date hereof but before the Stated Maturity Date, there occurs a Change of Control, then the Borrower shall redeem this Note at the Redemption Price, payable in cash, pursuant to Section 4.2 hereof.
4.2 Procedures for Redemption: Payment of Redemption Price .
4.2.1 The Borrower shall deliver a written notice to Healthtronics as soon as practicable after the Change of Control, but in no event later than 10 days thereafter. Written notice of redemption shall specify the date and place of the redemption of this Note, and require Healthtronics to surrender this Note to the Borrower on the redemption date at the Borrower’s principal place of business free and clear of all Encumbrances. The date such written notice is delivered to Healthtronics is the “ Redemption Record Date .” The redemption date shall be as soon as practicable following the event giving rise to such redemption, but in no event later than 30 days after the Redemption Record Date. On the redemption date, the Redemption Price shall be paid in cash to Healthtronics or on the order of Healthtronics to some other Person, in each case by wire transfer of immediately available U.S. Dollars to an account designated in writing by Healthtionics. This Note shall be thereafter canceled by the Borrower. Any notice of redemption delivered by the Borrower to Healthtronics under this Section 3 shall be irrevocable.
4.2.2 In the event the Borrower fails to deliver a written notice of redemption when required to do so pursuant to Section 4.2.1, a written notice of redemption shall be deemed to be delivered by the Borrower to Healthtronics on the date such delivery was due, and thereafter the redemption to which such notice relates shall occur in accordance with the terms of this Section 4.2.
4.3 Definitions .
4.3.1 “ Redemption Price ” means a redemption price for this Note or any portion thereof equal to the sum of (x) 100% of the Principal Amount thereof plus (y) accrued but unpaid interest thereon, in each case to and including the date of redemption.

 

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4.3.2 “ Change of Control ” means (i) the merger, consolidation or other combination of the Borrower with any person in which the stockholders of the Borrower immediately prior to such transaction in the aggregate cease to own at least 50% of the voting power of the voting securities of the person surviving or resulting from such transaction (or the ultimate parent thereof), (ii) the sale, conveyance or other transfer of all or substantially all of the assets of the Borrower, or (iii) any transaction or series of transactions in which more than 50% of the voting power of the Borrower’s voting securities is transferred to any person or group, in each case resulting in the payment of aggregate net proceeds to Borrower or its affiliates in excess of $50,000,000 in cash or stock (calculated based upon the fair market value of such stock).
ARTICLE V
CANCELLATION
5.1 If, as of the two year anniversary of the date hereof, Healthtronics or its Affiliates have not (i) purchased or otherwise obtained ownership of, any and all assets, rights, properties, claims and contracts of HMT High MediCal Technologies AG relating to the Business, including without limitation any and all rights and claims of HMT High Medical Technologies AG with respect to the Switzerland Litigation (as defined in the Letter Agreement) or any other Patent Litigation (as defined in the Letter Agreement) (if any), (ii) conveyed, transferred, assigned and delivered any such assets, rights, properties, claims and contracts to the Borrower pursuant to Section 2.5 of the Letter Agreement dated as of August 1, 2005, among the Borrower and Healthtronics (the “ Letter Agreement ”), and (iii) come to a reasonable agreement with Borrower that such provision has been complied with, this Note shall thereafter be canceled by the Borrower and be of no further force and effect and, notwithstanding anything to the contrary contained in this Note, Borrower shall have no obligation with respect to any payments hereunder, including with respect to any accrued and unpaid interest or principal.
ARTICLE VI
EVENTS OF DEFAULT
6.1 Events of Default; Remedies . If any of the following events (each such event herein termed an “ Event of Default ”) shall happen, that is to say:
6.1.1 the Borrower shall fail to make any payment of Principal Amount of this Note when due, whether at maturity by acceleration or otherwise;
6.1.2 The Borrower shall:
(a) commence a voluntary case under Title 11 of the United States Code as from time to time in effect, or authorize, by appropriate proceedings of its board of managers or other governing body, the commencement of such a voluntary case;

 

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(b) have filed against it a petition under said Title 11 which shall not have been dismissed within 30 days after the date on which said petition is filed, or file an answer or other pleading within said 30-day period admitting or failing to deny the material allegations of such a petition, or seeking, consenting to or acquiescing in the relief therein provided, or fail to controvert timely the material allegations of any such petition;
(c) have entered against it an order for relief in any involuntary case commenced under said Title 11;
(d) seek relief as a debtor under any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief;
(e) have entered against it any order by a court of competent. jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors or (iii) assuming custody of, or appointing a receiver or other custodian for, all or a substantial part of its property; or
(f) make an assignment for the benefit of, or enter into a composition with, its creditors or appoint or consent to the appointment of a receiver or other custodian for all or a substantial part of its property.
then and in each and every such case, Healthtronics shall notify the Borrower of such Event of Default and, in the event such Event of Default is not cured by Borrower within thirty (30) days of the date of such notice, Healthtronics may declare all or any part of the unpaid Principal Amount to be forthwith due and payable (unless there shall have occurred an Event of Default under Section 6.1.2 hereof; in which case the unpaid balance of this Note shall automatically become due and payable), and thereupon such unpaid Principal Amount or part thereof, together with interest accrued thereon and all other sums, if any, payable under this Note, shall become so due and payable without presentation, presentment, protest or further demand or notice of any kind, all of which are hereby expressly waived to the extent not prohibited by applicable law that cannot be waived, and Healthtronics, may proceed to enforce payment of such amount or part thereof in such manner as it or they may elect, and if additional Principal Amount and interest remain outstanding under this Note, Healthtionics may proceed to protect and enforce its or their rights by suit in equity, action at law and/or other appropriate proceeding either for specific performance of any covenant, provision or condition contained in this Note, or in aid of the exercise of any power granted in this Note.
6.2 Annulment of Defaults . An Event of Default shall not be deemed to be in existence for any purpose of this Note if Healthtronics shall have waived such event in writing or stated in writing that the same has been cured to its or their reasonable satisfaction. No waiver or statement of satisfactory cure pursuant to this Section 6.2 shall extend to or affect any subsequent or other Event of Default not specifically identified in such waiver or statement of satisfactory cure or impair any of the rights of Healthtronics upon the occurrence thereof.

 

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6.3 Waivers . The Borrower hereby waives to the extent not prohibited by provisions of applicable law which cannot be waived (a) all presentments, demands for performance and notices of nonperformance (except to the extent specifically required by the provisions hereof), (b) any requirement of diligence or promptness on the part of Healthtronics in the enforcement of its rights under the provisions of this Note, (c) any and all notices of every kind and description which may be required to be given by any legal requirement, and (d) any defense of any kind (other than payment) which it may now or hereafter have with respect to its obligations and liability under this Note.
6.4 Course of Dealing . No course of dealing between the Borrower on the one hand, and Healthtronics on the other hand, shall operate as a waiver of the parties’ rights under this Note. No delay or omission in exercising any right under this Note shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a waiver of or bar to any right or remedy on any other occasion. No waiver or statement of satisfactory cure or consent shall be binding upon Healthtronics unless it is in writing and signed by Healthtronics as may be required by the provisions of this Note.
ARTICLE VII
MISCELLANEOUS
7.1 GOVERNING LAW . THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
7.2 Notices . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, telecopied (with confirmation of receipt), delivered by nationally-recognized overnight express service or sent by registered or certified mail (postage prepaid, retain receipt requested) to the parties at the following addresses:
7.2.1 If to Healthtronics, to:
HealthTronics, Inc.
1301 S. Capital of Texas Hwy., Suite B-200
Austin, Texas 78746
Attention: James Whittenburg
Facsimile No.: (512) 314-4305

 

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7.2.2 If to the Borrower, to:
SanuWave, Inc.
44 Montgomery Street, Suite 860
San Francisco, California 94104
Attention: Chris Puscasiu
Facsimile No.: (617) 507-0438
With a copy to:
Simpson Thacher & Bartlett LLP
3330 Hillview Avenue
Palo Alto, CA 94304
Attention: Michael J. Nooney, Esq.
Telecopy: (650) 251-5002
or to such other address as the person to whom notice is to be given may have previously furnished to the other in writing in the manner set forth above, provided that notice of a change of address shall be deemed given only upon receipt.
7.3 Expenses . Each party hereto shall be solely responsible for all expenses incurred by it or on its behalf in connection with the preparation and execution of this Note and the consummation of the transactions contemplated hereby, including, without limitation, the fees and expenses of its counsel, accountants, brokers, finders, financial advisors and other representatives; provided , however, that in the event of any non-payment by Borrower of principal or interest due hereunder, which non-payment is finally judicially determined by a court of competent jurisdiction to have been the result of a breach solely by Borrower of the terms hereunder, Borrower agrees to reimburse Healthtronics for its reasonable costs and expenses in connection with the enforcement of its rights hereunder.
7.4 Specific Performance . Without limiting the rights of each party hereto to pursue all other legal and equitable rights available to such party for the other parties’ failure to Perform their obligations under this Note, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure.
7.5 Descriptive Headings:, Interpretation . The headings contained in this Note are for reference purposes only and shall not affect in any way the meaning or interpretation of this Note. References in this Note to Sections mean Sections of this Note, unless otherwise indicated. The term “person” shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, a governmental entity or an unincorporated organization. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Note and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in a document will be construed against the party drafting the document.

 

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7.6 Counterparts . This Note may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.
7.7 Severability . In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the parties shall negotiate in good faith with a view to the substitution therefor of a suitable and equitable solution in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid provision, provided , however , that the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted bylaw.
7.8 Entire Agreement; Third-Party Beneficiaries . This Note constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and is not intended to confer upon any person other than the parties hereto and their permitted assigns any rights or remedies hereunder.
7.9 Assignment . No party hereto may assign its rights or obligations under this Note.
7.10 Further Assurances . The Borrower and Healthtronics agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to implement the transactions contemplated by this Note.
[The remainder of this page is intentionally blank]

 

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The undersigned has caused this Note to be executed and delivered by its duly authorized officer as of the date first written above.
         
  SANUWAVE, INC.
 
 
  By:      
    Name:   Christian Puscasiu   
    Title:   President   
 
  HEALTHTRONICS, INC.
 
 
  By:      
    Name:   James Whittenburg   
    Title:   Senior Vice President Development, General Counsel and Secretary   

 

8

Exhibit 10.1
STOCK REPURCHASE AGREEMENT
This Stock Repurchase Agreement is entered into as of this                      day of September, 2009, by and between Rub Music Enterprises, Inc., a Nevada corporation (the “ Company ”), and                                           , a resident of the state of                                           (the “ Stockholder ”).
BACKGROUND
Stockholder owns                      shares of the Company’s common stock, $0.001 par value per share (the “ Shares ”) and the Company is willing to repurchase the Shares for the Purchase Price (as defined below) upon the terms and subject to the conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE , the Stockholder and the Company agree as follows:
SECTION 1
REPURCHASE AND SALE OF SHARES
1.1 Repurchase and Sale of Shares . On the terms and subject to the conditions set forth in this Agreement, the Company agrees to purchase from the Stockholder and the Stockholder agrees to sell, transfer, convey and deliver to the Company the Shares at a price equal to                      per Share.
1.2 Payment for Shares . The total purchase price for the Shares shall be                      United States Dollars ($                      ) (the “ Purchase Price ”), payable in cash. Upon receipt of the Purchase Price, the Stockholder agrees to deliver the certificates representing the Shares to the Company and irrevocably appoints any officer, employee or agent of the Company as his attorney to cancel or transfer the Shares on the books of the Company with full power of substitution.
SECTION 2
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of the Stockholder . The Stockholder represents and warrants to the Company as follows:
2.1.1 Power and Authority . The Stockholder has the power and authority to execute and deliver this Agreement and consummate the transactions contemplated hereby.
2.1.2 Validity; Enforceability . This Agreement and all other instruments or documents executed by the Stockholder in connection herewith have been duly executed by the Stockholder, and constitute legal, valid and binding obligations of the Stockholder, enforceable in accordance with their respective terms.
2.1.3 No Encumbrances . The Stockholder is the owner of record of all right, title and interest (legal and beneficial), free and clear of all liens, in and to the Shares. Upon delivery of certificates representing the Shares to be sold by the Stockholder to the Company hereunder and payment therefor pursuant to this Agreement, good, valid and marketable title to such Shares, free and clear of all liens, encumbrances, equities, claims, liabilities or obligations, whether absolute, accrued, contingent or otherwise, will be transferred to the Company.

 

 


 

2.1.4 Knowledge; Access . The Stockholder has such knowledge and experience in financial and business matters and has been furnished access to such information and documents concerning the Company that it is capable of evaluating the merits and risks of accepting the Purchase Price in exchange for the Shares and the other terms and conditions of this Agreement. The Stockholder has had an opportunity to ask questions and receive answers concerning the terms and conditions of this repurchase and to obtain additional information regarding the Company’s plans and future prospects.
2.2 Representations and Warranties of the Company . The Company represents and warrants to the Stockholder as follows:
2.2.1 Power and Authority . The Company has the power and authority to execute and deliver this Agreement and consummate the transactions contemplated hereby.
2.2.2 Organization and Qualification . The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of Nevada.
2.2.3 Validity; Enforceability . This Agreement and all other instruments or documents executed by the Company in connection herewith have been duly executed by the Company, and constitute legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and general principles of equity (whether considered in an action at law or in equity). The terms of this Agreement and the underlying transactions comply with all applicable laws of the United States of America and of any applicable state thereof, and no consent, approval, order or authorization of, or registration, qualifications, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the repurchase of shares contemplated by this Agreement.
SECTION 3
MISCELLANEOUS
3.1 Notices . In order to be effective, any notice or other communication required or permitted hereunder, shall, unless otherwise stated herein, be in writing and shall be transmitted by messenger, delivery service, mail or telecopy, as specified below:
             
    If to the Company to:    
 
           
    Rub Music Enterprises, Inc.
5555 North Star Ridge Way
Star, Idaho 83669
   
 
  Fax:        
 
           
 
           
    with a copy (which shall not constitute
notice) to:
 
           
    Cletha A. Walstrand, Esq.
Attorney at Law
1322 West Pachua Circle
Ivans, Utah 84738
   
 
  Fax:        
 
           
             
    If to the Stockholder to:    
 
           
         
 
           
         
 
  Fax:        
 
           
or at such other address as a party shall designate in a written notice to the other parties hereto given in accordance with this Section 3.1 . All notices and other communications shall be effective (a) if sent by messenger or delivery service, when delivered, (b) if sent by mail, five (5) days after having been sent by certified mail, with return receipt requested, or (c) if sent by facsimile with receipt acknowledged, when sent.

 

 


 

3.2 Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns.
3.3 Entire Agreement, Amendment . This Agreement constitutes the entire agreement between the Company and Stockholder with respect to the transactions contemplated hereby; supersedes all prior or contemporaneous negotiations, communications, discussions and correspondence concerning the subject matter hereof; and may be amended or modified only with the written consent of the Company and the Stockholder.
3.4 Severability of Provisions . If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement, and the parties shall use their respective best efforts to negotiate and enter into an amendment to this Agreement whereby such provision will be modified in a manner that is consistent with the intended economic consequences of the invalid provision and that, as modified, is legal and enforceable.
3.5 Governing Law . This agreement shall be governed by and construed in accordance with the internal laws of the State of Nevada without giving effect to any choice of law or conflict, provision or rule (whether of the State of Nevada or any other jurisdiction) that would cause the laws of any jurisdiction other than the State of Nevada to be applied.
3.6 Counterparts . This Agreement may be executed in separate counterparts, either of which, when so executed, shall be deemed to be an original and both of which, when taken together, shall constitute but one and the same agreement. In the execution of this Agreement, facsimiled or scanned and emailed manual signatures shall be effective for all purposes.
3.7 Survival . The representations, warranties, covenants and agreements made herein shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, notwithstanding any investigation made by either party.
3.8 Further Assurances . Each party shall at any time and from time to time after the date hereof take whatever actions the other party or its affiliates or agents reasonably request to effectuate, record, evidence or perfect its transfer of the Shares to the Company pursuant to this Agreement or to otherwise effectuate or consummate any of the transactions contemplated hereby.

 

 


 

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed the day and year first written above.
         
RUB MUSIC ENTERPRISES, INC.    
 
       
By:
  /s/    
 
       
 
  Cornelius Hofman    
 
  President    
 
       
Shareholder    
 
       
By:
       
 
       

 

 

Exhibit 10.2
EXECUTION VERSION
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this “ Agreement ”) is made as of September 25, 2009 by and among SANUWAVE, Inc. (“ SANUWAVE ”), a Delaware corporation, Rub Music Enterprises, Inc., a Nevada corporation (“ RME ”) and David N. Nemelka (“ Nemelka ”), an individual resident of the State of Utah.
RECITALS
WHEREAS , SANUWAVE, RME, and RME Delaware Merger Sub, Inc., a Delaware Corporation (“ Merger Sub” ) entered into that certain Agreement and Plan of Merger, dated as of September 25, 2009 (the “ Merger Agreement ”) whereby Merger Sub will merge with and into SANUWAVE, with SANUWAVE as the surviving corporation (the “ Merger ”);
WHEREAS , Nemelka will directly benefit from the Merger; and
WHEREAS , the Merger Agreement requires, as one of the conditions to the obligation of SANUWAVE to close the transactions contemplated by the Merger Agreement, that Nemelka provide the indemnification detailed in this Agreement.
NOW, THEREFORE , in consideration of the foregoing, the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Nemelka agrees to be legally bound as follows:
  1.  
Definitions.
  a.  
All capitalized terms not defined in this Agreement shall have the meanings given such terms in the Merger Agreement.
  b.  
Contract Documents ” means the Merger Agreement and any and all other documents comprising the entire documentation relating to, pertaining to or delivered in connection with, the Merger Agreement.
  c.  
Loss ” or “ Losses ” means any and all damages (including incidental, punitive, exemplary and consequential damages), fines, fees, penalties, deficiencies, diminution in value, losses and expenses (including the fees of attorneys and accountants) whether or not arising from a Third Party Claim.
  2.  
Survival . Notwithstanding the provisions of the Merger Agreement with respect to survival, or the merger clause set forth in the Merger Agreement, for purposes of this Agreement, all representations and warranties contained in Article III of the Merger Agreement and all covenants of RME and Merger Sub contained in the Merger Agreement shall survive the Closing.

 


 

  3.  
Indemnification by Nemelka . Subject to the other provisions of this Agreement, from and after the Closing, Nemelka shall indemnify, hold harmless and reimburse RME, SANUWAVE and its officers, directors, agents and representatives (each an “ Indemnified Party ” and collectively, the “ Indemnified Parties ”) from and against and in respect of any and all Losses that may be imposed on, sustained, incurred or suffered by or assessed against each Indemnified Party, directly or indirectly, to the extent relating to or arising out of or in connection with:
(i) any breach of any of the representations or warranties contained in Article III of the Merger Agreement;
(ii) any failure by RME or Merger Sub to perform or comply with their covenants and agreements contained in the Merger Agreement;
(iii) any liability or obligation of RME existing as of the Closing Date, other than those liabilities and obligations set forth on Exhibit A ; or
(iv) any Third Party Claim (defined below) asserted against any Indemnified Party related to the operation of RME’s business, the sale or transfer of RME’s securities (including repurchases and cancellations of securities effected immediately prior to the closing of the Merger) prior to the closing of the Merger.
  4.  
Timing of Delivery of Notice of Claim. Nemelka’s obligations under Paragraph 3 of this Agreement shall terminate at midnight on the first anniversary of the Closing Date except with respect to any Claim asserted pursuant to this Agreement by an Indemnified Party prior to such time and date, which shall survive until such Claim has been satisfied or otherwise finally resolved as provided in this Agreement.
  5.  
Limitation of Liability. The Indemnified Party’s maximum aggregate indemnification liability pursuant to Paragraph 3 shall be an amount equal to one hundred thousand dollars ($100,000) plus the net proceeds value of the RME stock held by Nemelka and his Affiliates or his family members at the time a payment is made hereunder, plus the amount of any proceeds Nemelka and his Affiliates or his family members have received from the sale of RME stock at any time after the date hereof until midnight on the first anniversary of the Closing Date.
  6.  
Notice of Claim . If the Indemnified Party shall become aware of any claim, proceeding or other matter (a “ Claim ”), that may give rise to a Loss that will be taken into account for purposes of calculating the amount of any indemnity obligation under this Agreement, the Indemnified Party shall promptly give notice thereof to Nemelka. Such notice shall specify whether the Claim arises as a result of a Claim by a third party against the Indemnified Party (a “ Third Party Claim ”) or whether the Claim does not so arise as a result of a Claim by a third party against the Indemnified Party (a “ Direct Claim ”), and shall also specify with reasonable particularity (to the extent that the information is available) the factual basis for the Claim and the amount of the Claim, if known. If the Indemnified Party does not promptly give Notice of any Claim as specified above, such failure shall not affect the Indemnified Party’s right to indemnification hereunder for Losses in connection with such Claim, except and only to the extent Nemelka’s rights are prejudiced by such failure.

 

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  7.  
Direct Claims. With respect to any Direct Claim, following receipt of notice from the Indemnified Party of the Claim, Nemelka shall have ninety (90) days to make such investigation of the Claim as he considers necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to Nemelka the information relied upon by the Indemnified Party to substantiate the Claim, together with all such other information as Nemelka may reasonably request. If all parties agree at or prior to the expiration of such 90-day period (or any mutually agreed upon extension thereof) to the validity and amount of such Claim, Nemelka shall immediately pay to the Indemnified Party the full agreed upon amount of the Claim. If the parties do not agree, such dispute shall be determined in accordance with Paragraph 19 .
  8.  
Third Party Claims.
i. With respect to any Third Party Claims as to which the Indemnified Party intends to seek indemnity from Nemelka, Nemelka shall have the right, at his expense and at his election, to assume control of the negotiation, settlement and defense of the Claim through counsel of his choice; provided , however , that Nemelka shall have no right to assume control of the negotiation, settlement or defense of any Third Party Claim (i) insofar as such Third Party Claim would have a material adverse effect on the Indemnified Party if resolved adversely to the interests of the Indemnified Party, or seeks as a remedy against the Indemnified Person any injunctive or other equitable relief or criminal penalty, and (ii) unless Nemelka acknowledges in writing to the Indemnified Party his liability hereunder to indemnify, hold harmless and reimburse the Indemnified Party in accordance herewith for all Losses arising in connection with such Third Party Claim. The election of Nemelka to assume such control shall be made within thirty (30) days of receipt of notice of the Third Party Claim, failing which Nemelka shall be deemed to have elected not to assume such control. If Nemelka elects to assume such control, the Indemnified Party shall have the right to be informed and consulted with respect to the negotiation, settlement or defenses of such Third Party Claim and to retain counsel to act on its behalf, but the fees and disbursements of such counsel shall be paid by the Indemnified Party unless Nemelka consents to the retention of such counsel or unless the named parties to any action or proceeding include both Nemelka and the Indemnified Party and a representation of both Nemelka and the Indemnified Party by the same counsel would be inappropriate due to the actual or potential differing interests between them (such as the availability of different defenses). If Nemelka, having elected to assume such control, thereafter fails to defend the Third Party Claim within a reasonable period of time, the Indemnified Party shall be entitled to assume such control, and Nemelka shall be bound by the results obtained by the Indemnified Party with respect to the Third Party Claim.
ii. If Nemelka assumes control of the negotiation, settlement or defense of any Third Party Claim, Nemelka shall not settle any such Third Party Claim without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld).
iii. The Indemnified Party and Nemelka shall cooperate fully with each other with respect to Third Party Claims and, regardless of which party has control thereof as provided for herein, shall keep each other reasonably advised with respect thereto.

 

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  9.  
Effect of Investigation. The right to indemnification, payment of Losses of an Indemnified Party or for other remedies based on any representation, warranty, covenant or obligation of RME or Merger Sub contained in or made pursuant to the Merger Agreement shall not be affected by (i) any investigation conducted with respect to, or any knowledge acquired (or capable or being acquired) at any time, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or obligation, or (ii) the waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation.
 
  10.  
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, (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:
         
 
  If to “Nemelka”   If to “SANUWAVE” or “RME”
 
       
 
  2662 Stonebury Loop Road   SANUWAVE, Inc.
 
  Springville, Utah 84663   11680 Great Oaks Way, Suite 350
 
  Fax: 801-489-7422   Alpharetta, Georgia 30022
 
      Attn: Barry Jenkins
 
      Fax: 866-641-1182
 
       
 
  With copies to (which shall not constitute notice):   With copies to (which shall not
constitute notice):
 
       
 
  Cletha A. Walstrand, Esq.   John C. Ethridge, Jr., Esq.
 
  Attorney at Law   Smith, Gambrell & Russell, LLP
 
  1322 West Pachua Circle   Promenade II, Suite 3100
 
  Ivans, Utah 84738   1230 Peachtree Street, N.E.
 
      Atlanta, Georgia 30309-3592
 
      Fax: 404-685-6934
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 Paragraph 10 .

 

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  11.  
Successors and Assigns. This Agreement shall be binding upon Nemelka and his heirs, successors, and assigns and shall inure to the benefit of each Indemnified Party and the heirs, successors and assigns of each respective Indemnified Party.
  12.  
Conflict. To the extent there is any conflict between the provisions of this Agreement and the Merger Agreement or the other Contract Documents, the terms of this Agreement shall control.
  13.  
No Waiver. No delay, forbearance or neglect by an Indemnified Party in the enforcement of any of the conditions of this Agreement or any of the Indemnified Parties rights or remedies hereunder shall constitute or be construed as a waiver thereof. No waiver of any provision hereof, or any consent required hereunder, shall be effective unless made in writing signed by or on behalf of the party to be charged with such waiver. No waiver shall be or be deemed to be a continuing waiver or waiver in respect of any subsequent condition, breach or default, either of a similar or different nature, unless expressly so stated in such writing by an Indemnified Party.
  14.  
Amendment. This Agreement may only be amended, changed or modified in a writing signed by Nemelka and SANUWAVE.
  15.  
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.
  16.  
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.
  17.  
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.
  18.  
Interpretation. Words in the singular number shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms “hereof,” “herein” and “herewith” and words of similar import shall be construed to refer to this Agreement in its entirety and not to any particular provision unless otherwise stated.

 

5


 

  19.  
Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of [Nevada] excluding its conflicts of laws provisions.
  20.  
Construction. This Agreement shall be construed without regard to any presumption or rule requiring construction against the party drafting any instrument or causing any instrument to be drafted.
  21.  
Entire Agreement. This Agreement represents the entire agreement of the undersigned regarding the subject matter hereof, and supersedes all prior written or oral understandings or agreements between the parties.
[Signature page follows]

 

6


 

IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the date first written above.
         
  David N. Nemelka    
     
 
  SANUWAVE, Inc.    
 
  By:      
    Christopher M. Cashman   
    President and CEO   
 
  RME
 
 
  By:      
    Cornelius Hofman
President 
 
Signature Page to the Indemnification Agreement

 


 

EXHIBIT A
Liabilities and Obligations
None.

 

Exhibit 10.3
LOCK-UP AGREEMENT
THIS LOCK-UP AGREEMENT (this “ Agreement ”) is being executed and delivered as of this  _____  day of September, 2009 by and between [_____] , an individual resident of the State of [_____] (the “ Shareholder ”) in favor of and for the benefit of Rub Music Enterprises, Inc. , a Nevada corporation (the “ Corporation ”).
W I T N E S S E T H :
WHEREAS , the Shareholder, pursuant to that certain Class C Warrant Agreement, dated September  _____  , 2009, is the holder of a warrant entitling the Shareholder to purchase from the Corporation all or any part of                      shares (the “ Warrant Shares ”) of the Corporation’s common stock;
WHEREAS , SANUWAVE, Inc., a Delaware corporation (“ SANUWAVE ”), the Corporation, and RME Delaware Merger Sub, Inc., a Delaware Corporation (“ Merger Sub” ) entered into that certain Agreement and Plan of Merger, dated as of September  _____, 2009 (the “ Merger Agreement ”) whereby Merger Sub will merge with and into SANUWAVE, with SANUWAVE as the surviving corporation (the “ Merger ”); and
WHEREAS , the Merger Agreement requires, as one of the conditions to the obligation of SANUWAVE to close the transactions contemplated by the Merger Agreement, that the Shareholder agree to the restrictions on the Warrant Shares detailed in this Agreement.
NOW , THEREFORE , in consideration of Ten and No/100 dollars and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.  Representations and Warranties . The Shareholder represents and warrants to the Corporation as follows:
(a) The Shareholder agrees that [he/she/it] shall not, directly or indirectly, contract to sell, sell, grant any option for the sale of, assign, exchange, transfer, convey, pledge, mortgage, hypothecate, encumber, distribute or otherwise dispose of (any of the foregoing, hereinafter referred to as a “ Transfer ”) any of the Warrant Shares, without the consent of the Corporation.
(b) The limits set forth in Section 1(a) shall expire on January 1, 2011.
(c) The Shareholder understands and acknowledges that the representations, warranties and covenants set forth in this Agreement will be relied upon by the Corporation and its successors and assigns.

 

 


 

(d) The Shareholder has carefully read this Agreement and has discussed with [his/her/its] counsel to the extent the Shareholder felt necessary, the limitations imposed on the Shareholder by this Agreement.
(e) The Shareholder understands that Rule 144 promulgated under the Securities Act of 1933, as amended requires, among other conditions, a minimum holding period prior to the resale of the Warrant Shares.
(f) The Shareholder understands that the certificates representing the Warrant Shares will bear a restrictive legend in substantially the follow form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A REASONABLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN LOCK-UP AGREEMENT, DATED SEPTEMBER  _____, 2009.
(g) The Shareholder understands that any transfer in violation of this Agreement is null and void.
2.  Specific Performance . The Shareholder agrees that in the event of any breach or threatened breach by such Shareholder of any covenant, obligation or other provision contained in this Agreement, the Corporation shall be entitled (in addition to any other remedy that may be available to the Corporation) to (a) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (b) an injunction restraining such breach or threatened breach.
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, (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:
if to the Corporation:
Rub Music Enterprises, Inc.
11680 Great Oaks Way, Suite 350
Alpharetta, Georgia 30022
Fax: 866-641-1182

 

2


 

if to the Shareholder: at the address and via the facsimile telephone number for such Shareholder set forth on the signature page to this Agreement.
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 Paragraph 3 .
4.  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.
5.  Governing Law . This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Nevada excluding its conflicts of laws provisions.
6.  Waiver . No failure on the part of any party hereto to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party hereto in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, rights, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No party hereto shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; any such waiver shall not be applicable or have any effect other than in the specific instance in which it is given.
7.  Captions . The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement, and shall not be referred to in connection with the construction or interpretation of this Agreement.
8.  Further Assurances . The Shareholder shall execute and/or cause to be delivered to the Corporation such instruments and other documents and shall take such other actions as the Corporation may reasonably request to effectuate the intent and purposes of this Agreement.

 

3


 

9.  Entire Agreement . This Agreement sets forth the entire understanding of the Corporation and the Shareholder relating to the subject matter hereof and thereof and supersede all other prior agreements and understandings between the Corporation and the Shareholder relating to the subject matter hereof and thereof.
10.  Amendments . This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the party to be bound.
11.  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 party. 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.
12.  Attorneys’ Fees and Expenses . If any legal action or other legal proceeding relating to the enforcement of any provision of this Agreement is brought against the Shareholder, the prevailing party shall be entitled to recover reasonable attorneys’ fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled).
13.  Construction . Each of the parties has agreed to the use of the particular language of the provisions of this Agreement, and any questions of doubtful interpretation shall not be resolved solely by any rule or interpretation against the draftsman, but rather in accordance with the fair meaning thereof.
14.  Expenses . The Shareholder shall bear [his/its] own expenses incurred with respect to this Agreement and the transactions contemplated hereby.
15.  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.
(signatures below)

 

4


 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
                 
    RUB MUSIC ENTERPRISES, INC.:    
 
               
 
  By:            
           
      Name: Cornelius Hofman    
      Title: President    
 
               
    SHAREHOLDER:    
 
               
         
    [___________]        
 
               
    Address:          
 
           
 
               
 
           
    Fax:          
 
           
Signature Page to Lock-Up Agreement

 

5

Exhibit 10.4
EXCUTION VERSION
LOCK-UP AGREEMENT
THIS LOCK-UP AGREEMENT (this “ Agreement ”) is being executed and delivered as of this ______ day of September, 2009 by and between _________, an individual resident of the State of __________  (the “ Shareholder ”) in favor of and for the benefit of SANUWAVE, Inc. , a Delaware corporation (the “ Corporation ”).
W I T N E S S E T H :
WHEREAS , the Shareholder is currently a holder of some or all of the following: the Corporation’s common stock; the Corporation’s Series A convertible participating preferred stock; options to acquire the Corporation’s common stock; and/or warrants to acquire the Corporation’s common stock;
WHEREAS , the Corporation wishes for RME Delaware Merger Sub, Inc., a Delaware Corporation (“ Merger Sub ”), a wholly-owned subsidiary of Rub Music Enterprises, Inc., a Nevada Corporation (“ RME ”), to be merged with and into the Corporation, with the Corporation as the surviving corporation (the “ Surviving Corporation ”) (the “ Merger ”);
WHEREAS , in order to effect the Merger, the Corporation will enter into that certain Agreement and Plan of Merger (the “Merger Agreement” );
WHEREAS , pursuant to the Merger Agreement, all of the shareholders of the Corporation will exchange all of their ownership interest in the Corporation, including any options and warrants, for an ownership interest in RME; and
WHEREAS , pursuant to the Merger Agreement, it is anticipated that each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time (defined in the Merger Agreement) shall be converted into one (1) share of the Corporation’s common stock, and the Corporation will become a wholly-owned subsidiary of RME.
NOW , THEREFORE , in consideration of Ten and No/100 dollars and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.  Representations and Warranties . The Shareholder represents and warrants to the Corporation as follows:
(a) The Shareholder agrees that [he/she/it] shall not, directly or indirectly, contract to sell, sell, grant any option for the sale of, assign, exchange, transfer, convey, pledge, mortgage, hypothecate, encumber, distribute or otherwise dispose of (any of the foregoing, hereinafter referred to as a “ Transfer ”) any of the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock, preferred stock, options or warrants or other rights issued by the Corporation (or its successors and assigns, including, but not limited to RME) to the shareholders to acquire the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock or preferred stock, or any shares of the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock or preferred stock that the Shareholder may receive in connection with any option or warrant or other security convertible or exchanged for the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock or preferred stock, without the consent of the Corporation (or its successors and assigns, including, but not limited to RME).

 

 


 

(b) The limits set forth in Section 1(a) shall expire on January 1, 2011.
(c) The Shareholder understands and acknowledges that the representations, warranties and covenants set forth in this Agreement will be relied upon by the Corporation and its successors and assigns.
(d) The Shareholder has carefully read this Agreement and has discussed with [his/her/its] counsel to the extent the Shareholder felt necessary, the limitations imposed on the Shareholder by this Agreement.
(e) The Shareholder understands that Rule 144 promulgated under the Securities Act of 1933, as amended requires, among other conditions, a minimum holding period prior to the resale of the securities acquired by the Shareholder pursuant to the Merger Agreement.
(f) The Shareholder understands that the certificates representing the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock and preferred stock issued to the Shareholder in accordance with the Merger Agreement, or certificates representing the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock and preferred stock subsequently acquired by the Shareholder, including through a conversion of convertible securities or through the exercise of warrants or options, will bear a restrictive legend in substantially the follow form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A REASONABLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN LOCK-UP AGREEMENT, DATED SEPTEMBER, 2009.
(g) The Shareholder understands that any transfer in violation of this Agreement is null and void.

 

2


 

2.  Specific Performance . The Shareholder agrees that in the event of any breach or threatened breach by such Shareholder of any covenant, obligation or other provision contained in this Agreement, the Corporation, and its successors and assigns, shall be entitled (in addition to any other remedy that may be available to the Corporation, and its successors and assigns) to (a) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (b) an injunction restraining such breach or threatened breach.
3.  Effective Date . This Agreement shall become effective upon the consummation of the Closing (as defined in the Merger Agreement).
4.  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, (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:
if to the Corporation:
SANUWAVE, Inc.
11680 Great Oaks Way, Suite 350
Alpharetta, Georgia 30022
Fax: 866-641-1182
if to the Shareholder: at the address and via the facsimile telephone number for such Shareholder set forth on the signature page to this Agreement.
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 Paragraph 4 .
5.  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.

 

3


 

6.  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.
7.  Waiver . No failure on the part of any party hereto to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party hereto in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, rights, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No party hereto shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; any such waiver shall not be applicable or have any effect other than in the specific instance in which it is given.
8.  Captions . The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement, and shall not be referred to in connection with the construction or interpretation of this Agreement.
9.  Further Assurances . The Shareholder shall execute and/or cause to be delivered to the Corporation such instruments and other documents and shall take such other actions as the Corporation may reasonably request to effectuate the intent and purposes of this Agreement.
10.  Entire Agreement . This Agreement sets forth the entire understanding of the Corporation and the Shareholder relating to the subject matter hereof and supersedes all other prior agreements and understandings between the Corporation and the Shareholder relating to the subject matter hereof.
11.  Amendments . This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the party to be bound.
12.  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 party. 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. Notwithstanding the foregoing, this Agreement shall inure to the benefit of, and shall be enforceable by, RME upon the closing of the Merger.
13.  Attorneys’ Fees and Expenses . If any legal action or other legal proceeding relating to the enforcement of any provision of this Agreement is brought against the Shareholder, the prevailing party shall be entitled to recover reasonable attorneys’ fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled).

 

4


 

14.  Construction . Each of the parties has agreed to the use of the particular language of the provisions of this Agreement, and any questions of doubtful interpretation shall not be resolved solely by any rule or interpretation against the draftsman, but rather in accordance with the fair meaning thereof.
15.  Expenses . The Shareholder shall bear [his/her/its] own expenses incurred with respect to this Agreement and the transactions contemplated hereby.
16.  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.
(signatures below)

 

5


 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
                 
    SANUWAVE, INC.:    
 
               
 
  By:              
           
 
    Name: Christopher M. Cashman    
 
    Title: President and CEO    
 
               
    SHAREHOLDER:    
 
               
         
 
               
 
  Print Name:          
             
 
               
 
  Address:          
             
 
               
         
 
               
         
 
               
 
  Fax:            
           
Signature Page to the Shareholder Lock-Up Agreement

 

 

Exhibit 10.5
EXECUTION VERSION
LOCK-UP AGREEMENT
THIS LOCK-UP AGREEMENT (this “ Agreement ”) is being executed and delivered as of this            day of September, 2009 by and between                                                                , an individual resident of the State of                                           (the “ Shareholder ”) in favor of and for the benefit of SANUWAVE, Inc. , a Delaware corporation (the “ Corporation ”).
W I T N E S S E T H :
WHEREAS , the Shareholder is currently a holder of some or all of the following: the Corporation’s common stock; the Corporation’s Series A convertible participating preferred stock; options to acquire the Corporation’s common stock; and/or warrants to acquire the Corporation’s common stock;
WHEREAS , the Corporation wishes for RME Delaware Merger Sub, Inc., a Delaware Corporation (“ Merger Sub ”), a wholly-owned subsidiary of Rub Music Enterprises, Inc., a Nevada Corporation (“ RME ”), to be merged with and into the Corporation, with the Corporation as the surviving corporation (the “ Surviving Corporation ”) (the “ Merger ”);
WHEREAS , in order to effect the Merger, the Corporation will enter into that certain Agreement and Plan of Merger (the “Merger Agreement” );
WHEREAS , pursuant to the Merger Agreement, all of the shareholders of the Corporation will exchange all of their ownership interest in the Corporation, including any options and warrants, for an ownership interest in RME; and
WHEREAS , pursuant to the Merger Agreement, it is anticipated that each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time (defined in the Merger Agreement) shall be converted into one (1) share of the Corporation’s common stock, and the Corporation will become a wholly-owned subsidiary of RME.

 

 


 

NOW , THEREFORE , in consideration of Ten and No/100 dollars and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.  Representations and Warranties . The Shareholder represents and warrants to the Corporation as follows:
(a) The Shareholder agrees that [he/she/it] shall not, directly or indirectly, contract to sell, sell, grant any option for the sale of, assign, exchange, transfer, convey, pledge, mortgage, hypothecate, encumber, distribute or otherwise dispose of (any of the foregoing, hereinafter referred to as a “ Transfer ”) any of the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock, preferred stock, options or warrants or other rights issued by the Corporation (or its successors and assigns, including, but not limited to RME) to the shareholders to acquire the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock or preferred stock, or any shares of the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock or preferred stock that the Shareholder may receive in connection with any option or warrant or other security convertible or exchanged for the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock or preferred stock, without the consent of the Corporation (or its successors and assigns, including, but not limited to RME); provided, however, if the Shareholder is a partnership, the restrictions of this Section 1 shall not apply to such Shareholder in the event the Shareholder is making a Transfer of any of the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock, preferred stock, options or warrants or other rights issued by the Corporation (or its successors and assigns, including, but not limited to RME) owned by the Shareholder to its partners, but only if such partners acknowledge and agree to be bound by this Agreement.
(b) The limits set forth in Section 1(a) shall expire on January 1, 2011.
(c) The Shareholder understands and acknowledges that the representations, warranties and covenants set forth in this Agreement will be relied upon by the Corporation and its successors and assigns.
(d) The Shareholder has carefully read this Agreement and has discussed with [his/her/its] counsel to the extent the Shareholder felt necessary, the limitations imposed on the Shareholder by this Agreement.
(e) The Shareholder understands that Rule 144 promulgated under the Securities Act of 1933, as amended requires, among other conditions, a minimum holding period prior to the resale of the securities acquired by the Shareholder pursuant to the Merger Agreement.
(f) The Shareholder understands that the certificates representing the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock and preferred stock issued to the Shareholder in accordance with the Merger Agreement, or certificates representing the Corporation’s (or its successors and assigns, including, but not limited to RME) common stock and preferred stock subsequently acquired by the Shareholder, including through a conversion of convertible securities or through the exercise of warrants or options, will bear a restrictive legend in substantially the follow form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A REASONABLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN LOCK-UP AGREEMENT, DATED SEPTEMBER, 2009.

 

2


 

(g) The Shareholder understands that any transfer in violation of this Agreement is null and void.
2.  Specific Performance . The Shareholder agrees that in the event of any breach or threatened breach by such Shareholder of any covenant, obligation or other provision contained in this Agreement, the Corporation, and its successors and assigns, shall be entitled (in addition to any other remedy that may be available to the Corporation, and its successors and assigns) to (a) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (b) an injunction restraining such breach or threatened breach.
3.  Effective Date . This Agreement shall become effective upon the consummation of the Closing (as defined in the Merger Agreement).
4.  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, (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:
if to the Corporation:
SANUWAVE, Inc.
11680 Great Oaks Way, Suite 350
Alpharetta, Georgia 30022
Fax: 866-641-1182
if to the Shareholder: at the address and via the facsimile telephone number for such Shareholder set forth on the signature page to this Agreement.
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 Paragraph 4 .

 

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5.  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.
6.  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.
7.  Waiver . No failure on the part of any party hereto to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party hereto in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, rights, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No party hereto shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; any such waiver shall not be applicable or have any effect other than in the specific instance in which it is given.
8.  Captions . The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement, and shall not be referred to in connection with the construction or interpretation of this Agreement.
9.  Further Assurances . The Shareholder shall execute and/or cause to be delivered to the Corporation such instruments and other documents and shall take such other actions as the Corporation may reasonably request to effectuate the intent and purposes of this Agreement.
10.  Entire Agreement . This Agreement sets forth the entire understanding of the Corporation and the Shareholder relating to the subject matter hereof and supersedes all other prior agreements and understandings between the Corporation and the Shareholder relating to the subject matter hereof.
11.  Amendments . This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the party to be bound.
12.  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 party. 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. Notwithstanding the foregoing, this Agreement shall inure to the benefit of, and shall be enforceable by, RME upon the closing of the Merger.

 

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13.  Attorneys’ Fees and Expenses . If any legal action or other legal proceeding relating to the enforcement of any provision of this Agreement is brought against the Shareholder, the prevailing party shall be entitled to recover reasonable attorneys’ fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled).
14.  Construction . Each of the parties has agreed to the use of the particular language of the provisions of this Agreement, and any questions of doubtful interpretation shall not be resolved solely by any rule or interpretation against the draftsman, but rather in accordance with the fair meaning thereof.
15.  Expenses . The Shareholder shall bear [his/her/its] own expenses incurred with respect to this Agreement and the transactions contemplated hereby.
16.  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.
(signatures below)

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
             
    SANUWAVE, INC.:    
 
           
 
  By:        
 
         
 
    Name:   Christopher M. Cashman    
 
    Title:   President and CEO    
 
           
    SHAREHOLDER:    
 
           
         
 
           
 
  Print Name:      
 
           
 
           
 
  Address:      
 
           
 
           
         
 
           
         
 
 
  Fax:        
 
         
Signature Page to the Shareholder Lock-Up Agreement

 

 

Exhibit 10.6
Execution Copy
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the “Agreement”) dated December 19, 2005, is made by and between SanuWave, Inc., a Delaware corporation (the “Company”), and Christopher M. Cashman (“Executive”).
The Company desires to employ Executive and to enter into an agreement embodying the terms of such employment; and
Executive desires to accept such employment and to enter into such an agreement; and
In consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows:
1.  Term of Employment . Subject to the provisions of Section 8 of this Agreement, Executive shall be employed by the Company and its affiliates on the terms and subject to the conditions set forth in this Agreement. The period of time during which Executive shall be providing services under this Agreement to the Company and its affiliates shall be known as the “Employment Term”. The Employment Term shall commence as of the date set forth above and be of no specific duration. Notwithstanding anything to the contrary herein, Executive shall be an “at will” employee of the Company during the Employment Term.
2.  Position .
a. During the Employment Term, Executive shall serve as the Company’s Chief Executive Officer. In such position, Executive shall have such duties and authority as shall be determined from time to time by the Board of Directors of the Company (the “Board”) consistent with such position. Executive also agrees to serve as a member of the Board without additional consideration.
b. During the Employment Term, Executive will devote substantially all of Executive’s business time and attention to the performance of Executive’s duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere with the rendition of such services either directly or indirectly, without the prior written consent of the Board; provided that Executive shall be permitted to serve as a member of the board of directors or trustees of any charitable organization. Subject to the provisions of the following sentence, Executive also may serve on the board of directors of any privately-held business corporation so long as he informs the Company of his intention to do so prior to commencing the performance of services to such corporation. Notwithstanding any other provision of this Agreement, Executive agrees that his service to any charitable organization, or to any other business venture, in each case, and in the aggregate, shall not conflict or interfere with the performance of Executive’s duties hereunder or conflict with Section 9 of this Agreement.

 


 

3.  Base Salary . During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $275,000, payable in regular installments in accordance with the Company’s usual payment practices but not less often than monthly. Executive shall be entitled to a performance and compensation review not less often than annually and shall be entitled to such increases in Executive’s base salary, if any, as may be determined from time to time in the sole discretion of the Board. Executive’s annual base salary, as in effect from time to time, is hereinafter referred to as the “Base Salary.”
4.  Annual Bonus . With respect to each full fiscal year during the Employment Term, Executive shall be eligible to earn an annual bonus award (an “Annual Bonus”) of forty percent (40%) of Executive’s Base Salary (the “Target”) based upon the achievement of certain performance goals established by the Board and generally consistent with the Company’s budget and performance goals established for other management employees. The Annual Bonus, if any, shall be paid to Executive within two and one-half (2.5) months after the end of the applicable fiscal year.
5.  Equity Arrangements .
a.  Options . Simultaneously with the execution of this Agreement, Executive shall be granted options to acquire 4,687 shares of common stock of the Company (“Shares”), which number is equal to five percent (5%) of the Company on a fully diluted basis (the “Options”). The Options shall have an exercise price of $100 per Share, which is equal to the price that Prides Capital Partners, LLC paid in its initial acquisition of Shares (the “Base Price”), and which is the fair market value of one Share, as determined by the Board in good faith. The Options will vest and become exercisable as to twenty-five percent (25%) of the total number of Shares subject to the Option on each twelve (12) month anniversary of the date of grant.
b.  Direct Purchase of Shares . Contingent upon Executive’s commencement of employment with the Company, Executive shall have the opportunity to purchase up to 2,228 Shares at a per share purchase price equal to $100 (the “Investment Shares”), by providing written notice to the Company’s Chairman of the Board prior to January 7, 2006. The Investment Shares acquired by Executive under this Section 5.b shall be fully vested on the date of such acquisition.
c.  Supplemental Options . In addition to the foregoing, simultaneously with the execution of this Agreement Executive shall be granted three (3) options, which will be in addition to the Option described in Section 5.a above (the “Supplemental Options”), Two Supplemental Options will provide Executive with the right to acquire 900 Shares, which is intended to equal one percent (1%) each of the Company on a fully diluted basis (the Supplemental Options described in this sentence will hereinafter be referred to as “Supplemental Option 1” and “Supplemental Option 2”). The third Supplement Option will provide Executive with the right to acquire 1,350 Shares, which is intended to equal one and one-half percent (1.5%) of the Company on a fully diluted basis (the Supplemental Option described in this sentence will hereinafter be referred to as “Supplemental Option 3”). Supplemental Option 1 will have an exercise price of $400 per Share, Supplemental Option 2 will have an exercise price of $800 per Share, and Supplemental Option 3 will have an exercise price of $1,200 per Share. Supplemental Option 1 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 on the earlier of (i) the six year anniversary of the date of grant and (ii) the date that the Company or its shareholders (A) enters into an agreement or adopts a plan of liquidation pursuant to which Prides Capital Partners, LLC

 

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and its affiliates can reasonably be expected to receive 4.0 times Prides Capital Partners, LLC’s initial aggregate investment in the Company, (B) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $400 per Share or (C) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $400 per Share. Supplemental Option 2 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 on the earlier of (i) the six year anniversary of the date of grant and (ii) the date that the Company or its shareholders (A) enters into an agreement or adopts a plan of liquidation pursuant to which Prides Capital Partners, LLC and its affiliates can reasonably be expected to receive 8.0 times Prides Capital Partners, LLC’s initial aggregate investment in the Company, (B) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $800 per Share or (C) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $800 per Share. Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 on the earlier of (i) the six year anniversary of the date of grant and (ii) the date that the Company or its shareholders (A) enters into an agreement or adopts a plan of liquidation pursuant to which Prides Capital Partners, LLC and its affiliates can reasonably be expected to receive 12.0 times Prides Capital Partners, LLC’s initial aggregate investment in the Company, (B) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $1,200 per Share or (C) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $1,200 per Share. For the avoidance of doubt, Executive shall not have the right to require the Company or Prides Capital Partners, LLC to obtain a valuation of the Company to determine whether any of the Supplemental Options would vest as provided above. In the event of any change in the outstanding shares of common stock of the Company after the date hereof by reason of any share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination, combination or transaction or exchange of shares or other corporate exchange, any distribution to stockholders, or any transaction similar to the foregoing, the Board shall make an equitable adjustment to the specified per Share values related to the vesting criteria described in this paragraph 5.c.
d.  Terms . Executive’s acquisition of Shares under this Section 5 shall be subject to the stock option agreement pursuant to which the grants are made.

 

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6.  Employee Benefits .
a.  General . During the Employment Term, Executive shall be entitled to participate in the Company’s employee benefit plans (other than annual bonus and incentive plans) as in effect from time to time (collectively “Employee Benefits”), on the same basis as those benefits are generally made available to other senior executives of the Company. Executive shall be entitled to four (4) weeks paid vacation per year during the Employment Term.
b.  Life Insurance . In the event of Executive’s death during the Employment Term, in addition to any death benefit payable under one or more life insurance policies on the life of the Executive maintained under the Company’s insurance program generally applicable to employees of the Company, Executive’s heir(s) shall receive a death benefit equal to at least $500,000 (subject to insurability at standard premium rates) pursuant to a life insurance policy or policies on the life of Executive, the premiums for which will be paid by the Company. Executive agrees to comply with all usual or customary requirements that the underwriter of a life insurer may request in order to evaluate whether to issue the policy, including, without limitation, Executive’s release of personal medical information to insurer’s underwriter and undergoing medical examinations and/or tests. If Executive does not cooperate with such requests, the Company shall be released from its obligation to provide such life insurance under this Section 6.b.
7.  Business Expenses and Perquisites .
a.  Expenses . During the Employment Term, reasonable business expenses incurred by Executive in the performance of Executive’s duties hereunder shall be advanced or reimbursed by the Company in accordance with Company policies. In the event that Executive is required to travel internationally in performance of his services pursuant to this Agreement, Executive shall be entitled to book a business class ticket for any international flight in excess of six (6) hours.
b.  Moving Expenses . The Company shall reimburse Executive for fifty percent (50%) of all costs and expenses that Executive is required to pay to Executive’s current employer as a result of the termination of his current employment as reimbursement for relocation expenses paid by such employer; provided, however, that the Company’s reimbursement obligation under this Section 7.b shall not exceed $5,000. The Company shall reimburse such costs and expenses following Executive’s submission of written documentation reasonably satisfactory to the Company evidencing that Executive has reimbursed his current employer.

 

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8.  Termination and Change of Control . The Employment Term and Executive’s employment hereunder may be terminated by either party at any time and for any reason; provided that Executive will be required to give the Company at least 30 days advance written notice of any resignation of Executive’s employment. Notwithstanding any other provision of this Agreement, the provisions of this Section 8 shall exclusively govern Executive’s rights upon termination of employment with the Company and its affiliates.
a. By the Company For Cause or By Executive Resignation Without Good Reason .
(i) The Employment Term and Executive’s employment hereunder may be terminated by the Company for Cause (as defined below) and shall terminate automatically upon Executive’s resignation without Good Reason (as defined in Section 8(b)); provided that Executive will be required to give the Company at least 30 days advance written notice of a resignation without Good Reason.
(ii) For purposes of this Agreement, “Cause” shall mean (A) Executive’s continued failure substantially to perform Executive’s duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness) for a period of 20 days following written notice by the Company to Executive of such failure, (B) dishonesty in the performance of Executive’s duties hereunder, (C) an act or acts on Executive’s part constituting (x) a felony under the laws of the United States or any state thereof or (y) a misdemeanor involving moral turpitude that could reasonably be expected to damage the Company or its reputation, (D) Executive’s willful malfeasance or willful misconduct in connection with Executive’s duties hereunder or (E) Executive’s breach of the provisions of Sections 9 or 10 of this Agreement.
(iii) If Executive’s employment is terminated by the Company for Cause, or if Executive resigns without Good Reason, or in the event that Executive’s employment terminates due to Executive’s death or disability, Executive (or Executive’s beneficiaries, in the event of Executive’s death) shall be entitled to receive:
(A) the Base Salary through the date of termination;
(B) any Annual Bonus earned, but unpaid, as of the date of termination for the immediately preceding fiscal year, paid in accordance with Section 4 (except to the extent payment is otherwise deferred pursuant to any applicable deferred compensation arrangement with the Company);
(C) reimbursement, within 60 days following submission by Executive to the Company of appropriate supporting documentation) for any unreimbursed business expenses properly incurred by Executive in accordance with Company policy prior to the date of Executive’s termination; provided claims for such reimbursement (accompanied by appropriate supporting documentation) are submitted to the Company within 90 days following the date of Executive’s termination of employment; and
(D) such Employee Benefits, if any, as to which Executive may be entitled under the employee benefit plans of the Company (the amounts described in clauses (A) through (D) hereof being referred to as the “Accrued Rights”).

 

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Following such termination of Executive’s employment by the Company for Cause or resignation by Executive without Good Reason, or on account of Executive’s death or disability, except as set forth in this Section 8(a)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.
b.  By the Company Without Cause or Resignation by Executive for Good Reason .
(i) The Employment Term and Executive’s employment hereunder may be terminated by the Company without Cause or by Executive’s resignation for Good Reason.
(ii) For purposes of this Agreement, “Good Reason” shall mean (A) the Company’s substantial breach of this Agreement including the failure of the Company to pay or cause to be paid Executive’s Base Salary or Annual Bonus, hereunder, (B) any substantial and sustained diminution in Executive’s authority or responsibilities as Chief Executive Officer of the Company or (C) any relocation of the location at which Executive is required to provide his services to a location that is more than 45 miles from its location as of the date herof; provided that either of the events described in clauses (A) and (B) of this Section 8(b)(ii) shall constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from Executive of written notice of the event which constitutes Good Reason; provided , further , that “Good Reason” shall cease to exist for an event on the 60 th day following the later of its occurrence or Executive’s knowledge thereof, unless Executive has given the Company written notice thereof prior to such date.
(iii) If Executive’s employment is terminated by the Company without Cause or if Executive resigns for Good Reason, Executive shall be entitled to receive:
(A) the Accrued Rights; and
(B) subject to Executive’s continued compliance with the provisions of Sections 9 and 10, and subject to Executive’s execution of an effective release of claims in a form reasonably acceptable to the Company, continued payment of the Base Salary in accordance with the Company’s normal payroll practices, as in effect on the date of termination of Executive’s employment, until twelve months following the date of such termination; and
(C) continued coverage for Executive and his qualified beneficiaries under the Company’s health insurance programs for a period of up to twelve (12) months through Company reimbursement of premiums paid by Executive for coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985.
Following Executive’s termination of employment by the Company without Cause or by Executive’s resignation for Good Reason, except as set forth in this Section 8(b)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.
c.  Change of Control. In addition to the benefits that Executive may be entitled to receive under Section 8b. above, if a Change of Control of the Company (as defined below) occurs, then subject to Executive’s continued compliance with the provisions of Sections 9 and 10, and subject to Executive’s execution of an effective release of claims in a form reasonably acceptable to the Company, Executive shall be entitled to receive 100% accelerated vesting of the Options.

 

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For purposes of this Agreement, a “Change of Control” means 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 the Company to a person or group of related persons, as such terms are defined or described in Sections 3(a)(9) and 13(d)(3) of the Exchange Act of 1934, as amended (the “Exchange Act”) (other than Prides Capital Partners, LLC and its affiliates, Nightwatch Capital LLC and its affiliates, or any group controlled by any of the foregoing persons), that will continue the business of the Company in the future; (2) a merger or consolidation involving the Company in which the voting securities of the Company owned by the shareholders of the Company immediately prior to such merger or consolidation do not represent, after conversion if applicable, more than fifty percent (50%) of the total voting power of the surviving controlling entity outstanding immediately after such merger or consolidation; provided that any person who (A) was a beneficial owner (within the meaning of Rules 13d-3 and 13d-5 promulgated under the Exchange Act) of the voting securities of the Company immediately prior to such merger or consolidation, and (B) is a beneficial owner of more than 20% of the securities of the Company immediately after such merger or consolidation, shall be excluded from the list of “shareholders of the Company immediately prior to such merger or consolidation” for purposes of the preceding calculation; or (3) any person or group (other than Prides Capital Partners, LLC and its affiliates, Nightwatch Capital LLC and its affiliates, or any group controlled by any of the foregoing persons) is or becomes the Beneficial Owner, directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company (including by way of merger, consolidation or otherwise) and the representatives of Prides Capital Partners, LLC and its affiliates, Nightwatch Capital LLC and its affiliates, or any group in which any of the foregoing persons is a member, individually or in the aggregate, cease to have the ability to elect a majority of the Board (for the purposes of this clause (3), a member of a group will not be considered to be the Beneficial Owner of the securities owned by other members of the group).
d.  Notice of Termination . Any purported termination of employment by the Company or by Executive (other than due to Executive’s death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 12(h) hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated.
9.  Non-Competition .
a. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Company and its affiliates and accordingly agrees as follows:
(1) During the Employment Term and, for a period of two years following the date Executive ceases to be employed by the Company (the “Restricted Period”), Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever (“Person”), directly or indirectly solicit or assist in soliciting in competition with the Company the business of any client or prospective client for the purpose of selling or providing a Competitive Product or Service.

 

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(2) During the Restricted Period, Executive will not directly or indirectly:
  (i)   engage in any business that competes with the business of the Company or its affiliates in selling or providing a Competitive Product or Service (including, without limitation, businesses which the Company or its affiliates have specific plans to conduct in the future and as to which Executive is aware of such planning) in any geographical area that is within 100 miles of any geographical area where the Company or its affiliates manufactures, produces, sells, leases, rents, licenses or otherwise provides its products or services (a “Competitive Business”);
 
  (ii)   enter the employ of, or render any services to, any Person who or which (or any division or controlled or controlling affiliate of such Person) engages in a Competitive Business; provided, however, that Executive shall be permitted to become an employee of, or render services to, a Person that engages in a Competitive Business (or that is a controlled or controlling affiliate of any Person that engages in a Competitive Business) if Executive’s employment or provision of services is limited to a line of business of such Person that does not constitute a Competitive Business, Executive does not sell or provide a Competitive Product or Service, and Executive does not otherwise indirectly violate the restrictive covenants set forth herein;
 
  (iii)   acquire a financial interest in, or otherwise become actively involved with, any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or
 
  (iv)   interfere with, or attempt to interfere with, business relationships (whether formed before, on or after the date of this Agreement) between the Company or any of its affiliates and customers, clients, suppliers partners, members or investors of the Company or its affiliates with respect to a Competitive Product or Service.
(3) Notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly own, solely as an investment, securities of any Person engaged in the business of the Company or its affiliates which are publicly traded on a national or regional stock exchange or on the over-the-counter market if Executive (i) is not a controlling person of, or a member of a group which controls, such person and (ii) does not, directly or indirectly, own 5% or more of any class of securities of such Person.

 

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(4) During the Restricted Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any Person, directly or indirectly:
  (i)   solicit or encourage any employee of the Company or its affiliates to leave the employment of the Company or its affiliates; or
 
  (ii)   hire any such employee who is at the time employed by the Company or its affiliates; provided, however, that nothing herein shall prevent Executive, whether on Executive’s own behalf or on behalf of or in conjunction with any Person, from hiring any such employee if such employee initially contacted Executive and initially solicited an offer of employment from Executive.
(5) During the Restricted Period, Executive will not, directly or indirectly, solicit or encourage to cease to work with the Company or its affiliates any consultant then under contract with the Company or its affiliates.
(6) For purposes of this Agreement, the term “Competitive Product or Service” means the products that use or incorporate Extracorporeal Shock Wave Technology for orthopedic or urology procedures, and any services related to such products.
b. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 9 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.

 

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10.  Confidentiality; Intellectual Property .
a. Confidentiality .
(i) Executive will not at any time (whether during or after Executive’s employment with the Company) (x) retain or use for the benefit, purposes or account of Executive or any other Person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the Company (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information —including without limitation trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals — concerning the past, current or future business, activities and operations of the Company, its subsidiaries or affiliates and/or any third party that has disclosed or provided any of same to the Company on a confidential basis (“Confidential Information”) without the prior written authorization of the Board.
(ii) “Confidential Information” shall not include any information that is (a) generally known to the industry or the public other than as a result of Executive’s breach of this covenant; (b) made legitimately available to Executive by a third party without breach of any confidentiality obligation; or (c) required by law to be disclosed; provided that Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment.
(iii) Except as required by law, Executive will not disclose to anyone, other than Executive’s immediate family and legal or financial advisors, the existence or contents of this Agreement; provided that Executive may disclose to any prospective future employer the provisions of Sections 9 and 10 of this Agreement provided they agree to maintain the confidentiality of such terms.
(iv) Upon termination of Executive’s employment with the Company for any reason, Executive shall (x) cease and not thereafter commence use of any Confidential Information or intellectual property (including without limitation, any patent, invention, copyright, trade secret, trademark, trade name, logo, domain name or other source indicator) owned or used by the Company, its subsidiaries or affiliates; (y) immediately destroy, delete, or return to the Company, at the Company’s option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Executive’s possession or control (including any of the foregoing stored or located in Executive’s office, home, laptop or other computer, whether or not Company property) that contain Confidential Information or otherwise relate to the business of the Company, its affiliates and subsidiaries, except that Executive may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information and copies of any agreements to which Executive is a party; and (z) notify and fully cooperate with the Company regarding the delivery or destruction of any other Confidential Information of which Executive is or becomes aware.

 

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b. Intellectual Property .
(i) If Executive has created, invented, designed, developed, contributed to or improved any works of authorship, inventions, intellectual property, materials, documents or other work product (including without limitation, research, reports, software, databases, systems, applications, presentations, textual works, content, or audiovisual materials) (“Works”), either alone or with third parties, prior to Executive’s employment by the Company, that are relevant to or implicated by such employment (“Prior Works”), Executive hereby grants the Company a perpetual, non-exclusive, royalty-free, worldwide, assignable, sublicensable license under all rights and intellectual property rights (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and related laws) therein for all purposes in connection with the Company’s current and future business. A list of all such material Works, if any, as of the date hereof is attached hereto as Exhibit A.
(ii) If Executive creates, invents, designs, develops, contributes to or improves any Works, either alone or with third parties, at any time during Executive’s employment by the Company and within the scope of such employment and/or with the use of any the Company resources (“Company Works”), Executive shall promptly and fully disclose same to the Company and hereby irrevocably assigns, transfers and conveys, to the maximum extent permitted by applicable law, all rights and intellectual property rights therein (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and related laws) to the Company to the extent ownership of any such rights does not vest originally in the Company.
(iii) Executive agrees to keep and maintain adequate and current written records (in the form of notes, sketches, drawings, and any other form or media requested by the Company) of all Company Works. The records will be available to and remain the sole property and intellectual property of the Company at all times.
(iv) Executive shall take all requested actions and execute all requested documents (including any licenses or assignments required by a government contract) at the Company’s expense (but without further remuneration) to assist the Company in validating, maintaining, protecting, enforcing, perfecting, recording, patenting or registering any of the Company’s rights in the Prior Works and Company Works. If the Company is unable for any other reason to secure Executive’s signature on any document for this purpose, then Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Executive’s agent and attorney in fact, to act for and in Executive’s behalf and stead to execute any documents and to do all other lawfully permitted acts in connection with the foregoing.

 

11


 

(v) Executive shall not improperly use for the benefit of, bring to any premises of, divulge, disclose, communicate, reveal, transfer or provide access to, or share with the Company any confidential, proprietary or non-public information or intellectual property relating to a former employer or other third party without the prior written permission of such third party. Executive hereby indemnifies, holds harmless and agrees to defend the Company and its officers, directors, partners, employees, agents and representatives from any breach of the foregoing covenant. Executive shall comply with all relevant policies and guidelines of the Company, including regarding the protection of confidential information and intellectual property and potential conflicts of interest. Executive acknowledges that the Company may amend any such policies and guidelines from time to time, and that Executive remains at all times bound by their most current version.
(vi) The provisions of Section 10 shall survive the termination of Executive’s employment for any reason.
11.  Specific Performance . Executive acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 or Section 10 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.
12.  Miscellaneous .
a.  Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to conflicts of laws principles thereof.
b.  Entire Agreement/Amendments . This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth or referenced herein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto.
c.  No Waiver . The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party’s rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.
d.  Severability . In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby.

 

12


 

e.  Assignment . This Agreement, and all of Executive’s rights and duties hereunder, shall not be assignable or delegable by Executive. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab initio and of no force and effect. This Agreement may be assigned by the Company to a person or entity which is an affiliate or a successor in interest to substantially all of the business operations of the Company. Upon such assignment, the rights and obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity.
f.  Compliance with IRC Section 409A . Notwithstanding anything herein to the contrary, (i) if at the time of Executive’s termination of employment with the Company Executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six months following Executive’s termination of employment with the Company (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by the Board, that does not cause such an accelerated or additional tax.
g.  Successors; Binding Agreement . This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
h.  Notice . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
If to the Company:
1841 West Oak Parkway, Suite A
Marietta, GA 30662
Attention: Chairman of the Board
If to Executive:
To the most recent address of Executive set forth in the personnel records of the Company.

 

13


 

i.  Executive Representation . Executive hereby represents to the Company that the execution and delivery of this Agreement by Executive and the Company and the performance by Executive of Executive’s duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any employment agreement or other agreement or policy to which Executive is a party or otherwise bound.
j.  Prior Agreements This Agreement supercedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its affiliates regarding the terms and conditions of Executive’s employment with the Company and/or its affiliates.
k.  Cooperation . Executive shall provide Executive’s reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) which relates to events occurring during Executive’s employment hereunder. This provision shall survive any termination of this Agreement.
l.  Withholding Taxes . The Company may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
m.  Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
             
SANUWAVE, INC.       Christopher M. Cashman
 
           
By:
  /s/ Chris Puscasin       /s/ Christopher M. Cashman
 
           
 
  Chris Puscasin        
 
  Title: Director        

 

14

Exhibit 10.7
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
FOR CHRISTOPHER M. CASHMAN
This AMENDMENT (the “Amendment”) to that certain Employment Agreement dated December 19, 2005 by and between Sanuwave, Inc. and Christopher M. Cashman (the “Employment Agreement”) is made by and between SANUWAVE, Inc., a Delaware corporation (the “Company”), and Christopher M. Cashman (the “Executive”).
WHEREAS, the parties entered into the Employment Agreement and now wish to amend the Employment Agreement as described in this Amendment;
WHEREAS, if the Company does not engage in a share exchange or reverse merger with a public shell company on or before October 31, 2009, certain revisions detailed in this Amendment shall be cancelled in their entirety and shall have no force or effect;
NOW THEREFORE, the parties hereby agree to amend the Employment Agreement as follows, effective as of the date this Amendment is executed by the parties (the “Effective Date”). Notwithstanding the foregoing, Items 3-12 of this Amendment (representing revisions to Sections 3, 4, 5c, 5e, 5f, 6b, 8b(iii), 8c and 13 of the Employment Agreement) shall be cancelled in their entirety and shall have no force or effect if the Company does not engage in a share exchange or reverse merger with a public shell company on or before October 31, 2009.
1. Section 2.a. is hereby amended by adding the following phrase to the end of the first sentence in this paragraph:
“and President”
2. Section 2.b. is hereby amended by deleting said paragraph in its entirety and substituting the following in lieu thereof:
“During the Employment Term, Executive will devote substantially all of Executive’s business time and attention to the performance of Executive’s duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere with the rendition of such services either directly or indirectly, without the prior written consent of the Board; provided that Executive shall be permitted to serve as a member of the board of directors or trustees of any organization so long as his service to any organization, or to any other business venture, in each case, and in the aggregate, shall not conflict or interfere with the performance of Executive’s duties hereunder or conflict with Section 9 of this Agreement.”

 

 


 

3. Section 3. Base Salary . is hereby amended by deleting said paragraph in its entirety and substituting the following in lieu thereof:
“3. Base Salary . During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $275,000, payable in regular installments in accordance with the Company’s usual payment practices but not less often than monthly, provided however that, effective January 1, 2010, the Company shall pay Executive a base salary at the annual rate of $350,000, and effective January 1, 2011, the Company shall pay Executive a base salary at the annual rate of not less than $385,000. Executive shall be entitled to a performance and compensation review not less often than annually and shall be entitled to such increases in Executive’s base salary as may be determined from time to time in the sole discretion of the Board, provided that such increase shall be at least one hundred and five percent (105%) of the previous annual base salary. Executive’s annual base salary, as in effect from time to time, is hereinafter referred to as the “Base Salary.”
4. Section 4. Annual Bonus . is hereby amended by deleting said paragraph in its entirety and substituting the following in lieu thereof:
“4. Annual Bonus . With respect to each full fiscal year during the Employment Term, Executive shall be eligible to earn an annual bonus award (an “Annual Bonus”) of not less than fifty-percent (50%) and not to exceed two hundred percent (200%) of Executive’s Base Salary (the “Target”) based upon the achievement of certain performance goals established by the Board and generally consistent with the Company’s budget and performance goals established for other management employees. The Annual Bonus shall be paid to Executive within two and one-half (2 1 / 2 ) months after the end of the applicable fiscal year, provided however, for the payment due in the fiscal year ending in 2010, if timely payment is administratively impractical or would jeopardize the Company’s ability to continue as a going concern, the payment may be delayed and/or paid in installments, and shall be paid as soon as administratively practicable or when such payment would not jeopardize the Company’s status as a going concern, in compliance with the provisions of Section 409A of the Code.”
5. Section 5.a. Options . is amended by adding the following sentence to the end thereto:
“On an annual basis, the Company, in its discretion, may issue additional Options, Restricted Stock or other equity arrangements to or for the benefit of Executive.”

 

 


 

6. Section 5.c. Supplemental Options. is amended by deleting said section in its entirety and substituting the following in lieu thereof:
“c. Supplemental Options . In addition to the foregoing, simultaneously with the execution of this Agreement, Executive shall be granted three (3) options, which will be in addition to the Option described in Section 5.a above (the “Supplemental Options”). Two Supplemental Options will provide Executive with the right to acquire 4,065 Shares, which is intended to equal one percent (1%) each of the Company on a fully diluted basis (the Supplemental Options described in this sentence will hereinafter be referred to as “Supplemental Option 1” and “Supplemental Option 2”). The third Supplemental Option will provide Executive with the right to acquire 6,098 Shares, which is intended to equal one and one-half percent (1.5%) of the Company on a fully diluted basis (the Supplemental Option described in this sentence will hereinafter be referred to as “Supplemental Option 3”).
(i) Supplemental Option 1 will have an exercise price of $100 per Share and will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 on the earlier of (i) December 19, 2011, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $300 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $300 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 1 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 if the future closing price is equal to or exceeds 3.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 1 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.
(ii) Supplemental Option 2 will have an exercise price of $100 per Share. Supplemental Option 2 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 on the earlier of (i) December 19, 2011, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $600 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $600 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 2 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 if the future closing price is equal to or exceeds 6.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 2 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.

 

 


 

(iii) Supplemental Option 3 will have an exercise price of $100 per Share. Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 on the earlier of (i) December 19, 2011, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $900 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $900 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 if the future closing price is equal to or exceeds 9.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 3 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.
For the avoidance of doubt, Executive shall not have the right to require the Company to obtain a valuation of the Company to determine whether any of the Supplemental Options would vest as provided above. In the event of any change in the outstanding shares of common stock of the Company after the date hereof by reason of any share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination, combination or transaction or exchange of shares or other corporate exchange, any distribution to stockholders, or any transaction similar to the foregoing, the Board shall make an equitable adjustment to the specified per Share values related to the vesting criteria described in this paragraph 5.c.”
7. A new Section 5.e. Restricted Stock. is added to the end of Section 5 to read as follows:
“e. Restricted Stock . In addition to the foregoing, simultaneously with the execution of the First Amendment to the Employment Agreement, Executive shall be granted annually Shares of Restricted Stock which number is equal to two and one-half (2 1 / 2 ) times his Base Salary in effect on the Effective Date. Such Shares of Restricted Stock shall be subject to the Restricted Stock Agreement and Award pursuant to which the grant is made. The Shares of Restricted Stock shall vest as to twenty-five percent (25%) of the total number of Shares of Restricted Stock on each twelve (12) month anniversary of the date of the grant; provided that the vesting of the Shares of Restricted Stock may be accelerated upon the achievement of certain performance goals established by the Board (or the compensation committee of the Board).”

 

 


 

8. A new Section 5.f. Reverse Merger or Share Exchange. is added to the end of Section 5 to read as follows:
“f. Reverse Merger or Share Exchange . Upon the effectiveness of the reverse merger or share exchange contemplated in this Amendment, each outstanding option or right of Common Stock of the Company, whether or not then exercisable, shall be converted into an option or right, as applicable, to purchase 34.233 shares of the reverse merger target company’s common stock (“RTO Company Common Stock”) on the same terms as in effect immediately prior to the reverse 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 34.233 shares of RTO Company Common Stock for [$2.92 ($100/34.233)] per share). ”
9. Section 6.b. Life Insurance . is hereby amended by adding the following text to the end thereof:
“Notwithstanding the above, as of the first day of the next policy year beginning on or after the Effective Date of this Amendment, the face value of the life insurance policy or policies issued under this Section 6.b. shall be equal to $1,500,000.”
10. Section 8 b.(iii) is amended by adding the following text to the end thereof:
“Effective as of the first anniversary of the effective date of a share exchange or reverse merger with a public shell occurring on or before October 31, 2009, if Executive’s employment is terminated by the Company without Cause or if Executive resigns for Good Reason, Executive shall be entitled to receive: (A) the Accrued Rights; (B) subject to Executive’s continued compliance with the provisions of Section 10, and subject to Executive’s execution of an effective release of claims in a form reasonably acceptable to the Company, a payment equal to (x) two hundred percent (200%) of the Base Salary then in effect plus (y) the sum of the cash bonuses paid during the previous two (2) fiscal years (but in no case less than fifty percent (50%) of the value of (x)); (C) full vesting of all outstanding stock options, including unvested Options and Supplemental Options, and Shares of Restricted Stock, provided that such stock options shall be exercisable until the end of the earlier of (x) the end of the option term specified in the option agreement or (y) the second anniversary of the date of the Executive’s termination of employment under this Section 8.b.; and (E) a lump sum payment equal to (x) twenty-four (24) months of the monthly premium cost of providing continuation coverage for Executive and his qualified beneficiaries under the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA”), provided that the premium cost of COBRA shall be calculated as of the date of Executive’s termination of employment, plus (y) an amount to compensate Executive for applicable U.S., State or local income taxes due by Executive for such COBRA payment.”

 

 


 

11. Section 8.c. is amended by adding the following text to the end thereof:
“Effective as of the first anniversary of the effective date of a share exchange or reverse merger with a public shell occurring on or before October 31, 2009, Executive shall be entitled to receive the benefits under Section 8.b. above, if a Change of Control of the Company (as defined below) occurs, subject to Executive’s continued compliance with the provisions of Section 10, and subject to Executive’s execution of an effective release of claims in a form reasonably acceptable to the Company.
For purposes of this Agreement, a “Change of Control” means 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 the Company to a person or group of related persons, as such terms are defined or described in Sections 3(a)(9) and 13(d)(3) of the Exchange Act of 1934, as amended (the “Exchange Act”) (other than Prides Capital Partners, LLC and its affiliates, Nightwatch Capital LLC and its affiliates, or any group controlled by any of the foregoing persons), that will continue the business of the Company in the future; (2) a merger or consolidation involving the Company in which the voting securities of the Company owned by the shareholders of the Company immediately prior to such merger or consolidation do not represent, after conversion if applicable, more than fifty percent (50%) of the total voting power of the surviving controlling entity outstanding immediately after such merger or consolidation; provided that any person who (A) was a beneficial owner (within the meaning of Rules 13d-3 and 13d-5 promulgated under the Exchange Act) of the voting securities of the Company immediately prior to such merger or consolidation, and (B) is a beneficial owner of more than 20% of the securities of the Company immediately after such merger or consolidation, shall be excluded from the list of “shareholders of the Company immediately prior to such merger or consolidation” for purposes of the preceding calculation; or (3) any person or group (other than Prides Capital Partners, LLC and its affiliates, Nightwatch Capital LLC and its affiliates, or any group controlled by any of the foregoing persons) is or becomes the Beneficial Owner, directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company (including by way of merger, consolidation or otherwise) and the representatives of Prides Capital Partners, LLC and its affiliates, Nightwatch Capital LLC and its affiliates, or any group in which any of the foregoing persons is a member, individually or in the aggregate, cease to have the ability to elect a majority of the Board (for the purposes of this clause (3), a member of a group will not be considered to be the Beneficial Owner of the securities owned by other members of the group).”

 

 


 

12. The following new Section 13. Gross-Up Provisions . is hereby added to the end of the Employment Agreement:
“13. Gross-Up Provisions . Notwithstanding anything in this Agreement to the contrary, in the event that any payment made to Executive by or for the Company under this Agreement, or under any other plan or compensation program maintained by the Company, is subject to the excise tax imposed by Code §4999 (the “Excise Tax”) (any such payment, or part thereof, subject to Excise Tax being a “Parachute Payment”), then the Company shall pay Executive an additional amount (the “Gross-Up”) to compensate Executive for the economic cost of (i) the Excise Tax on the Parachute Payment, (ii) the U.S., state and local income tax (as applicable) on the Gross-Up, and (iii) the Excise Tax on the Gross-Up. The calculation shall insure that Executive, after receipt of the Parachute Payment and the Gross-Up and the payment of taxes thereon, will be in approximately the same economic position after all taxes as if the Parachute Payment had been subject only to income tax at the marginal rate. For purposes of determining the amount of the Gross-Up, Executive shall be deemed to pay U.S., state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Parachute Payment is to be made. State and local taxes shall be determined based upon the state and locality of Executive’s domicile on the date of Executive’s termination of employment with the Company. The determination of whether such Excise Tax is payable and the amount thereof shall be based upon the opinion of tax counsel selected by the Company and acceptable to Executive. If such opinion is not accepted by the Internal Revenue Service upon audit, then appropriate adjustments shall be computed (without interest but with Gross-Up, if applicable) by such tax counsel based upon the final amount of the Excise Tax so determined.”
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the  _____  day of                      , 2009.
                 
SANUWAVE, Inc.       EXECUTIVE
 
               
By:
               
             
 
  Name:           Christopher M. Cashman
 
               
 
  Title:            
 
               

 

 

Exhibit 10.8
AMENDMENT TO NONSTATUTORY STOCK OPTION AWARD
AND NONSTATUTORY SUPPLEMENTAL
STOCK OPTION AGREEMENTS
This AMENDMENT TO NONSTATUTORY STOCK OPTION AWARD AND NONSTATUTORY STOCK OPTION AGREEMENTS (this “Amendment”) is made by and between SANUWAVE, Inc., a Delaware corporation (the “Company”), and Christopher M. Cashman (the “Optionholder”).
WHEREAS, the parties entered into that certain Employment Agreement, dated December 19, 2005, pursuant to which the Optionholder was granted nonstatutory stock options and supplemental nonstatutory stock options under Section 5 of the Employment Agreement;
WHEREAS, the parties entered into that certain Nonstatutory Stock Option Award, dated December 19, 2005, as amended in August of 2006, pursuant to which the Optionholder was granted nonstatutory stock options (“Nonstatutory Stock Options”) to purchase whole shares of 5,880.25 shares of the Company’s common stock; and
WHEREAS, the Optionholder was granted additional Nonstatutory Stock Options to purchase whole shares of 13,956.36 shares of the Company’s common stock in 2008; and
WHEREAS, the parties entered into certain Nonstatutory Stock Option Agreements, dated December 19, 2005, as amended in August of 2006, describing the Supplemental Options, pursuant to which the Optionholder was granted nonstatutory stock options to purchase all or any part of (a) 1,176 shares of the Company’s common stock (“Supplemental Option 1”), (b) 1,176 shares of the Company’s common stock (“Supplemental Option 2”), and (c) 1,764 shares of the Company’s common stock (“Supplemental Option 3”), (collectively, the “Supplemental Options”); and
WHEREAS, in 2008, the Optionholder was granted additional Supplemental Options to purchase all or part of (a) 1,939.26 shares of the Company’s common stock under Supplemental Option 1, (b) 1,939.26 shares of the Company’s common stock under Supplemental Option 2, and (c) 2,908.89 shares of the Company’s common stock under Supplemental Option 3; and
WHEREAS, the Company has approved the grant of additional nonstatutory stock options to reflect changes to the number of the Company’s outstanding shares since the date of the initial stock option grants, and to change the vesting and exercise price of certain options underlying the shares of the Company’s common stock;
NOW THEREFORE, the parties hereby agree to amend the Nonstatutory Stock Options and the Supplemental Options as follows, effective as of the date of this Amendment:
  1.  
The Company hereby grants additional Nonstatutory Stock Options under the Nonstatutory Stock Option Award to reflect changes to the number of the Company’s outstanding shares since the date of the initial stock option grants. Accordingly, the Optionholder is granted an additional nonstatutory stock option to purchase whole shares of 1,300.70 shares of the Company’s common stock for a total option to purchase whole shares of 21,137.31 shares of the Company’s common stock.

 

 


 

  2.  
The Company hereby grants additional nonstatutory stock options under the Supplemental Options to reflect changes to the number of the Company’s outstanding shares since the date of the initial stock option grants. Accordingly, the Optionholder is granted additional supplemental nonstatutory stock options to purchase whole shares of (a) 950 shares of the Company’s common stock under Supplemental Option 1, (b) 950 shares of the Company’s common stock under Supplemental Option 2, and (c) 1425 shares of the Company’s common stock under Supplemental Option 3;
  3.  
Sections 3 and 5 of Supplemental Option 1 are hereby amended to reflect the following: Supplemental Option 1 will have an exercise price of $100 per Share. Supplemental Option 1 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 on the earlier of (i) December 19, 2011, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $300 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $300 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 1 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 if the future closing price is equal to or exceeds 3.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 1 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.
  4.  
Sections 3 and 5 of Supplemental Option 2 are hereby amended to reflect the following: Supplemental Option 2 will have an exercise price of $100 per Share. Supplemental Option 2 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 on the earlier of (i) December 19, 2011, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $600 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $600 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 2 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 if the future closing price is equal to or exceeds 6.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 2 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.

 

 


 

  5.  
Sections 3 and 5 of Supplemental Option 3 are hereby amended to reflect the following: Supplemental Option 3 will have an exercise price of $100 per Share. Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 on the earlier of (i) December 19, 2011, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $900 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $900 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 if the future closing price is equal to or exceeds 9.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 3 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.
  6.  
Notwithstanding the foregoing, the options granted under this Amendment shall be cancelled and all rights to such options for shares of common stock and the changes in the vesting and exercise price shall be forfeited in their entirety if the Company does not engage in a share exchange or reverse merger with a public shell company on or before October 31, 2009.

 

 


 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the 14th day of September, 2009.
                     
SANUWAVE, Inc.       OPTIONHOLDER    
 
By:
                   
                 
 
  Name:           Christopher M. Cashman    
 
  Title:                
 
     
 
           

 

 


 

AMENDMENT TO NONSTATUTORY STOCK OPTION AWARD
AND NONSTATUTORY SUPPLEMENTAL
STOCK OPTION AGREEMENTS
SCHEDULE A
         
Date Option granted:
  December 19, 2005
Date Option expires:
  December 19, 2015
 
       
Options:
       
Original Number of shares granted
  5,880.25 shares
Additional Number of shares granted in 2008
  13,956.36 shares
Additional Number of shares granted under this Amendment:
  1,300.70 shares
 
       
Supplemental Option 1:
       
Original Number of shares granted
  1,176.00 shares
Additional Number of shares granted in 2008
  1,939.26 shares
Additional Number of shares granted under this Amendment:
  950.00 shares
 
       
Supplemental Option 2:
       
Original Number of shares granted
  1,176.00 shares
Additional Number of shares granted in 2008
  1,939.26 shares
Additional Number of shares granted under this Amendment:
  950.00 shares
 
       
Supplemental Option 3:
       
Original Number of shares granted
  1,764.00 shares
Additional Number of shares granted in 2008
  2,908.89 shares
Additional Number of shares granted under this Amendment:
  1,425.00 shares
 
       
Exercise Price of Option (per Share):
    $ 100.00  

 

 


 

         
    Total Number of Shares    
    in Installment    
Date Installment   (including original grant, 2008 grant,   Incentive or
First Exercisable   and Options Granted Under This Amendment)   Nonstatutory Option
Vested*
  15,853.00 shares of Nonstatutory Options   Nonstatutory Stock
 
  3,048.94 shares of Supplemental Option 1   Nonstatutory Stock
 
  3,048.94 shares of Supplemental Option 2   Nonstatutory Stock
 
  4,573.42 shares of Supplemental Option 3   Nonstatutory Stock
 
December 19, 2009*
  5,284.31 shares of Nonstatutory Options   Nonstatutory Stock
 
  1,016.32 shares of Supplemental Option 1   Nonstatutory Stock
 
  1,016.32 shares of Supplemental Option 2   Nonstatutory Stock
 
  1,524.47 shares of Supplemental Option 3   Nonstatutory Stock
     
*  
All Supplemental Options are subject to additional vesting and exercise requirements as described in each individual stock option agreement.

 

 

Exhibit 10.9
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the “Agreement”) dated April 10, 2006, is made by and between SANUWAVE, Inc., a Delaware corporation (the “Company”), and Barry J. Jenkins (“Executive”).
The Company desires to employ Executive and to enter into an agreement embodying the terms of such employment; and
Executive desires to accept such employment and to enter into such an agreement; and
In consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows:
1.  Term of Employment . Subject to the provisions of Section 8 of this Agreement, Executive shall be employed by the Company and its affiliates on the terms and subject to the conditions set forth in this Agreement. The period of time during which Executive shall be providing services under this Agreement to the Company and its affiliates shall be known as the “Employment Term”. The Employment Term shall commence as of the date set forth above and be of no specific duration. Notwithstanding anything to the contrary herein, Executive shall be an “at will” employee of the Company during the Employment Term.
2.  Position .
a. During the Employment Term, Executive shall serve as the Company’s Chief Financial Officer. In such position, Executive shall have such duties and authority as shall be determined from time to time by the Board of Directors, the President, and/or CEO of the Company (the “Board”) consistent with such position.
b. During the Employment Term, Executive will devote substantially all of Executive’s business time and attention to the performance of Executive’s duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise, without the prior written consent of the Board.
3.  Base Salary . During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $205,000, payable in regular installments in accordance with the Company’s usual payment practices but not less often than monthly. Executive shall be entitled to a performance and compensation review not less often than annually at which time compensation may be adjusted as may be determined in the sole discretion of the Board. Executive’s annual base salary, as in effect is hereinafter referred to as the “Base Salary.”
4.  Annual Bonus . With respect to each full fiscal year during the Employment Term, Executive shall be eligible to earn an annual bonus award (an “Annual Bonus”) of forty percent (40%) of Executive’s Base Salary (the “Target”) based upon the achievement of certain performance goals established by the Board and generally consistent with the Company’s budget and performance goals established for other management employees. The Annual Bonus, if any, shall be paid to Executive within two and one-half (2.5) months after the end of the applicable fiscal year.

 

 


 

5.  Equity Arrangements .
a.  Options . Simultaneously with the execution of this Agreement, Executive shall be granted options to acquire 3,057.75 shares of common stock of the Company (“Shares”), which number is equal to two and three fifths percent (2.6%) of the Company on a fully diluted basis (the “Options”). The Options shall have an exercise price of $100 per Share, which is equal to the price that Prides Capital Partners, LLC paid in its initial acquisition of Shares (the “Base Price”), and which is the fair market value of one Share, as determined by the Board in good faith. The Options will vest and become exercisable as to twenty-five percent (25%) of the total number of Shares subject to the Option on each twelve (12) month anniversary of the date of grant.
b.  Direct Purchase of Shares . Contingent upon Executive’s commencement of employment with the Company, Executive shall have the opportunity to purchase up to 1,025 Shares, which number is equal to one percent (1%) of the Company on a fully diluted basis, at a per share purchase price equal to $1,000 (the “Investment Shares”), by providing written notice to the Company’s President prior to September 30, 2006. The Investment Shares acquired by Executive under this Section 5.b shall be fully vested on the date of such acquisition.
c.  Supplemental Options . In addition to the foregoing, simultaneously with the execution of this Agreement Executive shall be granted three (3) options, which will be in addition to the Option described in Section 5.a above (the “Supplemental Options”). Two Supplemental Options will each provide Executive with the right to acquire ) 294 Shares, which is intended to equal 0.25% each of the Company on a fully diluted basis (the Supplemental Options described in this sentence will hereinafter be referred to as “Supplemental Option 1” and “Supplemental Option 2”). The third Supplement Option will provide Executive with the right to acquire 441 Shares, which is intended to equal 0.375% of the Company on a fully diluted basis (the Supplemental Option described in this sentence will hereinafter be referred to as “Supplemental Option 3”). Supplemental Option 1 will have an exercise price of $400 per Share, Supplemental Option 2 will have an exercise price of $800 per Share, and Supplemental Option 3 will have an exercise price of $1,200 per Share. Supplemental Option 1 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 on the earlier of (i) the six year anniversary of the date of grant and (ii) the date that the Company or its shareholders (A) enters into an agreement or adopts a plan of liquidation pursuant to which Prides Capital Partners, LLC and its affiliates can reasonably be expected to receive 4.0 times Prides Capital Partners, LLC’s initial aggregate investment in the Company, (B) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $400 per Share or (C) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $400 per Share. Supplemental Option 2 will vest and

 

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become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 on the earlier of (i) the six year anniversary of the date of grant and (ii) the date that the Company or its shareholders (A) enters into an agreement or adopts a plan of liquidation pursuant to which Prides Capital Partners, LLC and its affiliates can reasonably be expected to receive 8.0 times Prides Capital Partners, LLC’s initial aggregate investment in the Company, (B) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $800 per Share or (C) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $800 per Share. Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 on the earlier of (i) the six year anniversary of the date of grant and (ii) the date that the Company or its shareholders (A) enters into an agreement or adopts a plan of liquidation pursuant to which Prides Capital Partners, LLC and its affiliates can reasonably be expected to receive 12.0 times Prides Capital Partners, LLC’s initial aggregate investment in the Company, (B) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $1,200 per Share or (C) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $1,200 per Share. For the avoidance of doubt, Executive shall not have the right to require the Company or Prides Capital Partners, LLC to obtain a valuation of the Company to determine whether any of the Supplemental Options would vest as provided above. In the event of any change in the outstanding shares of common stock of the Company after the date hereof by reason of any share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination, combination or transaction or exchange of shares or other corporate exchange, any distribution to stockholders, or any transaction similar to the foregoing, the Board shall make an equitable adjustment to the specified per Share values and vesting criteria described in this paragraph 5.c.
d.  Terms . Executive’s acquisition of Shares under this Section 5 shall be subject to the stock option agreement pursuant to which the grants are made.
6.  Employee Benefits . During the Employment Term, Executive shall be entitled to participate in the Company’s employee benefit plans (other than annual bonus and incentive plans) as in effect from time to time (collectively “Employee Benefits”), on the same basis as those benefits are generally made available to other senior executives of the Company. Executive shall be entitled to four (4) weeks paid vacation per year during the Employment Term.

 

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7.  Business Expenses and Perquisites . During the Employment Term, reasonable business expenses incurred by Executive in the performance of Executive’s duties hereunder shall be advanced or reimbursed by the Company in accordance with Company policies.
8.  Termination and Change of Control . The Employment Term and Executive’s employment hereunder may be terminated by either party at any time and for any reason; provided that Executive will be required to give the Company at least 30 days advance written notice of any resignation of Executive’s employment. Notwithstanding any other provision of this Agreement, the provisions of this Section 8 shall exclusively govern Executive’s rights upon termination of employment with the Company and its affiliates.
a. By the Company For Cause or By Executive Resignation Without Good Reason.
(i) The Employment Term and Executive’s employment hereunder may be terminated by the Company for Cause (as defined below) and shall terminate automatically upon Executive’s resignation without Good Reason (as defined in Section 8(b)); provided that Executive will be required to give the Company at least 30 days advance written notice of a resignation without Good Reason.
(ii) For purposes of this Agreement, “Cause” shall mean (A) Executive’s continued failure substantially to perform Executive’s duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness) for a period of 20 days following written notice by the Company to Executive of such failure, (B) dishonesty in the performance of Executive’s duties hereunder, (C) an act or acts on Executive’s part constituting (x) a felony under the laws of the United States or any state thereof or (y) a misdemeanor involving moral turpitude that could reasonably be expected to damage the Company or its reputation, (D) Executive’s willful malfeasance or willful misconduct in connection with Executive’s duties hereunder or (E) Executive’s breach of the provisions of Sections 9 or 10 of this Agreement.
(iii) If Executive’s employment is terminated by the Company for Cause, or if Executive resigns without Good Reason, or in the event that Executive’s employment terminates due to Executive’s death or disability, Executive (or Executive’s beneficiaries, in the event of Executive’s death) shall be entitled to receive:
  (A)   the Base Salary through the date of termination;
 
  (B)   any Annual Bonus earned, but unpaid, as of the date of termination for the immediately preceding fiscal year, paid in accordance with Section 4 (except to the extent payment is otherwise deferred pursuant to any applicable deferred compensation arrangement with the Company);

 

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  (C)  
reimbursement, within 60 days following submission by Executive to the Company of appropriate supporting documentation) for any unreimbursed business expenses properly incurred by Executive in accordance with Company policy prior to the date of Executive’s termination; provided claims for such reimbursement (accompanied by appropriate supporting documentation) are submitted to the Company within 90 days following the date of Executive’s termination of employment; and
 
  (D)  
such Employee Benefits, if any, as to which Executive may be entitled under the employee benefit plans of the Company (the amounts described in clauses (A) through (D) hereof being referred to as the “Accrued Rights”).
Following such termination of Executive’s employment by the Company for Cause or resignation by Executive without Good Reason, or on account of Executive’s death or disability, except as set forth in this Section 8(a)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.
b. By the Company Without Cause or Resignation by Executive for Good Reason.
(i) The Employment Term and Executive’s employment hereunder may be terminated by the Company without Cause or by Executive’s resignation for Good Reason.
(ii) For purposes of this Agreement, “Good Reason” shall mean (A) the Company’s substantial breach of this Agreement including the failure of the Company to pay or cause to be paid Executive’s Base Salary or Annual Bonus, hereunder, (B) any substantial and sustained diminution in Executive’s authority or responsibilities as Chief Financial Officer of the Company or (C) any relocation of the location at which Executive is required to provide his services to a location that is more than 45 miles from its location as of the date hereof; provided that either of the events described in clauses (A) and (B) of this Section 8(b)(ii) shall constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from Executive of written notice of the event which constitutes Good Reason; provided , further , that “Good Reason” shall cease to exist for an event on the 60 th day following the later of its occurrence or Executive’s knowledge thereof, unless Executive has given the Company written notice thereof prior to such date.
(iii) If Executive’s employment is terminated by the Company without Cause or if Executive resigns for Good Reason, Executive shall be entitled to receive:
  (A)   the Accrued Rights; and
 
  (B)  
subject to Executive’s continued compliance with the provisions of Sections 9 and 10, and subject to Executive’s execution of an effective release of claims in a form reasonably acceptable to the Company, continued payment of the Base Salary in accordance with the Company’s normal payroll practices, as in effect on the date of termination of Executive’s employment, until six months following the date of such termination; and
 
  (C)  
continued coverage for Executive and his qualified beneficiaries under the Company’s health insurance programs for a period of up to six (6) months through Company reimbursement of premiums paid by Executive for coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985.

 

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Following Executive’s termination of employment by the Company without Cause or by Executive’s resignation for Good Reason, except as set forth in this Section 8(b)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement.
c.  Change of Control. In addition to the benefits that Executive may be entitled to receive under Section 8.b above, if a Change of Control of the Company (as defined below) occurs, then subject to Executive’s continued compliance with the provisions of Sections 9 and 10, and subject to Executive’s execution of an effective release of claims in a form reasonably acceptable to the Company, Executive shall be entitled to receive 100% accelerated vesting of the Options.
d. For purposes of this Agreement, a “Change of Control” means 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 the Company to a person or group of related persons, as such terms are defined or described in Sections 3(a)(9) and 13(d)(3) of the Exchange Act of 1934, as amended (the “Exchange Act”) (other than Prides Capital Partners, LLC and its affiliates, NightWatch Capital LLC and its affiliates, or any group controlled by any of the foregoing persons), that will continue the business of the Company in the future; (2) a merger or consolidation involving the Company in which the voting securities of the Company owned by the shareholders of the Company immediately prior to such merger or consolidation do not represent, after conversion if applicable, more than fifty percent (50%) of the total voting power of the surviving controlling entity outstanding immediately after such merger or consolidation; provided that any person who (A) was a beneficial owner (within the meaning of Rules 13d-3 and 13d-5 promulgated under the Exchange Act) of the voting securities of the Company immediately prior to such merger or consolidation, and (B) is a beneficial owner of more than 20% of the securities of the Company immediately after such merger or consolidation, shall be excluded from the list of “shareholders of the Company immediately prior to such merger or consolidation” for purposes of the preceding calculation; or (3) any person or group (other than Prides Capital Partners, LLC and its affiliates, NightWatch Capital LLC and its affiliates, or any group controlled by any of the foregoing persons) is or becomes the Beneficial Owner, directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company (including by way of merger, consolidation or otherwise) and the representatives of Prides Capital Partners, LLC and its affiliates, NightWatch Capital LLC and its affiliates, or any group in which any of the foregoing persons is a member, individually or in the aggregate, cease to have the ability to elect a majority of the Board (for the purposes of this clause (3), a member of a group will not be considered to be the Beneficial Owner of the securities owned by other members of the group).

 

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e.  Notice of Termination . Any purported termination of employment by the Company or by Executive (other than due to Executive’s death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 12(h) hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated.
9.  Non-Competition .
a. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Company and its affiliates and accordingly agrees as follows:
(i) During the Employment Term and, for a period of two years following the date Executive ceases to be employed by the Company (the “Restricted Period”), Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever (“Person”), directly or indirectly solicit or assist in soliciting in competition with the Company the business of any client or prospective client for the purpose of selling or providing a Competitive Product or Service.
(ii) During the Restricted Period, Executive will not directly or indirectly:
  (A)  
engage in any business that competes with the business of the Company or its affiliates in selling or providing a Competitive Product or Service (including, without limitation, businesses which the Company or its affiliates have specific plans to conduct in the future and as to which Executive is aware of such planning) in any geographical area that is within 100 miles of any geographical area where the Company or its affiliates manufactures, produces, sells, leases, rents, licenses or otherwise provides its products or services (a “Competitive Business”);
 
  (B)  
enter the employ of, or render any services to, any Person who or which (or any division or controlled or controlling affiliate of such Person) engages in a Competitive Business; provided, however, that Executive shall be permitted to become an employee of, or render services to, a Person that engages in a Competitive Business (or that is a controlled or controlling affiliate of any Person that engages in a Competitive Business) if Executive’s employment or provision of services is limited to a line of business of such Person that does not constitute a Competitive Business, Executive does not sell or provide a Competitive Product or Service, and Executive does not otherwise indirectly violate the restrictive covenants set forth herein;

 

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  (C)  
acquire a financial interest in, or otherwise become actively involved with, any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or
 
  (D)  
interfere with, or attempt to interfere with, business relationships (whether formed before, on or after the date of this Agreement) between the Company or any of its affiliates and customers, clients, suppliers partners, members or investors of the Company or its affiliates with respect to a Competitive Product or Service.
(iii) Notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly own, solely as an investment, securities of any Person engaged in the business of the Company or its affiliates which are publicly traded on a national or regional stock exchange or on the over-the-counter market if Executive (A) is not a controlling person of, or a member of a group which controls, such person and (B) does not, directly or indirectly, own 5% or more of any class of securities of such Person.
(iv) During the Restricted Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any Person, directly or indirectly:
  (A)  
solicit or encourage any employee of the Company or its affiliates to leave the employment of the Company or its affiliates; or
 
  (B)  
hire any such employee who is at the time employed by the Company or its affiliates; provided, however, that nothing herein shall prevent Executive, whether on Executive’s own behalf or on behalf of or in conjunction with any Person, from hiring any such employee if such employee initially contacted Executive and initially solicited an offer of employment from Executive.
(v) During the Restricted Period, Executive will not, directly or indirectly, solicit or encourage to cease to work with the Company or its affiliates any consultant then under contract with the Company or its affiliates.
(vi) For purposes of this Agreement, the term “Competitive Product or Service” means the products that use or incorporate Extracorporeal Shock Wave Technology for orthopedic or urology procedures, and any services related to such products.

 

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b. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 9 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
10.  Confidentiality; Intellectual Property.
a. Confidentiality .
(i) Executive will not at any time (whether during or after Executive’s employment with the Company) (A) retain or use for the benefit, purposes or account of Executive or any other Person; or (B) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the Company (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information —including without limitation trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals — concerning the past, current or future business, activities and operations of the Company, its subsidiaries or affiliates and/or any third party that has disclosed or provided any of same to the Company on a confidential basis (“Confidential Information”) without the prior written authorization of the Board.
(ii) “Confidential Information” shall not include any information that is (A) generally known to the industry or the public other than as a result of Executive’s breach of this covenant; (B) made legitimately available to Executive by a third party without breach of any confidentiality obligation; or (C) required by law to be disclosed; provided that Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment.
(iii) Except as required by law, Executive will not disclose to anyone, other than Executive’s immediate family and legal or financial advisors, the existence or contents of this Agreement; provided that Executive may disclose to any prospective future employer the provisions of Sections 9 and 10 of this Agreement provided they agree to maintain the confidentiality of such terms.

 

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(iv) Upon termination of Executive’s employment with the Company for any reason, Executive shall (A) cease and not thereafter commence use of any Confidential Information or intellectual property (including without limitation, any patent, invention, copyright, trade secret, trademark, trade name, logo, domain name or other source indicator) owned or used by the Company, its subsidiaries or affiliates; (B) immediately destroy, delete, or return to the Company, at the Company’s option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Executive’s possession or control (including any of the foregoing stored or located in Executive’s office, home, laptop or other computer, whether or not Company property) that contain Confidential Information or otherwise relate to the business of the Company, its affiliates and subsidiaries, except that Executive may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information and copies of any agreements to which Executive is a party; and (C) notify and fully cooperate with the Company regarding the delivery or destruction of any other Confidential Information of which Executive is or becomes aware.
b. Intellectual Property .
(i) If Executive has created, invented, designed, developed, contributed to or improved any works of authorship, inventions, intellectual property, materials, documents or other work product (including without limitation, research, reports, software, databases, systems, applications, presentations, textual works, content, or audiovisual materials) (“Works”), either alone or with third parties, prior to Executive’s employment by the Company, that are relevant to or implicated by such employment (“Prior Works”), Executive hereby grants the Company a perpetual, non-exclusive, royalty-free, worldwide, assignable, sublicensable license under all rights and intellectual property rights (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and related laws) therein for all purposes in connection with the Company’s current and future business. A list of all such material Works, if any, as of the date hereof is attached hereto as Exhibit A.
(ii) If Executive creates, invents, designs, develops, contributes to or improves any Works, either alone or with third parties, at any time during Executive’s employment by the Company and within the scope of such employment and/or with the use of any the Company resources (“Company Works”), Executive shall promptly and fully disclose same to the Company and hereby irrevocably assigns, transfers and conveys, to the maximum extent permitted by applicable law, all rights and intellectual property rights therein (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and related laws) to the Company to the extent ownership of any such rights does not vest originally in the Company.

 

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(iii) Executive agrees to keep and maintain adequate and current written records (in the form of notes, sketches, drawings, and any other form or media requested by the Company) of all Company Works. The records will be available to and remain the sole property and intellectual property of the Company at all times.
(iv) Executive shall take all requested actions and execute all requested documents (including any licenses or assignments required by a government contract) at the Company’s expense (but without further remuneration) to assist the Company in validating, maintaining, protecting, enforcing, perfecting, recording, patenting or registering any of the Company’s rights in the Prior Works and Company Works. If the Company is unable for any other reason to secure Executive’s signature on any document for this purpose, then Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Executive’s agent and attorney in fact, to act for and in Executive’s behalf and stead to execute any documents and to do all other lawfully permitted acts in connection with the foregoing.
(v) Executive shall not improperly use for the benefit of, bring to any premises of, divulge, disclose, communicate, reveal, transfer or provide access to, or share with the Company any confidential, proprietary or non-public information or intellectual property relating to a former employer or other third party without the prior written permission of such third party. Executive hereby indemnifies, holds harmless and agrees to defend the Company and its officers, directors, partners, employees, agents and representatives from any breach of the foregoing covenant. Executive shall comply with all relevant policies and guidelines of the Company, including regarding the protection of confidential information and intellectual property and potential conflicts of interest. Executive acknowledges that the Company may amend any such policies and guidelines from time to time, and that Executive remains at all times bound by their most current version.
(vi) The provisions of Section 10 shall survive the termination of Executive’s employment for any reason.
11.  Specific Performance . Executive acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 or Section 10 would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.

 

Page 11 of 15


 

12.  Miscellaneous .
a.  Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to conflicts of laws principles thereof.
b.  Entire Agreement/Amendments . This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth or referenced herein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto.
c.  No Waiver . The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party’s rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.
d.  Severability . In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby.
e.  Assignment . This Agreement, and all of Executive’s rights and duties hereunder, shall not be assignable or delegable by Executive. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab initio and of no force and effect. This Agreement may be assigned by the Company to a person or entity which is an affiliate or a successor in interest to substantially all of the business operations of the Company. Upon such assignment, the rights and obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity.
f.  Compliance with IRC Section 409A . Notwithstanding anything herein to the contrary, (i) if at the time of Executive’s termination of employment with the Company Executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six months following Executive’s termination of employment with the Company (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by the Board, that does not cause such an accelerated or additional tax.
g.  Successors; Binding Agreement . This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

 

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h.  Notice . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
If to the Company:
1841 West Oak Parkway, Suite A
Marietta, GA 30662
Attention: President
If to Executive:
To the most recent address of Executive set forth in the personnel records of the Company.
i.  Executive Representation . Executive hereby represents to the Company that the execution and delivery of this Agreement by Executive and the Company and the performance by Executive of Executive’s duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any employment agreement or other agreement or policy to which Executive is a party or otherwise bound.
j.  Prior Agreements This Agreement supersedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its affiliates regarding the terms and conditions of Executive’s employment with the Company and/or its affiliates.
k.  Cooperation . Executive shall provide Executive’s reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) which relates to events occurring during Executive’s employment hereunder. This provision shall survive any termination of this Agreement.
l.  Withholding Taxes . The Company may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
m.  Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

 

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
             
SANUWAVE, INC.       Barry J. Jenkins
 
           
         
By:
           
 
           
Title:
           
 
           

 

Page 14 of 15

Exhibit 10.10
AMENDMENT TO NONSTATUTORY STOCK OPTION AWARD
AND NONSTATUTORY SUPPLEMENTAL
STOCK OPTION AGREEMENTS
This AMENDMENT TO NONSTATUTORY STOCK OPTION AWARD AND NONSTATUTORY STOCK OPTION AGREEMENTS (this “Amendment”) is made by and between SANUWAVE, Inc., a Delaware corporation (the “Company”), and Barry J. Jenkins (the “Optionholder”).
WHEREAS, the parties entered into that certain Employment Agreement, dated April 10, 2006, pursuant to which the Optionholder was granted nonstatutory stock options and supplemental nonstatutory stock options under Section 5 of the Employment Agreement;
WHEREAS, the parties entered into a Nonstatutory Stock Option Award on October 24, 2006, pursuant to which the Optionholder was granted nonstatutory stock options (“Nonstatutory Stock Options”) to purchase whole shares of 3,057.75 shares of the Company’s common stock; and
WHEREAS, the Optionholder was granted additional Nonstatutory Stock Options to purchase whole shares of 6,739.05 shares of the Company’s common stock in 2008; and
WHEREAS, the parties entered into certain Nonstatutory Stock Option Agreements, dated October 24, 2006, describing the Supplemental Options, pursuant to which the Optionholder was granted nonstatutory stock options to purchase all or any part of (a) 294 shares of the Company’s common stock (“Supplemental Option 1”), (b) 294 shares of the Company’s common stock (“Supplemental Option 2”), and (c) 441 shares of the Company’s common stock (“Supplemental Option 3”), (collectively, the “Supplemental Options”); and
WHEREAS, in 2008, the Optionholder was granted additional Supplemental Options to purchase all or part of (a) 484.82 shares of the Company’s common stock under Supplemental Option 1, (b) 484.82 shares of the Company’s common stock under Supplemental Option 2, and (c) 727.22 shares of the Company’s common stock under Supplemental Option 3; and
WHEREAS, the Company has approved the grant of additional nonstatutory stock options to reflect changes to the number of the Company’s outstanding shares since the date of the initial stock option grants, and to change the vesting and exercise price of certain options underlying the shares of the Company’s common stock;
NOW THEREFORE, the parties hereby agree to amend the Nonstatutory Stock Options and the Supplemental Options as follows, effective as of the date of this Amendment:
  1.  
The Company hereby grants additional Nonstatutory Stock Options under the Nonstatutory Stock Option Award to reflect changes to the number of the Company’s outstanding shares since the date of the initial stock option grants. Accordingly, the Optionholder is granted an additional nonstatutory stock option to purchase whole shares of 603.50 shares of the Company’s common stock for a total option to purchase whole shares of 10,400.30 shares of the Company’s common stock.

 

 


 

  2.  
The Company hereby grants additional nonstatutory stock options under the Supplemental Options to reflect changes to the number of the Company’s outstanding shares since the date of the initial stock option grants. Accordingly, the Optionholder is granted additional supplemental nonstatutory stock options to purchase whole shares of (a) 237.10 shares of the Company’s common stock under Supplemental Option 1, (b) 237.10 shares of the Company’s common stock under Supplemental Option 2, and (c) 355.60 shares of the Company’s common stock under Supplemental Option 3.
 
  3.  
Sections 3 and 5 of Supplemental Option 1 are hereby amended to reflect the following: Supplemental Option 1 will have an exercise price of $100 per Share. Supplemental Option 1 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 on the earlier of (i) April 10, 2012, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $300 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $300 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 1 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 1 if the future closing price is equal to or exceeds 3.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 1 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.
 
  4.  
Sections 3 and 5 of Supplemental Option 2 are hereby amended to reflect the following: Supplemental Option 2 will have an exercise price of $100 per Share. Supplemental Option 2 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 on the earlier of (i) April 10, 2012, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $600 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $600 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 2 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 2 if the future closing price is equal to or exceeds 6.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 2 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.

 

 


 

  5.  
Sections 3 and 5 of Supplemental Option 3 are hereby amended to reflect the following: Supplemental Option 3 will have an exercise price of $100 per Share. Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 on the earlier of (i) April 10, 2012, and (ii) the date that the Company or its shareholders (A) enters into a transaction with any person or entity (including an issuance of options or the sale of equity interests in or assets of the Company) that establishes a value for the Company on a per share basis equal to at least $900 per Share or (B) receives a valuation from the Company’s usual financial advisor, or from another financial firm retained by the Company for the purpose of obtaining such valuation, that establishes a value for the Company on a per share basis equal to at least $900 per Share. Notwithstanding the above, if the Common Stock of the Company is or becomes listed on a national security exchange, Supplemental Option 3 will vest and become exercisable as to 100 percent (100%) of the total number of Shares subject to Supplemental Option 3 if the future closing price is equal to or exceeds 9.0 times the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange. Exercise price for the Supplemental Option 3 will be the closing price of the Company’s Common Stock as of the first date that such Common Stock is listed and traded on that exchange.
 
  6.  
Notwithstanding the foregoing, the options granted under this Amendment shall be cancelled and all rights to such options for shares of common stock and the changes in vesting and exercise price shall be forfeited in their entirety if the Company does not engage in a share exchange or reverse merger with a public shell company on or before October 31, 2009.

 

 


 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the 14th day of September, 2009.
                     
SANUWAVE, Inc.       OPTIONHOLDER    
 
                   
By:
                   
                 
 
  Name:           Barry J. Jenkins    
 
     
 
           
 
  Title:                
 
     
 
           

 

 


 

AMENDMENT TO NONSTATUTORY STOCK OPTION AWARD
AND NONSTATUTORY SUPPLEMENTAL
STOCK OPTION AGREEMENTS
SCHEDULE A
         
Date Option granted:
  October 24, 2006
Date Option expires:
  October 24, 2016
 
       
Options:
       
Original Number of shares granted
  3,057.75 shares
Additional Number of shares granted in 2008
  6,739.05 shares
Additional Number of shares granted under this Amendment:
  603.50 shares
 
       
Supplemental Option 1:
       
Original Number of shares granted
  294.00 shares
Additional Number of shares granted in 2008
  484.82 shares
Additional Number of shares granted under this Amendment:
  237.10 shares
 
       
Supplemental Option 2:
       
Original Number of shares granted
  294.00 shares
Additional Number of shares granted in 2008
  484.82 shares
Additional Number of shares granted under this Amendment:
  237.10 shares
 
       
Supplemental Option 3:
       
Original Number of shares granted
  441.00 shares
Additional Number of shares granted in 2008
  727.22 shares
Additional Number of shares granted under this Amendment:
  355.60 shares
 
Exercise Price of Option (per Share):
    $ 100.00  

 

 


 

         
    Total Number of Shares    
    in Installment    
Date Installment   (including original grant, 2008 grant,   Incentive or
First Exercisable   and Options Granted Under This Amendment)   Nonstatutory Option
 
       
Vested*
  7,800.22 shares of Nonstatutory Options   Nonstatutory Stock
 
  761.94 shares of Supplemental Option 1   Nonstatutory Stock
 
  761.94 shares of Supplemental Option 2   Nonstatutory Stock
 
  1,142.86 shares of Supplemental Option 3   Nonstatutory Stock
 
       
April 10, 2010*
  2,600.08 shares of Nonstatutory Options   Nonstatutory Stock
 
  253.98 shares of Supplemental Option 1   Nonstatutory Stock
 
  253.98 shares of Supplemental Option 2   Nonstatutory Stock
 
  380.96 shares of Supplemental Option 3   Nonstatutory Stock
     
*  
All Supplemental Options are subject to additional vesting and exercise requirements as described in each individual stock option agreement.

 

 

Exhibit 10.11
Execution Copy
MANAGEMENT STOCKHOLDERS AGREEMENT
MANAGEMENT STOCKHOLDERS AGREEMENT dated as of December 19, 2005 (this “ Agreement ”) among SanuWave, Inc., a Delaware corporation (the “ Company ”), Prides Capital Fund I, L.P., a Delaware limited partnership (“ PC ”) and each of the holders of Common Stock (as defined herein) (each a “ Management Stockholder ”). Each of the parties to this Agreement (other than the Company) and any other Person (as hereinafter defined) who or which shall become a party to or agree to be bound by the terms of this Agreement after the date hereof is sometimes hereinafter referred to as a “ Stockholder .”
WITNESSETH:
WHEREAS, the Management Stockholder has purchased shares of common stock of the Company, par value $0.01 per share (“ Common Stock ”); and
WHEREAS, the parties hereto desire to restrict the sale, assignment, transfer, encumbrance or other disposition of the Shares (as hereinafter defined) and to provide for certain rights and obligations and other agreements in respect of the Shares and the Company, all as hereinafter provided.
NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions . As used in this Agreement, the following terms have the following meanings:
Affiliate ”, as applied to any Person, shall mean any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition “ control ” (including, with correlative meanings, the terms “ controlling ”, “ controlled by ” and “ under common control with ”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities (the ownership of more than 50% of the voting securities of an entity shall for purposes of this definition be deemed to be “control”), by contract or otherwise.
Cost ” shall mean the purchase price per share of Common Stock paid by the applicable Management Stockholder determined by dividing (x) the total purchase price paid by such Management Stockholder on the date of purchase of such share by (y) the number of shares of Common Stock purchased by such Management Stockholder on such date, as adjusted by the Board of Directors of the Company in good faith and on a consistent basis to reflect stock splits, stock dividends, recapitalizations and other similar transactions.

 

 


 

Disposition ” shall mean a direct or indirect, transfer, sale, assignment, pledge, hypothecation, encumbrance, or other disposition of, all or any portion of any Shares or any economic interest therein (other than a disposition to a Permitted Transferee).
Employment Agreement ” shall mean the applicable employment agreement between such Management Stockholder and the Company (and/or, if applicable, the Company’s Subsidiaries).
Fair Market Value ” shall mean on a given date, (i) if there is a public market for the shares on such date, the average high and low closing bid prices of the Shares, as applicable, on such stock exchange on which the Shares are principally trading on the date in question, or if there were no sales on such date, on the closest preceding date on which there were sales of Shares, or (ii) if there is no public market for the Shares on such date, as determined in good faith by the Board of Directors of the Company. The determination of Fair Market Value will not give effect to any restrictions on transfer of the shares or the fact that such shares would represent a minority interest in the Company. If the applicable Management Stockholder disagrees in good faith with the determination of Fair Market Value by the Board of Directors of the Company, the applicable Management Stockholder shall notify the Board of Directors in writing no later than 20 days following its determination and shall set forth his or her reason(s) for disagreement and his or her assessment of Fair Market Value. If the Board of Directors and the applicable Management Stockholder are unable to reach agreement regarding Fair Market Value in the 30 days following the receipt by the Board of Directors of the applicable Management Stockholder’s notification, a neutral third party shall be mutually selected to determine the Fair Market Value. The costs and expenses of such neutral third party’s decision shall be borne by the applicable Management Stockholder, unless the neutral third party assesses the Fair Market Value to be greater than 110% of the determination of Fair Market Value by the Board of Directors.
Permitted Transferee ” shall mean: (i) any Affiliate of PC, (ii) the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of such Stockholder (or its Permitted Transferees), (iii) for estate planning purposes, any trust, the beneficiaries of which include only Permitted Transferees referred to in clauses (i) and (ii) and spouses and lineal descendants of Permitted Transferees referred to in clause (ii), (iv) a corporation or partnership, a majority of the equity, of which is owned and controlled by PC or Permitted Transferees referred to in clauses (i), (ii) or (iii) and (v) any bank or financial institution to which a bona fide pledge of Shares is made, provided that immediately following any foreclosure upon such pledged Shares, such bank or financial institution shall cease to be a Permitted Transferee for all purposes of this Agreement; provided , further that any such Permitted Transferee referred to in the foregoing clauses agrees in writing to be bound by the terms of this Agreement in accordance with Section 2.2.
Person ” shall mean an individual, partnership, corporation, business trust, joint stock company, limited liability company, unincorporated association, joint venture or other entity of whatever nature.

 

 


 

Public Offering ” shall mean any public offering of equity securities of the Company pursuant to an effective registration statement under the Securities Act.
Securities Act ” shall mean the United States Securities Act of 1933, as amended.
Shares ” shall mean, with respect to any Stockholder, any and all shares of Common Stock, preferred stock or other capital stock of the Company, whether now owned or hereafter acquired (including upon exercise of options, preemptive rights or otherwise), held by such Stockholder.
Subsidiary ” shall mean, with respect to any Person, any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar function at the time directly or indirectly owned by such Person.
Third Party ” shall mean any prospective Transferee of Shares (other than the Company) that is not a Permitted Transferee of the Stockholder proposing the Transfer of such Shares to such prospective Transferee.
Transferee ” shall mean any Person who or which acquires Shares from a Stockholder or a Transferee (including Permitted Transferees) of a Stockholder subject to this Agreement.
ARTICLE II
CERTAIN RESTRICTIONS ON TRANSFERS
Section 2.1. Transfers in Accordance with this Agreement . No Management Stockholder shall, directly or indirectly, transfer, sell, assign, pledge, hypothecate, encumber, or otherwise dispose of, all or any portion of any Shares or any economic interest therein (including without limitation by means of any participation or swap transaction) (each, a “ Transfer ”) to any Person, except in compliance with the Securities Act, applicable state and other securities laws and this Agreement. Any attempt to Transfer any Shares in violation of the terms of this Agreement shall be null and void, and neither the Company, nor any transfer agent shall register upon its books any Transfer of Shares by a Management Stockholder to any Person except a Transfer in accordance with this Agreement.
Section 2.2. Agreement to be Bound . No Transfer of Shares (other than Transfers in a Public Offering, if any) by a Management Stockholder shall be effective unless such Transferee, if not already a party hereto, shall have executed and delivered to the Company and PC, as a condition precedent to such Transfer, an instrument or instruments reasonably satisfactory to such parties confirming that the Transferee agrees to be bound by the terms of this Agreement with respect to the Shares so Transferred to the same extent applicable to the Transferor thereof.

 

 


 

Section 2.3. Share Register . A copy of this Agreement shall be kept with the records of the Company, and the share register of the Company shall contain a notation, so long as such notation is true, with respect to all Shares subject to this Agreement reading substantially as follows:
THE SHARES OF SANUWAVE, INC. HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY BE OFFERED AND SOLD ONLY IF SO REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
Section 2.4. Restrictions on Transfer of Shares . No Management Stockholder shall make a Disposition of any of its Shares until the earlier to occur of (i) the second anniversary of a Public Offering and (ii) the seventh anniversary of the date that such Management Stockholder becomes a party hereto, except for Dispositions (x) to a Permitted Transferee in accordance with the terms hereof, including Section 2.2, (y) in accordance with and pursuant to Sections 2.5 or 2.6 hereof or (z) with the prior written consent of the Company and PC.
Section 2.5. Tag-Along Right .
(a) If at any time PC (and/or its Permitted Transferees) proposes to Transfer Shares held by it to any Person (each, a “Proposed Transferee”), then PC shall send written notice to each Management Stockholder (and/or its Permitted Transferees) which shall state (i) that PC and/or its Permitted Transferees desires to make such a Transfer, (ii) the identity of the Proposed Transferee and the number of Shares proposed to be sold or otherwise transferred, (iii) the proposed purchase price per Share to be paid and the other terms and conditions of such Transfer and (iv) the projected closing date of such Transfer, which in no event shall be prior to 20 days after the giving of such written notice to the Management Stockholder.
(b) For a period of 20 days after the giving of the notice pursuant to clause (a) above, each Management Stockholder shall have the right to sell to the Proposed Transferees in such Transfer at the same price and upon the same terms and conditions as PC (and/or its Permitted Transferees) (which terms and conditions may include making representations or providing indemnities; provided , however , that in no event shall such Management Stockholder be required to make any representations or provide any indemnities other than (i) on a proportionate basis and (ii) with respect to matters relating solely to such Management Stockholder (and/or its Permitted Transferees), such as representations as to title to Shares to be transferred by such Management Stockholder and/or its Permitted Transferees) a percentage of the total number of Shares proposed to be Transferred to such Proposed Transferee equal to the percentage obtained by dividing (x) the number of Shares of the same series and class then held by such Management Stockholder (if any) by (y) the total number of such Shares then outstanding, and the number of Shares that may be Transferred by PC and their Permitted Transferees in such proposed Transfer shall be commensurately reduced.
(c) The rights of each Management Stockholder under Section 2.5(b) shall be exercisable by delivering written notice thereof, prior to the expiration of the 20-day period referred to in clause (b) above, to PC with a copy to the Company. The failure of any Management Stockholder to respond within such period to PC shall be deemed to be a waiver of such Management Stockholder’s rights under this Section 2.5 with respect to that Transfer, so long as such Transfer takes place within a period of 120 days following the expiration of such 20-day period.

 

 


 

(d) In the event that any Management Stockholder exercises rights under Section 2.5(b) and following such exercise there is a change in the price or terms of the proposed transaction between PC and the Proposed Transferee, then PC shall promptly notify such Management Stockholder of the revised price or terms and, if the price has changed at all or the other terms have changed materially, such Management Stockholder shall have the right to rescind the exercise of its rights under Section 2.5(b) by notice to PC within five business days of receipt of the notice from PC.
Section 2.6. Drag-Along Right . If at any time PC (and/or its Permitted Transferees) propose to sell or cause the sale of more than 50% of the outstanding Shares to a Third Party in any transaction or series of related transactions, then PC shall have the right to deliver a written notice (a “ Buyout Notice ”) to each Management Stockholder which shall state (i) that PC proposes to effect such transaction, (ii) the identity of the Third Party and the proposed purchase price per Share to be paid and any other terms and conditions, and (iii) the projected closing date of such sale. Each Management Stockholder agrees that, upon receipt of a Buyout Notice, such Management Stockholder (and its Permitted Transferees) shall be obligated to sell in such transaction the same percentage of the Shares held by such Management Stockholder (and/or its Permitted Transferees) as PC (and/or its Permitted Transferees) proposes to sell (on an as-converted basis) upon the terms and conditions of such transaction (and otherwise take all necessary action to cause consummation of the proposed transaction); and provided, farther, that in no event shall any Management Stockholder be required to make any representations or provide any indemnities other than (A) on a proportionate basis and (B) with respect to matters relating solely to such Management Stockholder (and/or its Permitted Transferees), such as representations as to title to Shares to be transferred by such Management Stockholder (and/or its Permitted Transferees).
ARTICLE III
MISCELLANEOUS
Section 3.1. No Inconsistent Agreements . The Company will not hereafter enter into any agreement with respect to its securities which is inconsistent with the rights granted to the Stockholders in this Agreement.
Section 3.2. Recapitalization, Exchanges, etc. In the event that any capital stock or other securities are issued in respect of, in exchange for, or in substitution of, any Shares by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to Stockholders or combination of the Shares or any other change in capital structure of the Company, appropriate adjustments shall be made with respect to the relevant provisions of this Agreement so as to fairly and equitably preserve, as far as practicable, the original rights and obligations of the parties hereto under this Agreement and the term “Shares,” as used herein, shall be deemed to include shares of such capital stock or other securities, as appropriate.

 

 


 

Section 3.3. Successors and Assigns . This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, and their respective successors and permitted assigns.
Section 3.4. No Waivers, Amendments .
(a) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
(b) Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective unless such modification, amendment or waiver is approved in writing (i) by the Company, (ii) the Management Stockholders representing a majority of the Shares held by all Management Stockholders and (iii) PC; provided , however , that no such modification, amendment or waiver shall be effective against any Management Stockholder without such Management Stockholder’s consent unless such modification, amendment or waiver does not treat such Management Stockholder differently in any material respect from all other Management Stockholders holding the same class or series of Shares. Notwithstanding the foregoing, the Company may from time to time add additional holders of Shares or other equity securities of the Company as parties to this Agreement with the consent of PC and without the consent or additional signatures of the Management Stockholders (and amend and/or restate the Agreement, including any schedules or exhibits hereto, to reflect such additions), and upon the Company’s receipt of such additional holder’s executed signature pages hereto, such additional holders shall be deemed to be a party hereto and such additional signature pages shall be a part of this Agreement.
Section 3.5. Notices . All notices, requests and other communications to any party hereunder shall be in writing (including telex, telecopier or similar writing) and shall be given to such party at its address or telecopier number set forth below, or such other address or telecopier number as such party may hereinafter specify for the purpose to the party giving such notice. Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate answerback is received or, (b) if given by overnight courier or express mail service, when delivery is confirmed or, (c) if given by any other means, when delivered at the address specified in this Section 3.5. In each case, notice shall be sent to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
if to the Company:
SanuWave, Inc.
44 Montgomery Street, Suite 860 San
Francisco, California 94104
Attn: Chris Puscasiu
Telecopy: (801) 344-8773

 

 


 

with a copy to:
Simpson Thacher & Bartlett LLP
3330 Hillview Avenue
Palo Alto, California 94304
Attention: Michael J. Nooney
Telecopier: (650) 251-5002
if to PC:
c/o Prides Capital, LLC
44 Montgomery Street, Suite 860
San Francisco, California 94104
Attn: Chris Puscasiu
Telecopy: (801) 344-8773
with a copy thereof to:
Simpson Thacher & Bartlett LLP
3330 Hillview Avenue
Palo Alto, California 94304
Attention: Michael J. Nooney
Telecopy: (650) 251-5002
if to a Management Stockholder, to the most recent address in the personnel records of the Company.
Section 3.6. Term of Agreement . This Agreement shall become effective as of the date hereof and shall terminate upon the expiration of the transfer restrictions set forth in Section 2.4 hereof.
Section 3.7. Inspection . So long as this Agreement shall be in effect, this Agreement and any amendments hereto shall be made available for inspection by a Stockholder at the principal offices of the Company.

 

 


 

Section 3.8. Governing Law; Submission to Jurisdiction . This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts executed and to be performed entirely within that state. Each of the parties to this Agreement irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any California state court, or Federal court of the United States of America, sitting in the Northern District of California, and any appellate court to any thereof, in any action or proceeding arising out of or relating to this Agreement or the agreements delivered in connection with this Agreement or the transactions contemplated by this Agreement or by the agreements delivered in connection with this Agreement or for recognition or enforcement of any judgment relating thereto, and each of the parties irrevocably and unconditionally (i) agrees not to commence any such action or proceeding except in such courts, (ii) agrees that any claim in respect of any such action or proceeding may be heard and determined in such California state court or, to the extent permitted by law, in such Federal court, (iii) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such California state or Federal court, and (iv) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such California state or Federal court. Each of the parties to this Agreement agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Section Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
Section 3.9. Entire Agreement . This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, written or oral, relating to the subject matter hereof.
Section 3.10. Severability . Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdictions, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law.
Section 3.11. Counterparts . This Agreement may be signed in counterparts, each of which shall constitute an original and which together shall constitute one and the same agreement.
Section 3.12. Confidentiality . Except as required by law or the rules of any applicable stock exchange, any announcements or similar publicity or any disclosure to any person other than the respective advisors of PC or any Management Stockholder by PC or such Management Stockholder regarding the contents of this Agreement or any other agreement between the parties entered into pursuant thereto shall be agreed upon by PC and the Company prior to such disclosure and, except as provided herein, any information relating to the matters described above hereof shall be kept confidential by the parties hereto (and their respective representatives and agents).
Section 3.13. Parties in Interest . This Agreement and all the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and Permitted Transferees. Neither this Agreement nor any of their rights hereunder shall be assigned by any Management Stockholder to any Person who is not a Permitted Transferee without the prior written consent of PC and the Company.

 

 


 

Section 3.14. Enforcement; Further Assurances .
(a) The parties hereto 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. It is accordingly agreed that the parties shall be entitled to specific performance of the terms hereof, this being in addition to any other remedy to which they are entitled at law or in equity.
(b) The parties hereto agree to execute, acknowledge, deliver, file and record such further certificates, amendments, instruments, agreements and documents, and to do all such other acts and things, as may be required by law or as may be necessary or advisable to carry out the intent and purposes of this Agreement.

 

 


 

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth above.
         
  SANUWAVE, INC.
 
 
  By:   /s/ Chris Puscasiu   
    Name:   Chris Puscasiu   
    Title:   Director   
 
PRIDES CAPITAL FUND I, L.P.
 
 
  By:   Prides Capital Partners, LLC,
its general partner  
 
     
  By:   /s/ Christian Puscasiu    
    Name:   Christian Puscasiu   
    Title:   Managing Member   
 
  MANAGEMENT STOCKHOLDER
 
 
  By:   /s/ Christopher M. Cashman   
    Name:   Christopher M. Cashman   

 

 

Exhibit 10.12
Amendment to Management Stockholders Agreement of SANUWAVE, Inc.
The Management Stockholders Agreement of SANUWAVE, Inc., dated as of December 19, 2005, is hereby amended effective October 24, 2006 as follows:
1. The first paragraph shall be amended to modify the definition of “Management Stockholder” to read:
“...each of the holders of Common Stock (as defined herein) designated by the Board of Directors of the Company as provided in Section 3.4(b) (each, a “Management Stockholder”).”
2. The definition of “Shares” contained in Section 1.1 shall be amended to add the following language to the end thereof:
“, to the extent that such shares are designated by the Board of Directors of the Company as being covered by this Agreement.”
3. The term “Stockholders” as used in Section 3.2 shall be changed to read “stockholders”.
4. The address for the Company as set forth in Section 3.5 shall be changed to reflect the Company’s new address and contact information: SANUWAVE, Inc., 11680 Great Oaks Way, Suite 350, Alpharetta, GA 30022, Attention: Chris Cashman, Telecopy: (866) 641-1293.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date set forth above.
                 
SANUWAVE, Inc.            
 
               
By:
          By:    
 
               
 
  Christopher M. Cashman,           Christopher M. Cashman,
 
  President and Chief Executive Officer           Management Stockholder
 
               
PRIDES CAPITAL FUND I, L.P.            
 
               
By:
  Prides Capital Partners, LLC,       By:    
 
               
 
  its general partner           Barry J. Jenkins,
Management Stockholder By:
 
               
By:
               
 
               
 
  Christian Puscasiu, Managing Member            

 

Exhibit 10.13
SECOND AMENDMENT TO THE MANAGEMENT STOCKHOLDERS AGREEMENT
This Second Amendment to the Management Stockholders Agreement, dated September  _____ , 2009, (this “ Amendment ”), is entered into by and among Sanuwave, Inc., a Delaware corporation (the “ Company ”), Prides Capital Fund I, L.P., a Delaware limited partnership (“ PC ”), Christopher M. Cashman and Barry J. Jenkins, and amends that certain Management Stockholders Agreement, made effective as of December 19, 2005, by and among the Company, PC, Christopher M. Cashman and Barry J. Jenkins, as amended by the first amendment on October 24, 2006 (the “ Agreement ”). Terms not defined herein have the meanings ascribed to them in the Agreement.
WITNESSETH:
WHEREAS , reference is hereby made to that certain Agreement and Plan of Merger (the “ Merger Agreement ”) to be entered into by and among the Company, Rub Music Enterprises, Inc., a Nevada corporation (“ RME ”) and RME Delaware Merger Sub, Inc., a Delaware corporation (“ Merger Sub ”), pursuant to which Merger Sub will be merged with and into the Company, with the Company as the surviving corporation (the “ Merger ”);
WHEREAS , pursuant to the Merger Agreement, all of the shareholders of the Company will exchange all of their ownership interest in the Company, including any options and warrants, for an ownership interest in RME, and the Company will become a wholly-owned subsidiary of RME;
WHEREAS , in anticipation of the Merger, PC and the holders of Common Stock listed on the signature pages of the Agreement have each entered into Lock-Up Agreements with the Company whereby each such shareholder agrees that it will not transfer any of the Company’s (or its successors and assigns) common stock, preferred stock, options or warrants or other rights issued by the Company (or its successors and assigns) to the shareholders, until January 1, 2011 (the “ Lock-Up Agreements ”);
WHEREAS , the stock transfer restrictions in Section 2.4 of the Agreement conflict with the stock transfer restrictions in the Lock-Up Agreements; and
WHEREAS , the parties hereto, in accordance with Section 3.4(b) of the Agreement, desire to amend the Agreement to eliminate the inconsistency of the restrictions on the transfer of shares set forth in Section 2.4 of the Agreement.
NOW THEREFORE , in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
  1.  
This Amendment shall become effective upon the closing of the Merger in accordance with the Merger Agreement.
  2.  
Section 2.4 of the Agreement shall be deleted in its entirety.

 

 


 

  3.  
The parties to this Amendment agree that, effective upon the closing of the Merger, the limitations contained in the Agreement relating to the Shares will, upon the closing of the Merger, relate to and bind the parties with respect to the shares of RME received in exchange for the Shares pursuant to the Merger, the same as if RME and its shareholders had been the original parties to the Agreement.
  4.  
Except as otherwise set forth herein, all the terms and conditions of the Agreement shall remain in full force and effect.
  5.  
To the extent that any provision of this Amendment is inconsistent with, conflicts with, or varies from any provision of the Agreement, the provisions of this Amendment shall control.
  6.  
This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same agreement, it being understood that all of the parties need not sign the same counterpart. In the execution of this Amendment, facsimile or scanned and emailed manual signatures shall be fully effective for all purposes.
  7.  
In the event the Merger does not close, this Agreement shall become null and void.
(signatures below)

 

 


 

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
             
SANUWAVE, INC.    
 
           
By:
           
         
    Christopher M. Cashman
President and CEO
   
 
           
PRIDES CAPITAL FUND I, L.P.    
 
           
By:
           
         
 
  Name:        
 
     
 
   
 
  Title:        
 
     
 
   
 
           
     
Christopher M. Cashman, individually    
 
           
     
Barry J. Jenkins, individually    
Signature Page to the Second Amendment to the Management Stockholders Agreement

 

 

Exhibit 16.1
September 25, 2009
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Ladies and Gentlemen:
We have read the statements of Rub Music Enterprises, Inc. pertaining to our firm included under Item 4.01 of the Form 8-K to be filed on or about September 25, 2009, and agree with such statements as they pertain to our firm. We have no basis to agree or disagree with any other statements of the registrant contained therein.
Sincerely,
/s/ Pritchett, Siler & Hardy, P.C.
PRITCHETT, SILER & HARDY, P.C.

 

Exhibit 21.1
List of Subsidiaries
Direct Subsidiary of Rub Music Enterprises, Inc.
  1.  
Sanuwave, Inc., a Delaware corporation
Subsidiaries of Sanuwave, Inc. — Indirect Subsidiaries of Rub Music Enterprises, Inc.
  2.  
Sanuwave Services, LLC, a Delaware limited liability company
 
  3.  
HT Orthotripsy Management Company, LLC, a Delaware limited liability company
 
  4.  
Sanuwave I, LLC, a Delaware limited liability company
 
  5.  
Sanuwave Equipment, LLC, a Delaware limited liability company
 
  6.  
Sanuwave AG, a company organized under the laws of Switzerland
 
  7.  
Sanuwave Holding, AG, a company organized under the laws of Switzerland

 

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation in the current report of Rub Music Enterprises, Inc., on Form 8-K, of our report dated April 6, 2009, except as to Note 1, 2, 3, 4, 12, 14, and 16, as to which the date is August 25, 2009, with respect to the consolidated financial statements of SANUWAVE, Inc. for the years ended December 31, 2008 and 2007.
/s/ HLB Gross Collins, P.C.
Certified Public Accountants
Atlanta, Georgia
September 25, 2009

 

Exhibit 99.1
SANUWAVE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008 and 2007

 

 


 

SANUWAVE, INC. AND SUBSIDIARIES
CONTENTS
         
    Pages  
 
       
Report of Independent Registered Accounting Firm
    1  
 
       
Consolidated Financial Statements
       
 
       
Balance Sheets
    2  
 
       
Statements of Income and Comprehensive Loss
    3  
 
       
Statements of Stockholders’ Equity (Deficit)
    4  
 
       
Statements of Cash Flows
    5  
 
       
Notes to Consolidated Financial Statements
    6-27  

 

 


 

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 Company’s 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 Company’s 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 Company’s 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
                 
    2008     2007  
ASSETS
 
 
CURRENT ASSETS
               
Cash
  $ 543,626     $ 693,033  
Accounts receivable — trade, net of allowance for doubtful accounts of $64,490 in 2008 and $90,353 in 2007 (Note 1)
    52,414       110,402  
Inventory (Note 3)
    684,750       691,857  
Prepaid expenses
    106,617       328,969  
Current assets related to discontinued operations (Note 2)
    1,285,017       2,207,794  
 
           
TOTAL CURRENT ASSETS
    2,672,424       4,032,055  
 
               
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Note 4)
    279,791       439,556  
OTHER ASSETS
    81,017       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.

 

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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 Company’s 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 Company’s foreign operations are the local currencies. The financial statements of the Company’s 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 management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein. Significant estimates include the recording of allowances for doubtful accounts, 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 asset’s 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 Company’s 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 Company’s 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 acquirer’s 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 parent’s 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 entity’s 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 Commission’s 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 Company’s 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 Company’s 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  
 
           
(3)  
Inventory
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
(5)  
Intangible assets
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
(6)  
Accrued expenses
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  
 
           
(7)  
Income taxes
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 Company’s 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.
(10)  
Common stock
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 holder’s 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.
(13)  
401k plan
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.
(14)  
Going concern
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 Company’s current liabilities exceeded its current assets by approximately $418,000 and $500,000, respectively. Those factors create an uncertainty about the Company’s ability to continue as a going concern. Management of the Company believes the Company’s 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 Company’s 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 Company’s 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
(16)  
Subsequent event
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 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 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 Company’s 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 Company’s 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
6.  
Inventory
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.
8.  
Intangible assets
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.
9.  
Income taxes
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 Company’s 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 holder’s 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.
13.  
401k plan
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.
14.  
Going concern
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 Company’s ability to continue as a going concern. Management of the Company believes the Company’s 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 Company’s 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
16.  
Subsequent Events
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 Company’s 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 RME’s common stock, warrants to purchase 1,106,627 shares of RME’s common stock at $4.00 per share, and warrants to purchase an additional 1,106,627 shares of RME’s 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 RME’s common stock at $4.00 per share.
As a result of the Merger and Share Repurchase, the stockholders of SANUWAVE control approximately 88% of RME’s 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, RME’s 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.