2.	Summary of significant accounting policies

Description of the business

– SANUWAVE Health, Inc. and subsidiaries (the “Company”) is an acoustic pressure shock wave technology company using a patented system of noninvasive, high-energy, acoustic pressure shock waves for indications such as regenerative medicine and other applications. The Company’s initial focus is regenerative medicine – utilizing noninvasive (extracorporeal), acoustic pressure shock waves to produce a biological response resulting in the body healing itself through the repair and regeneration of skin, musculoskeletal tissue, and vascular structures. The Company’s lead regenerative product in the United States is the dermaPACE

device, used for treating diabetic foot ulcers, which was subject to

two

double-blinded, randomized Phase II clinical studies. The results of these clinical studies were submitted to the FDA in late

July

2016

for possible FDA approval in

2017.

Our revenues are generated from sales of the European Conformity Marking (CE Mark) devices and accessories in Europe, Canada, Asia and Asia/Pacific as we do not currently have any approved devices or accessories to sell in the United States.

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 subsidiary have been translated into United States dollars in accordance with ASC

830,

Foreign Currency Matters

, 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 in other comprehensive income (loss) in the consolidated statements of comprehensive loss and as cumulative translation adjustments in accumulated other comprehensive income (loss) in the consolidated statements of stockholders’ deficit.

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 reserves for inventory, valuation of derivatives, accrued expenses, the determination of the valuation allowances for deferred taxes, estimated fair value of stock-based compensation, estimated fair value of warrant liabilities and the estimated fair value of intangible assets.

Cash and cash equivalents

- For purposes of the consolidated financial statements, liquid instruments with an original maturity of

days or less when purchased are considered cash and cash equivalents. The Company maintains its cash in bank accounts which

may

exceed federally insured limits.

Concentration of credit risk and limited suppliers

- 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. Two distributors accounted for

50%

and

32%

of revenues for the year ended

December

31,

2016,

and

87%

and

10%

of accounts receivable at

December

31,

2016.

Two distributors accounted for

37%

and

29%

of revenues for the year ended

December

31,

2015,

and

63%

and

10%

of accounts receivable at

December

31,

2015.

We depend on suppliers for product component materials and other components that are subject to stringent regulatory requirements. We currently purchase most of our product component 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. 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.

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. Receivables are generally considered past due if greater than

days old. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts.

Inventory

- Inventory consists of finished medical equipment and parts and is stated at the lower of cost or market, which is valued using the

first

in,

first

out (“FIFO”) method. Market is based upon realizable value less allowance for selling and distribution expenses.

The Company analyzes its inventory levels and writes down inventory that has, or is expected to, become obsolete.

Depreciation of property and equipment

- The straight-line method of depreciation is used for computing depreciation on property and equipment. Depreciation is based on estimated useful lives as follows: machines and equipment,

years; old or used devices,

years; new devices,

years; office and computer equipment,

years; furniture and fixtures,

years; and software,

years.

Intangible assets

- Intangible assets subject to amortization consist of patents which are recorded at cost. Patents are amortized on a straight-line basis over

11.4

years.

he Company regularly reviews intangible assets to determine if facts and circumstances indicate that the useful life is shorter than the Company originally estimated or that the carrying amount of the assets

may

not be recoverable. Factors the Company considers important and could trigger an impairment review include the following:

●

Significant delays or obstacles encountered in the dermaPACE device clinical trial and PMA application;

●

Significant changes in the manner in which the Company uses its assets or significant changes in the Company’s overall business strategy; and

●

Significant underperformance of the Company’s assets relative to future operating results.

If such facts and circumstances exist, the Company assesses the recoverability of the intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the intangible asset exceeds its fair value.

Fair value of financial instruments

- The book values of accounts receivable, accounts payable, and other financial instruments approximate their fair values, principally because of the short-term maturities of these instruments.

The Company has adopted ASC

820

10,

Fair Value Measurements

, which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The framework that is set forth in this standard is applicable to the fair value measurements where it is permitted or required under other accounting pronouncements.

The ASC

820

hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in

one

of the following

three

categories:

Level

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

Level

- Inputs other than quoted prices included within Level

that are observable for the asset or liability, either directly or indirectly; and

Level

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

The Company accounts for derivative instruments under ASC

815,

Accounting for Derivative Instruments and Hedging Activities

, as amended and interpreted. ASC

815

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

of the fair value hierarchy.

The following table sets forth a summary of changes in the fair value of the derivative liability for the year ended

December

31,

2016:

	Warrant
	Liability
Balance at December 31, 2015	$	138,100
New issuances		34,441
Warrant redemption		(1,154,139	)
Change in fair value		2,223,718
Balance at December 31, 2016	$	1,242,120

The Company’s notes payable, related parties had an aggregate outstanding principal balance of

$5,364,572,

net of

$8,171

debt discount at

December

31,

2016

and

$5,348,112,

net of

$24,631

debt discount at

December

31,

2015,

respectively. Interest accrues on the notes at a rate of

eight

percent per annum, effective

June

15,

2015.

The fair value was determined using estimated future cash flows discounted at current rates, which is a Level

measurement. The estimated fair value of the Company’s notes payable, related parties was

$4,923,723

and

$4,844,792

December

31,

2016

and

2015,

respectively.

Impairment of long-lived assets

– The Company reviews long-lived assets 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.

Revenue recognition

- Sales of medical devices, including related applicators, are recognized when shipped to the customer. Shipments under agreements with distributors are invoiced at a fixed price, are not subject to return, and payment for these shipments is not contingent on sales by the distributor. The Company recognizes revenues on shipments to distributors in the same manner as with other customers. Fees from services performed are recognized when the service is performed.

Shipping and handling costs

- Shipping charges billed to customers are included in revenues. Shipping and handling costs have been recorded in cost of revenues.

ncome taxes

- Income taxes are accounted for utilizing the asset and liability method prescribed by the provisions of ASC

740,

Income Taxes

, Accounting for Income Taxes

. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis 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, including loss carryforwards, when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

A provision of ASC

740,

Income Taxes

, 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. ASC

740

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.

The Company will recognize in income tax expense interest and penalties related to income tax matters. For the years ended

December

31,

2016

and

2015,

the Company did not have any amounts recorded for interest and penalties.

Loss

per share

- The Company calculates net income (loss) per share in accordance with ASC

260,

Earnings Per Share

. Under the provisions of ASC

260,

basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents then outstanding.

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 years ended

December

31,

2016

and

2015,

respectively, all potentially dilutive shares were anti-dilutive and therefore excluded from the computation of diluted net loss per share. The anti-dilutive equity securities totaled

94,290,134

shares and

48,376,071

shares at

December

31,

2016

and

2015,

respectively.

Comprehensive income

– ASC

220,

Comprehensive Income

, Reporting Comprehensive Income 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. The only source of other comprehensive income (loss) for the Company, which is excluded from net income (loss), is foreign currency translation adjustments.

Stock-based compensation

- The Company uses the fair value method of accounting prescribed by ASC

718,

Compensation – Stock Compensation

, Accounting for Stock-Based Compensation for its employee stock option program. Under ASC

718,

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 up to

three

years).

Research and

evelopment

- Research and development costs are expensed as incurred. Research and development costs include payments to

third

parties that specifically relate to the Company’s products in clinical development, such as payments to contract research organizations, clinical investigators, clinical monitors, clinical related consultants and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits and travel) for employees of the regulatory affairs, clinical affairs, quality assurance, and research and development departments are classified as research and development costs.

Recent pronouncements

– New accounting pronouncements are issued by the Financial Standards Board (“FASB”) or other standards setting bodies that the Company adopts according to the various timetables the FASB specifies.

May

2014,

the FASB issued Accounting Standards Update No.

2014

09,

Revenue from Contracts with Customers

(ASU

2014

09),

which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU

2014

is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU

2014

defines a

five

-step process to achieve this core principle and, in doing so, more judgment and estimates

may

be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after

December

15,

2017,

and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU

2014

recognized at the date of adoption (which includes additional footnote disclosures). In

July

2015,

the FASB confirmed a

one

-year delay in the effective date of ASU

2014

09,

making the effective date for the Company the

first

quarter of fiscal

2019

instead of the current effective date, which was the

first

quarter of fiscal

2018.

August

2015,

the FASB issued ASU

2015

14,

Revenue from Contracts with Customers (Topic

606)

, deferring the effective date of ASU

2014

one

year. The Company can elect to adopt the provisions of ASU

2014

for annual periods beginning after

December

31,

2017,

including interim periods within that reporting period. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The Company is currently evaluating the impact of the pending adoption of ASU

2014

on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.

August

2014,

the FASB issued ASU

2014

15,

Presentation of Financial Statements – Going Concern (Subtopic

205

40):

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures in the notes to the financial statements. The amendments in this ASU should help reduce the diversity in the timing and content of disclosures in the notes to the financial statements. This guidance is effective for fiscal years, and interim periods within those fiscal years, ending after

December

15,

2016,

with early adoption permitted. The Company adopted this guidance in the

fourth

quarter of

2016.

April

2015,

the FASB issued ASU

2015

03,

Interest-Imputation of Interest (Subtopic

835

30):

Simplifying the Presentation of Debt Issuance Costs

. This ASU provides guidance that simplifies the presentation of debt issuance costs by amending the accounting guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The amendments are consistent with the accounting guidance related to debt discounts. This guidance is effective for the

first

interim or annual period beginning after

December

15,

2015.

The Company adopted this guidance in the

first

quarter of fiscal

2016.

July

2015,

the FASB issued Accounting Standards Update No.

2015

11,

Simplifying the Measurement of Inventory

(ASU

2015

11),

which proposed that inventory should be measured at the lower of cost and net realizable value for inventory that is measured using

first

-in,

first

-out (FIFO) or average cost. The main provision of ASU

2015

is that an entity should measure inventory at the lower or cost and net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This amendment does not apply to entities that measure inventory using last-in,

first

-out (LIFO) or the retail inventory method. The standard is effective for public entities for fiscal years beginning after

December

15,

2016,

including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period. The Company elected early adoption of this guidance as it more reasonably states inventory and adopted ASU

2015

effective

January

2016.

November

2015,

the FASB issued ASU

2015

17,

Income Taxes (Topic

740):

Balance Sheet

Classification of Deferred Taxes

. This ASU provides guidance that simplifies the presentation of deferred income taxes. This ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for financial statements issued for annual periods beginning after

December

15,

2016,

and interim periods within those annual periods. The implementation of this ASU is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

February

2016,

the FASB issued ASU No.

2016

02,

Leases (Topic

842)

, which requires lessees to recognize the most leases on the balance sheet. The provisions of this guidance are effective for the annual periods beginning after

December

15,

2018,

and interim periods within those years, with early adoption permitted. Management is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company’s financial position or results of operations.

March

2016,

the FASB issued ASU No.

2016

09,

Compensation – Stock Compensation (Topic

718).

This ASU provides

guidance to simplify several aspects of the accounting for share-based payments transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual and interim periods beginning after

December

31,

2016.

Early adoption is permitted for an entity in an interim or annual period. We are currently evaluating the effect that the updated standard will have on our financial statements, but expect the guidance will add modest volatility in our equity-based compensation expense, provision for income taxes, and net income (loss).

August

2016,

the FASB issued ASU No.

2016

15,

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

(Topic

230)

. This ASU will make

eight

targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU will be effective for fiscal years beginning after

December

15,

2017.

This standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. Management is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company’s financial position or results of operations.