SANUWAVE HEALTH, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2024
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ________ to
Commission File Number
000-52985
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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(
952
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656-1029
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which
registered
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None
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N/A
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N/A |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Yes
☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Yes
☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer ☐
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Accelerated filer ☐
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No ☒
As of
May 7
,
2024
there were issued and outstanding
1,145,974,342
shares of the registrant’s common stock, $0.001 par value per share.
SANUWAVE Health, Inc.
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Page
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PART I – FINANCIAL INFORMATION
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Item 1.
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4
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5
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6
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7
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8
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Item 2.
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15
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Item 3.
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18
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Item 4.
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19
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PART II – OTHER INFORMATION
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Item 1.
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20
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Item 1A.
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20
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Item 2.
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Item 3.
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20
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Item 4.
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20
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Item 5.
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20
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Item 6.
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20
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23
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Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. and its subsidiaries (“SANUWAVE,” the “Company,” “we,” “us,” and “our”) contains forward-looking statements. All statements in this
Quarterly Report on Form 10-Q, 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: our proposed
business combination with SEP Acquisition, Corp., results of operations, liquidity, and operations, restrictions and new regulations on our operations and processes, including the execution of clinical trials; the Company’s future financial
results, operating results, and projected costs; market acceptance of and demand for UltraMIST and PACE®; success of future business development and acquisition activities; management’s plans and objectives for future operations; industry
trends; regulatory actions that could adversely affect the price of or demand for our approved products; our intellectual property portfolio; our business, marketing and manufacturing capacity and strategy; estimates regarding our capital
requirements, the anticipated timing of the need for additional funds, and our expectations regarding future capital-raising transactions, including through investments by strategic partners for market opportunities, which may include strategic
partnerships or licensing agreements, or raising capital through the conversion of outstanding warrants or issuances of securities; product liability claims; economic conditions that could adversely affect the level of demand for or the cost of
our products; timing of clinical studies and any eventual U.S. Food and Drug Administration (“FDA”) approval of new products and new uses of our current products; financial markets; the competitive environment; supplier and customer disputes;
and our plans to remediate our material weaknesses in our disclosure controls and procedures and our internal control over financial reporting. 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 the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2023, filed on March 21, 2024. Other risks and uncertainties are and will be disclosed in the Company’s subsequent SEC filings, including this Quarterly Report on Form 10-Q. 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 the Company’s Annual Report on
Form 10-K for the year ended December 31, 2023, filed on March 21, 2024.
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” are to the consolidated business of the Company.
(UNAUDITED)
(In thousands, except share data)
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March 31, 2024
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December 31, 2023
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ASSETS
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Current Assets:
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Cash and cash equivalent
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$
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$
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Accounts receivable, net of allowance of $
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Inventory
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Prepaid expenses and other current assets
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Total Current Assets
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Property, equipment and other, net
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Intangible assets, net
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Goodwill
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| Total Non-current Assets |
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Total Assets
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$
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$
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LIABILITIES
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Current Liabilities:
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Senior secured debt, in default
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$
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$
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Convertible promissory notes payable
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Convertible promissory notes payable, related parties
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Asset-backed secured promissory notes
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Asset-backed secured promissory notes, related parties
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Accounts payable
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Accrued expenses
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Factoring liabilities
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Warrant liability
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Accrued interest
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Accrued interest, related parties
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Current portion of contract liabilities
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Other
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Total Current Liabilities
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Non-current Liabilities
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Lease liabilities
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Contract liabilities
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Total Non-current Liabilities
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Total Liabilities
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$
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$
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Commitments and Contingencies (Footnote 13)
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STOCKHOLDERS’ DEFICIT
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Preferred Stock, par value $
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$
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$
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Common stock, par value $
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Additional paid-in capital
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Accumulated deficit
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Accumulated other comprehensive loss
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Total Stockholders’ Deficit
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Total Liabilities and Stockholders’ Deficit
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$
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$
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The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands, except share data)
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Three Months Ended March 31,
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2024
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2023
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Revenue
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$
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$
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Cost of Revenues
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Gross Margin
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Operating Expenses:
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General and administrative
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Selling and marketing
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Research and development
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Depreciation and amortization
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Total Operating Expenses
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Operating Loss
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Other (Expense)/Income:
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Interest expense
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Interest expense, related party
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Loss on extinguishment of debt
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Change in fair value of derivative liabilities
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Other expense
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Other income
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Total Other Expense
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Net Loss
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Other Comprehensive Loss
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Foreign currency translation adjustments
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Total Comprehensive Loss
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$
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$
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Loss per Share:
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Basic and diluted
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$
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$
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| Weighted average shares outstanding | ||||||||
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Basic and diluted
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The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands, except share data)
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Three Months Ended March 31, 2024
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Common Stock
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Number of
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Accumulated
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| Shares | Other | |||||||||||||||||||||||
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Issued and
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Additional Paid-
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Accumulated
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Comprehensive
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| Outstanding |
Par Value
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in Capital
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Deficit
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Loss | Total | |||||||||||||||||||
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Balances as of December 31,
2023
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$
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$
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$
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(
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$
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$
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Foreign currency translation adjustment
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- |
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Net loss
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- |
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Balances as of March 31,
2024
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$
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$
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$
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(
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$
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$
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| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
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Number of
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Accumulated
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| Shares |
Other
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Issued and
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Additional Paid-
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Accumulated
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Comprehensive
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| Outstanding |
Par Value
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in Capital
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Deficit
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Loss | Total | |||||||||||||||||||
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Balances as of December 31,
2022
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$
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$
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$
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(
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$
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(
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$
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Shares issued for settlement of debt and warrants
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Foreign currency translation adjustment
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- |
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Net loss
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-
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(
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Balances as of March 31,
2023
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$
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$
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$
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(
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$
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(
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$
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(
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The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands)
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Three Months Ended March 31,
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2024
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2023
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Cash Flows - Operating Activities:
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Net loss
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$
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(
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$
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Adjustments to reconcile net loss to net cash used by operating activities
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Depreciation and amortization
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Bad debt expense
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Loss on extinguishment of debt
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Change in fair value of derivative liabilities
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Amortization of debt issuance costs and original issue discount
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Accrued interest
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Changes in operating assets and liabilities
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Accounts receivable
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Inventory
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Prepaid expenses and other assets
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Accounts payable
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Accrued expenses
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Contract liabilities
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Net Cash Provided by/(Used) in Operating Activities
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(
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Cash Flows - Investing Activities
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Purchase of property and equipment
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Net Cash Flows Used in Investing Activities
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(
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Cash Flows - Financing Activities
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Proceeds/(Payments)
from factoring, net
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Payments of principal on finance leases
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(
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Net Cash Flows Provided by/ (Used in) Financing Activities
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Effect of Exchange Rates on Cash
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Net Change in Cash During Period
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Cash at Beginning of Period
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Cash at End of Period
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$
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$
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Supplemental Information:
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Cash paid for interest
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$
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$
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Non-cash Investing and Financing Activities:
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Warrants issued in conjunction with convertible promissory notes
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Conversion of asset-backed secured promissory notes to convertible promissory notes
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Common shares issued for advisory shares
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The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
March 31, 2024
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1.
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Nature of the Business and Basis of Presentation
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SANUWAVE Health, Inc. and subsidiaries (“SANUWAVE” or the “Company”) is focused on the commercialization of its patented noninvasive and
biological response activating medical systems for the repair and regeneration of skin, musculoskeletal tissue, and vascular structures.
Basis of Presentation –
The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of
Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all the information and disclosures required by U.S. GAAP for comprehensive financial statements.
The financial information as of March 31, 2024, and for the three months ended March 31, 2024, and 2023 is unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that
may be expected for any other interim period or for the year ending December 31, 2024.
The condensed consolidated balance sheet on December 31, 2023, has been derived from the audited consolidated financial statements at that date but
does not include all the information and disclosures required by U.S. GAAP for comprehensive financial statements. These financial statements should be read in conjunction with the Company’s December 31, 2023, Annual Report on Form 10-K filed
with the SEC on March 21, 2024 (the “2023 Annual Report”).
| 2. |
Going Concern
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Our recurring losses from operations, the events of default on the Company’s notes payable, and dependency upon future issuances of equity or other
financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q. We will be required to raise additional fund to finance
our operations and remain a going concern; we may not be able to do so, and/or the terms of any financing may not be advantageous to us.
The
continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources for the commercialization of UltraMIST and PACE systems which will require additional capital resources to remain a going
concern
.
Management’s plans are to obtain additional capital in
2024
,
primarily through closing the Merger, as described in Note 4. The Company could also obtain additional capital
through the conversion of outstanding warrants, issuance of
common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing stockholders. In
addition, there can be no assurances that the Company’s plans to obtain additional capital will be successful on the terms or timeline it expects, or at all. If these efforts are unsuccessful, the Company may be required to significantly curtail
or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms.
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of
the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not
necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. The Company’s condensed consolidated financial
statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
| 3. |
Summary of Significant Accounting Policies
|
Significant accounting policies followed by the Company are summarized below and should be read in conjunction with those described in Note 3 of
the consolidated financial statements in our 2023 Annual Report.
Estimates
– These condensed consolidated financial statements have been prepared in
accordance with U.S. GAAP. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of condensed consolidated financial statements for any period necessarily
involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These condensed 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 credit losses, the net realizable value of inventory, fair value of goodwill and
other intangible assets, the determination of the valuation allowances for deferred taxes, litigation contingencies, and the estimated fair value of financial instruments, including warrants and embedded conversion options.
Revenue Recognition -
The core p
rinciple of
Accounting Standards Codification (“ASC”)
Topic 606 “Revenue from
Contracts with Customers” (“ASC 606”)
requires that
an entity recognize revenu
e to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company allocates the transaction price to all contractual performance obligations included in the contract. If a
contract has more than one performance obligation, we allocate the transaction price to each performance obligation based on standalone selling price, which depicts the amount of consideration we expect to be entitled in exchange for
satisfying each performance obligation. The Company recognizes revenue primarily from the following types of contracts:
System Sales, Consumables and Part Sales -
System sales, consumables and part sales include devices and applicators (new and refurbished).
Performance obligations are satisfied at the point in time when the customer obtains control of the goods, which is generally at the point in time that the product is shipped.
Other Revenue -
Other revenue primarily includes warranties, repairs,
and billed freight. The
Company allocates the
device sales price to the
product and the embedde
d warranty by reference to the stand-alone extended warranty price. Warranty revenue is recognized over the time that the Company satisfies its performance obligations, which is generally the warranty term.
Repairs (parts and labor) and billed freight revenue are recognized at the point in time that the service is performed, or the product is shipped, respectively.
Deferred Offering Costs
-
Deferred stock offering costs represent
amounts paid for legal, consulting, and other offering expenses directly attributable to the offering of securities in conjunction with the recapitalization under the Merger Agreement, as defined in Note 4 and further described in Note 4 and
are deferred and charged against the gross proceeds of the offering. In the event of a significant delay or cancellation of a planned offering of securities, all the costs would be expensed. As of March 31, 2024, $
1.6
million in Merger costs were deferred until the closing of the Merger.
Recent Accounting
Pronouncements
-
In December 2023, the Financial
Accounting Standards Board issued ASC Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Update No. 2023-09 aims to enhance the transparency and decision usefulness of income tax disclosures. Update No.
2023-09 modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between
domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state, and foreign). Update 2023-09 also requires entities to disclose their income tax payments to international, federal, state
and local jurisdictions, among other changes. Update No. 2023-09 is effective for fiscal years beginning after December 15, 2024. We expect to adopt Update No. 2023-09 prospectively. We are currently evaluating the potential impact of
adopting this new guidance on our condensed consolidated financial statements and related disclosures.
| 4. |
Merger Agreement
|
On August 23, 2023, the
Company entered into an Agreement and Plan of Merger (the “
Merger Agreement
”) by and among SEP Acquisition Corp., a Delaware corporation (“
SEPA
”), SEP Acquisition Holdings Inc., a Nevada corporation and a wholly owned subsidiary of
SEPA (“
Merger Sub
”). Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA (the “
Merger
”) will be affected. More specifically, and as described in greater detail below, at the effective
time of the Merger (the “
Effective Time
”):
|
|
• |
Merger Sub will merge with and into
the Company, with the Company being the surviving company following the Merger.
|
|
|
• |
Each issued and outstanding share of
the Company’s common stock, will automatically be converted into Class A common stock of SEPA, par value $
|
|
|
• |
Outstanding convertible securities
of the Company will be assumed by SEPA and will be converted into the right to receive Class A Common Stock of SEPA.
|
If the Merger Agreement is consummated SEPA
will acquire
100
% of the Company’s issued and outstanding equity securities. The proposed merger will be accounted for as a “reverse
recapitalization” in accordance with US GAAP. Under the reverse recapitalization model, the transaction will be treated as the Company issuing equity for the net assets of SEPA, with no goodwill or intangible assets recorded. Under this method
of accounting, SEPA will be treated as the acquired company for financial reporting purposes. This determination is primarily based on the fact that following the merger, the Company’s stockholders are expected to have a majority voting power
of the combined company, approximately
69
–
70
%, the Company will comprise all of the ongoing operations of the combined company, Company representatives will comprise a majority of the governing body of the combined company, and the Company’s senior
management will comprise all of the senior management of the combined company. As a result of the merger, SEPA will be renamed Sanuwave Health, Inc.
Merger Consideration
-
The consideration to be delivered to
the Company
’s
securityholders by SEPA in connection with the
consummation of the Merger (the “Closing”) will consist solely of
7,793,000
shares of Class A Common Stock and, in the case of certain
securityholders, of securities convertible into or exercisable for new shares of Class A Common Stock reserved for issuance from the merger consideration (the
“
Merger Consideration
”)
. The Merger Consideration deliverable to the Company
’s
stockholders will be allocated pro rata based on their ownership after giving effect to the required conversion or exercise, as
applicable, of all the outstanding convertible notes, in-the-money options, and in-the-money warrants immediately prior to the Closing.
Out-of-the-money options
and out-of-the-money warrants will be assumed by SEPA and converted into options or warrants, respectively, exercisable for shares of Class A Common Stock based on the Conversion Ratio; however, such out-of-the-money options and warrants shall not be
reserved for issuance from the Merger Consideration.
Conditions to Closing
-
The Merger Agreement contains customary conditions to Closing, including the following mutual conditions of the
parties (unless waived): (i) approval of the stockholders of the Company and SEPA; (ii) approvals of any required governmental authorities; (iii) no law or order preventing the transactions; (iv)
the filing of the Charter Amendments (as defined in the Merger Agreement);
(v) the appointment of SEPA’s post-closing board of directors; (vi) the Registration Statement having been declared effective by the
SEC; (vii) approval of the Class A Common Stock of SEPA for listing on Nasdaq; (viii) holders of
80
% or more of the Company’s
convertible notes with a maturity date occurring after the date of the Closing (the “
Closing Date
”), measured by number of shares into which such convertible notes may be converted, agreeing to convert their convertible notes into shares
of common stock immediately prior to the Effective Time; and (ix) holders of
80
% or more of the Company’s warrants that would be
outstanding on the Closing Date, measured by number of shares subject to all such warrants in the aggregate, agreeing to convert their warrants into shares of common stock immediately prior to the Effective Time.
In addition, unless
waived by the Company, the obligations of the Company to consummate the business combination are subject to the satisfaction of the following additional Closing conditions, in addition to the delivery by SEPA of customary certificates and other
Closing deliverables: (ii) SEPA having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Merger Agreement required to be performed or complied with by it on or prior
to the Closing Date; (iii) SEPA having delivered a fairness opinion of the Purchaser Financial Advisor (as defined in the Merger Agreement), in form and substance reasonably satisfactory to the Company; (iv) SEPA having, at the Closing, at least $
12,000,000
in cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of any
redemptions) and the proceeds of any PIPE Investment; and other customary conditions to Closing as defined in the Merger Agreement.
In February 2024, the Company amended the Merger Agreement to extend the date after which the
Company or SEPA, in its discretion, can elect to terminate the Merger Agreement if any of the conditions to closing of the other party have not been met or waived, from February 28, 2024, to April 30, 2024 (the “Outside Date”). In April 2024,
the Company amended the Merger Agreement to further extend the Outside Date to May 31, 2024.
|
5.
|
Loss per Share
|
Diluted net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares
outstanding for the three months ended March 31, 2024, and 2023. The weighted average number of shares outstanding includes outstanding common stock and shares issuable for nominal consideration.
Accordingly, warrants issued
with a $
0.01
per share exercise price, are included in weighted average shares outstanding as follows
:
|
Three
Months Ended
|
||||||||
|
(in Thousands)
|
March 31, 2024
|
March 31, 2023
|
||||||
|
Weighted average shares outstanding
|
||||||||
|
Common shares
|
|
|
||||||
|
Common shares issuable assuming exercise of nominally priced warrants
|
|
|
||||||
|
Weighted average shares outstanding
|
|
|
||||||
Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares
of common stock and dilutive common stock equivalents outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net loss per share.
As a result of the net loss for each the three months ended March 31, 2024,
and March 31, 2023, all potentially dilutive shares in such periods were anti-dilutive and therefore excluded from the computation of diluted net loss per share.
| Three Months Ended | ||||||||
| (in thousands) |
March 31, 2024
|
March 31, 2023
|
||||||
|
Common stock options
|
|
|
||||||
|
Common stock purchase warrants
|
|
|
||||||
|
Convertible notes payable, including interest
|
|
|
||||||
|
|
|
|||||||
| 6. |
Accrued Expenses
|
Accrued expenses consist of the following:
|
(in Thousands)
|
March 31, 2024
|
December 31, 2023
|
||||||
|
Registration penalties
|
$
|
|
$
|
|
||||
|
License fees
|
|
|
||||||
|
Board of directors fees
|
|
|
||||||
|
Employee compensation
|
|
|
||||||
|
Other
|
|
|
||||||
|
|
$
|
|
$
|
|
||||
| 7. |
Senior Secured Debt, In Default
|
The following table summarizes outstanding senior secured debt, in default:
|
March 31, 2024
|
December 31, 2023
|
|||||||||||||||||||||||||||||||
|
(in thousands)
|
Principal
|
Debt Discount
|
Carrying Value
|
Accrued Interest
|
Principal
|
Debt Discount
|
Carrying Value
|
Accrued Interest
|
||||||||||||||||||||||||
|
Senior secured debt
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||
Senior secured promissory note payable, in default (“Senior
Secured Note”) –
In
August 2020, the Company entered into a Note and Warrant Purchase and Security Agreement (the “NWPSA”). In accordance with the NWPSA, the Company issued a $
15
million Senior Secured Promissory Note Payable (the “Senior Secured Note”) and a warrant exercisable for shares of the Company’s common stock in exchange for cash to support operations, repay outstanding
debt and close on the acquisition of the UltraMIST assets from Celularity Inc. (Celularity) among other transactions.
In February 2022,
the Company entered into a Second Amendment to Note and Warrant Purchase and Security Agreement (the “Second NWPSA”) for $
3.0
million, for a total of $
18.0
million outstanding. Along with the issuance of the note, the Company also issued warrants to purchase
16.2
million shares of common stock with an exercise price of $
0.18
and
20.6
million shares of common stock.
Interest is charged
at the greater of the prime rate or
3
% plus
9
%. The principal increases at a rate of
3
% of the outstanding principal balance (PIK interest) on
each quarterly interest payment date. The original maturity date of the Senior Secured Note is September 20, 2025, and it can be prepaid.
In March
2024, the Company entered into a Consent, Limited Waiver and Fifth Amendment to Note and Warrant Purchase Agreement (the “Fifth Amendment”). The Fifth Amendment provides (i) consent to enter into a License and Option Agreement and consummation of
a License and Option Transaction a waiver of any event of default that may occur under the NWPSA, because of the License and Option Agreement or License and Option Transaction and (iii) amended the NWPSA to release certain patents from the
collateral. The Fifth Amendment also provides for a forbearance of exercising remedies in connection with certain existing events of default under the NWPSA until the earlier of (x) the occurrence of another event of default under the NWPSA and
(y) April 30, 2024. During the forbearance period, the outstanding obligations under the NWPSA continue to accrue interest at the default rate.
As of March 31, 2024, the Company is in default on the minimum liquidity provisions in the Senior Secured Note and, as a result, it is classified in current liabilities in the accompanying condensed consolidated balance sheets. The Company is
accruing interest at the default interest rate of an incremental
5
%.
The debt issuance costs, and debt discount related to the Senior Secured Note were capitalized as a reduction in the
principal amount and are being amortized to interest expense over the life of the Senior Secured Note. The amortization of the debt issuance costs and debt discount, included in interest expense, for the three months ended March 31, 2024, and
2023, totaled $
0.5
million and $
0.4
million, respectively. Interest expense on the Senior Secured Note totaled $
1.9
million and $
1.6
million for the three months ended March 31, 2024, and 2023, respectively.
| 8. |
Convertible Promissory Notes Payable
|
The following two tables summarize outstanding notes payable as of March 31,
2024, and December 31, 2023:
|
|
As of March 31, 2024
|
|||||||||||||||
|
(In thousands, except conversion price)
|
Conversion
Price
|
Principal
|
Remaining
Debt Discount
|
Carrying Value
|
||||||||||||
|
Acquisition convertible promissory note, in default
|
$
|
|
|
|
|
|||||||||||
|
Historical convertible promissory notes payable, related parties, in default
|
$
|
|
|
|
|
|||||||||||
|
Convertible notes payable
|
$
|
|
|
(
|
)
|
|
||||||||||
|
Convertible notes payable, related parties
|
$
|
|
|
(
|
)
|
|
||||||||||
|
Total Convertible Promissory Notes Payable
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||
|
|
As of December 31, 2023
|
|||||||||||||||||||
|
(In thousands, except conversion price)
|
Conversion
Price
|
Principal
|
Remaining
Debt Discount
|
Remaining
Embedded
Conversion
Option
|
Carrying
Value
|
|||||||||||||||
|
Acquisition convertible promissory note, in default
|
$
|
|
|
|
|
|
||||||||||||||
|
Historical convertible promissory note, related party, in default
|
$
|
|
|
|
|
|
||||||||||||||
|
Convertible notes payable
|
$
|
|
|
(
|
)
|
|
|
|||||||||||||
|
Convertible notes payable, related parties
|
$
|
|
|
(
|
)
|
|
|
|||||||||||||
|
Total Convertible Promissory Notes Payable
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||
Convertible Notes Payable and Convertible Notes Payable, Related
Parties
–
In
August 2022, November 2022, May 2023, December 2023, and January 2024, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”), for the sale in a private placement of (i) Future Advance Convertible Promissory Notes
(the “Notes”) in an aggregate principal amount of approximately $
16.2
million in August
approximately
$
4.0
million in November,
$
1.2
million in May, $
1.9
million in December 2023, and $
4.6
million in January 2024 related to the conversion of the Asset-Backed Secured Promissory Notes (described in Note 9)
(ii) Common
Stock Purchase Warrants to purchase an additional
695.6
million shares of common stock with an exercise price of $
0.067
per share and (iii) Common Stock Purchase Warrants to purchase an additional
695.6
million shares of common stock with an exercise price of $
0.04
per share. Interest expense for the three months ended March 31, 2024, and 2023 totaled $
1.6
million and
$
2.3
million respectively.
The Notes have a term of 12 months from the date of issue.
Pursuant to the Notes, the Company promised to pay in cash and/or in shares of common stock, at a conversion price of $
0.04
(the
“Conversion Price”), the principal amount and interest at a rate of
15
% per annum on any outstanding principal. The Conversion
Price of the Notes is subject to adjustment, including if the Company issues or sells shares of common stock for a price per share less than the Conversion Price of the Notes or if the Company lists its shares of common stock on The Nasdaq
Capital Market and the average volume weighted average price of such common stock for the
preceding such listing
is less than $
0.04
per share; provided, however, that the Conversion Price shall never be less than $
0.01
. The Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens.
| 9. |
Asset-Backed Secured Promissory Notes
|
In July 2023, the
Company issued Asset-Backed Secured Promissory Notes (the “ABS Promissory Notes”) in an aggregate principal amount of $
4.6
million to
certain accredited investors (the “Purchasers”) at an original issue discount of
33.33
%. The ABS Promissory Notes bear an interest rate
of
0
% per annum and mature on
January 21, 2024
(the “Maturity Date”). The Company received total proceeds of approximately $
3.0
million. The Company entered
into a Security Agreement providing for a continuing and unconditional security interest in any and all property of the Company. This security interest is subordinate to the Senior Secured Debt described in Note 7. Interest expense for the three
March 31, 2024, totaled $
0.1
million prior to conversion at the Maturity Date.
On January 21, 2024, pursuant to the side letter, which the parties agreed that upon the Maturity Date, the Company will issue each Purchaser a
Convertible Note Payable with the same principal amount as the principal amount of such Purchasers’ ABS Promissory Notes. Pursuance to this side letter the ABS Promissory Notes converted to convertible promissory notes, as described in Note 8.
The Company recorded a net loss on
extinguishment of debt totaling $
0.1
million for the three months ended March 31, 2024.
|
10.
|
Fair Value Measurements
|
The Company uses various inputs to measure the outstanding warrants and certain embedded conversion features associated with a convertible debt on a recurring basis to determine the fair value of the liabilities.
The following tables classify the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy:
|
Fair value measured at March 31, 2024
|
||||||||||||||||
|
Fair value at
|
Quoted prices in
active markets
|
Significant other
observable inputs
|
Significant
unobservable inputs
|
|||||||||||||
|
(in thousands)
|
March 31, 2024
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
|
Warrant liability
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Fair value measured at December 31, 2023
|
||||||||||||||||
| Fair value at |
Quoted prices in
active markets
|
Significant other
observable inputs
|
Significant
unobservable inputs
|
|||||||||||||
|
(in thousands)
|
December 31, 2023
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
|
Warrant liability
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Embedded conversion option
|
|
|
|
|
||||||||||||
|
Total fair value
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
There were
no
transfers among Levels 1, 2 or 3 during the three months ended March 31, 2024, and 2023.
Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses
associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g. changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities)
inputs.
Warrant Liability
The Company’s liability classified warrants as of March 31, 2024 and the value of initial warrant liability from the conversion of the ABS Promissory Notes, were valued using a probability weighted expected value considering the Merger
Agreement and the previous Black Scholes valuation model, with significant value stemming from the Merger Agreement. Significant inputs under the Merger Agreement valuation included the expected exchange ratio
0.003
, the value of SEPA’s Class A Common Stock, the expected timing of the closing of the Merger (estimated by May 31, 2024), and the probability of
the Merger closing (
90
% probability).
A summary of the warrant liability
activity for the three months ended March 31, 2024, is as follows:
|
|
Warrants
|
Fair Value
|
Fair Value
|
|||||||||
|
(in thousands, except per share data)
|
Outstanding
|
per Share
|
(in thousands)
|
|||||||||
|
Balance at December 31, 2023
|
|
$
|
|
$
|
|
|||||||
|
Issuance
|
|
|
|
|||||||||
|
Loss on remeasurement of warrant liability
|
|
|
||||||||||
|
Balance at March 31, 2024
|
|
$
|
|
$
|
|
|||||||
|
11.
|
Revenue
|
The
disaggregation of revenue is based on type and geographical region. The following table presents revenue from contracts with customers:
|
Three Months Ended March 31, 2024
|
Three Months Ended March 31, 2023
|
|||||||||||||||||||||||
|
United States
|
International
|
Total
|
United States
|
International
|
Total
|
|||||||||||||||||||
|
Consumables and parts revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
$
|
|
|||||||||||
|
System revenue
|
|
|
|
|
|
|
||||||||||||||||||
|
License fees and other
|
|
|
|
|
|
|
||||||||||||||||||
|
Product Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Rental Income
|
|
|
|
|
|
|
||||||||||||||||||
|
Total Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
| 12. |
Concentration of Credit Risk and Limited Suppliers
|
The
Company currently purchases most of its product component materials from single suppliers and the loss of any of these suppliers could result in a disruption in the Company’s production. The percentage of purchases from major vendors of the
Company that exceeded ten percent of total purchases for the three months ended March 31, 2024, and 2023 were as follows:
|
Three Months Ended
|
||||||||
|
March 31, 2024
|
March 31, 2023
|
|||||||
|
Purchases:
|
||||||||
|
Vendor A
|
|
% |
|
%
|
||||
|
13
.
|
License and Option Agreement
|
In March 2024, the Company entered into an exclusive license and option agreement with a third-party licensee in connection with a portfolio of Sanuwave,
Inc. patents related to the field of intravascular shockwave applications. The Company received a one-time payment of $
2.5
million
related to this patent license, which was recorded in other income during the three months ended March 31, 2024. Sanuwave, Inc. granted the Licensee an exclusive license to the Patents and an option to acquire the Patents for an additional one-time
payment in the single-digit millions of dollars. If the Licensee does not exercise its option to acquire the Patents during a specified option period, the license terminates and all rights revert back to Sanuwave, Inc.
| 14. |
Commitments and Contingencies
|
In the ordinary course of business, the Company from time to time becomes
involved in various legal proceedings involving a variety of matters. The Company does not believe there are any pending legal proceedings that will have a material adverse effect on the Company’s business, consolidated financial position,
results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. The Company expenses legal fees in the period in which they are incurred.
Termination Agreement
– In
February 2024, the Company entered into a termination agreement with an advisor to agree on termination fees owed with respect to a previous engagement agreement. The company agreed to a contingent payment of $
670
thousand upon the closure of the Merger disclosed in note 4.
Acquisition dispute
–
In May 2021, the Company received notification alleging that it is not in compliance with the license agreement with Celularity entered into in connection with the acquisition of the UltraMIST assets. The Company has responded and
asserted that the Company is not in breach and that the supplier has breached various agreements. It is too early to determine the outcome of this matter. Any potential impact on the Company cannot be fully determined at this time and there
is no guarantee that the dispute will be resolved in a manner beneficial to the Company.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial
statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as of
and for the year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the SEC on March 21, 2024 (the “2023 Annual Report”).
Executive Summary
We continued to realize significant revenue growth during the three months ended March 31, 2024, as compared to the same periods in 2023. Revenue for the three months ended March 31, 2024,
totaled $5.8 million, an increase of 53%, as compared to $3.8 million for the same period of 2023.
Net loss for the three months ended March 31, 2024, was $4.5 million, or $0.00 per basic and diluted share, compared to a net loss of $13.1 million, or $0.02 per basic and diluted share, for
the same period in 2023. The decrease in our net loss for the three months ended March 31, 2024, was primarily related to a decrease in change of fair value of derivative liabilities. For the three months ended March 31, 2024, our operating
loss totaled $1.1 million, which is an improvement of $0.9 million compared to 2023.
Merger Agreement with SEPA
On August 23, 2023, we entered into an Agreement and Plan of Merger (the “
Merger Agreement
”) by and among SEP Acquisition Corp., a Delaware corporation (“
SEPA
”), SEP Acquisition
Holdings Inc., a Nevada corporation, and a wholly owned subsidiary of SEPA (“
Merger Sub
”). Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA (the “
Merger
”) will be affected. More
specifically, and as described in greater detail below, at the effective time of the Merger (the “
Effective Time
”):
|
|
• |
Merger Sub will merge with and into the Company, with the Company being the surviving company following the merger.
|
|
|
• |
Each issued and outstanding share of the Company common stock will automatically be converted into Class A common stock of SEPA, par value $0.0001 per share, at the Conversion Ratio (as defined in the
Merger Agreement); and
|
|
|
• |
Outstanding Company convertible securities of the Company will be assumed by SEPA and will be converted into the right to receive Class A Common Stock of SEPA.
|
Pursuant to the terms of the Merger Agreement, the holders of (i) Company common stock, (ii) in-the-money options to purchase Company common stock, (iii) in-the-money warrants to purchase
Company common stock, and (iv) convertible promissory notes, collectively will be entitled to receive 7,793,000 shares of Class A Common Stock of SEPA. Out-of-the-money options and out-of-the-money warrants will be assumed by SEPA and converted
into options or warrants, respectively, exercisable for shares of Class A Common Stock based on the Conversion Ratio; however, such out-of-the-money options and out-of-the-money warrants shall not be reserved for issuance from the Merger
Consideration.
The Merger Agreement contains certain conditions to Closing, including the following:
|
|
• |
holders of 80% or more of the Company’s convertible notes with a maturity date occurring after the date of the Closing (the “
Closing Date
”), measured by number of shares of our common stock into
which such convertible notes may be converted, agreeing to convert their convertible notes into shares of common stock immediately prior to the Effective Time.
|
|
|
• |
holders of 80% or more of the Company’s warrants that would be outstanding on the Closing Date, measured by number of shares of our common stock subject to all such warrants in the aggregate, agreeing to
convert their warrants into shares of common stock immediately prior to the Effective Time.
|
|
|
• |
SEPA having, at the Closing, at least $12,000,000 in cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of any redemptions) and the
proceeds of any private placement in SEPA.
|
Non-GAAP Financial Measures
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we present certain financial measures that facilitate management's review of the
operational performance of the Company and as a basis for strategic planning; however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United States
(U.S.) (U.S. GAAP). These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, or a replacement for, financial measures presented in accordance with U.S.
GAAP.
The Company uses Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA to assess its operating performance. Adjusted EBITDA is Earnings before Interest,
Taxes, Depreciation and Amortization adjusted for the change in fair value of derivatives and any significant non-cash or non-recurring one-time charges. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income as a
measure of financial performance or any other performance measure derived in accordance with U.S. GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP
financial measures are presented in a consistent manner for each period, unless otherwise disclosed. The Company uses these measures for the purpose of evaluating its historical and prospective financial performance, as well as its performance
relative to competitors. These measures also help the Company to make operational and strategic decisions. The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results
through the eyes of Management, and to better understand its historical and future financial performance. These non-GAAP financial measures are also frequently used by analysts, investors, and other interested parties to evaluate companies in our
industry, when considered alongside other U.S. GAAP measures.
EBITDA and Adjusted EBITDA have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.
Some of these limitations are that EBITDA and Adjusted EBITDA:
| • |
Do not reflect every expenditure, future requirements for capital expenditures or contractual commitments.
|
| • |
Do not reflect all changes in our working capital needs.
|
| • |
Do not reflect interest expense, or the amount necessary to service our outstanding debt.
|
As presented in the U.S. GAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measure excludes the impact of certain charges that contribute to our net loss (Non-GAAP
Adjustments).
|
Three months ended March 31,
|
||||||||
|
(in thousands)
|
2024
|
2023
|
||||||
|
Net (Loss)/Income
|
$
|
(4,528
|
)
|
$
|
(13,084
|
)
|
||
|
Non-GAAP Adjustments:
|
||||||||
|
Interest expense
|
3,560
|
4,278
|
||||||
|
Depreciation and amortization
|
218
|
259
|
||||||
|
EBITDA
|
(750
|
)
|
(8,547
|
)
|
||||
|
Non-GAAP Adjustments for Adjusted EBITDA:
|
||||||||
|
Change in fair value of derivative liabilities
|
2,501
|
6,797
|
||||||
|
Other non-cash or non-recurring charges:
|
||||||||
|
Loss on extinguishment of debt
|
105
|
-
|
||||||
|
Severance agreement and legal settlement
|
585
|
-
|
||||||
|
License and option agreement
|
(2,500
|
)
|
-
|
|||||
|
Adjusted EBITDA
|
$
|
(59
|
)
|
$
|
(1,750
|
)
|
||
Results of Operations
|
For the Three Months Ended
|
||||||||||||||||
|
March 31,
|
Change
|
|||||||||||||||
|
(in Thousands)
|
2024
|
2023
|
$ |
|
%
|
|||||||||||
|
Revenues:
|
||||||||||||||||
|
Total Revenue
|
$
|
5,786
|
$
|
3,775
|
$
|
2,011
|
53
|
%
|
||||||||
|
Cost of Revenues
|
1,584
|
1,262
|
322
|
26
|
%
|
|||||||||||
|
Gross Margin
|
4,202
|
2,513
|
1,709
|
68
|
%
|
|||||||||||
|
Gross Margin %
|
73
|
%
|
67
|
%
|
600 bps
|
|||||||||||
|
Operating Expenses:
|
||||||||||||||||
|
General and administrative
|
3,675
|
2,759
|
916
|
33
|
%
|
|||||||||||
|
Selling and marketing
|
1,232
|
1,412
|
(180
|
)
|
-13
|
%
|
||||||||||
|
Research and Development
|
163
|
131
|
32
|
24
|
%
|
|||||||||||
|
Depreciation and amortization
|
182
|
189
|
(7
|
)
|
-4
|
%
|
||||||||||
|
Operating Loss
|
(1,050
|
)
|
(1,978
|
)
|
928
|
47
|
%
|
|||||||||
|
Other Expense
|
3,478
|
11,102
|
(7,624
|
)
|
-69
|
%
|
||||||||||
|
Net Loss
|
$
|
(4,528
|
)
|
$
|
(13,080
|
)
|
8,552
|
65
|
%
|
|||||||
nm - Not Meaningful
Revenues and Gross Margin
Revenues for the three month-period ended March 31, 2024, were $5.8 million compared to $3.8 million for the same period of 2023, an increase of $2.0 million, or 53%. The increase was primarily
driven by the continued increased sales of our UltraMIST® system. The increase in revenues was due to an increase in the average selling price of our consumables and parts revenue of 28% year over year, and the remainder of the growth in the
number of consumables and systems sold year over year. Gross margin as a percentage of revenue increased to 73% during the three months ended March 31, 2024, from 67% in the same period of 2023.
General and Administrative Expenses
General and administrative expenses increased $0.9 million or 33% for the three months ended March 31, 2024, compared with the same period of 2023. The increase for the three months ended March
31, 2024, was primarily due to severance costs and non-recurring legal settlement.
Selling and Marketing Expenses
Selling and marketing expenses decreased by $0.2 million or 13% for the three months ended March 31, 2024, as compared with the same period of 2023. The decrease was primarily due to severance
payments in 2023.
Research and Development Expenses
Research and development expenses increased 24% for the three months ended March 31, 2024, as compared with the same period of 2023. Research and development expenses as a percentage of revenue
stayed flat at 3% during the three months ended March 31, 2024, and for the same period in 2023.
Other (Expense)/Income, net
|
For the three months
ended March 31,
|
Change
|
|||||||||||||||
|
2024
|
2023
|
$ |
|
%
|
||||||||||||
|
Interest expense
|
$
|
(3,560
|
)
|
$
|
(4,278
|
)
|
$
|
718
|
17
|
%
|
||||||
|
Loss on extinguishment of debt
|
(105
|
)
|
-
|
(105
|
)
|
nm
|
||||||||||
|
Change in fair value of derivatives
|
(2,501
|
)
|
(6,797
|
)
|
4,296
|
63
|
%
|
|||||||||
|
Other income / (expense)
|
2,688
|
(27
|
)
|
2,715
|
nm
|
|||||||||||
|
Other (expense)/income, net
|
$
|
(3,478
|
)
|
$
|
(11,102
|
)
|
$
|
7,624
|
69
|
%
|
||||||
nm - not meaningful
Other expense, net decreased by $7.6 million to $3.5 million for the three months ended March 31, 2024, as compared to the same period for 2023. The decrease was primarily due to a decrease in
change in fair value of derivatives expense of $4.3 million, recognition of a non-recurring loss on extinguishment of debt of $105 thousand and offset by the receipt of $2.5 million from a third-party license and option agreement.
Liquidity and Capital Resources
Since inception, we have incurred losses from operations each year. As of March 31, 2024, we had an accumulated deficit of $225 million. Historically, our operations have primarily been funded
from the sale of capital stock, notes payable, and convertible debt securities. The recurring losses from operations, the events of default on our notes payable, and dependency upon future issuances of equity or other financing to fund ongoing
operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q. We expect to devote substantial resources for the commercialization of UltraMIST
and PACE systems which will require additional capital resources to remain a going concern.
Management’s plans are to obtain additional capital in 2024 primarily through the closure of the Merger, which is expected to add additional capital and funding to the Company. We could
alternatively obtain capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on
terms that result in significant dilution to our existing stockholders. In addition, there can be no assurances that our plans to obtain additional capital will be successful on the terms or timeline we expect, or at all. If these efforts are
unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms.
Statement of Cash Flows
|
For the three months ended March 31,
|
||||||||
|
(in thousands)
|
2024
|
2023
|
||||||
|
Cash flows provided by (used by) operating activities
|
$
|
1,100
|
$
|
(371
|
)
|
|||
|
Cash flows used by investing activities
|
$
|
(114
|
)
|
$
|
(18
|
)
|
||
|
Cash flows provided by (used in) financing activities
|
$
|
42
|
$
|
(654
|
)
|
|||
Cash provided by operating activities during the three months ended March 31, 2024, totaled $1.1 million as compared to cash used in operating activities of $371 thousand in the previous
period. This improvement in cash provided by operations is driven by the receipt of $2.5 million related to a license agreement and option agreement.
Critical Accounting Estimates
We have used various accounting policies to prepare the condensed consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 3 to
the consolidated financial statements in Part II Item 8. “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 21, 2024.
The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant
information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
The following accounting estimates are deemed critical:
Litigation Contingencies
We may be involved in legal actions involving product liability, intellectual property and commercial disputes, tax disputes, and governmental proceedings and investigations. The outcomes of
these legal actions are not completely within our control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages that could require significant expenditures or result in
lost revenues or limit our ability to conduct business in the applicable jurisdictions. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural
stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. The Company
records a liability in the condensed consolidated financial statements for loss contingencies when a loss is known or considered probable, and the amount may be reasonably estimated. If the reasonable estimate of a known or probable loss is a
range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of
loss is disclosed. Our significant legal proceedings are discussed in Note 13 to the condensed consolidated financial statements.
Derivative Liabilities from Embedded Conversion Options and Warrants
The Company classified certain convertible instruments as having embedded conversion options which qualified as derivative financial instruments to be separately accounted for. The Company also determined that
certain warrants also qualified as derivative financial instruments. Various valuation models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on the consolidated
balance sheets. The models include subjective input assumptions that can materially affect the fair value estimates and as such are subject to uncertainty. Our significant input assumptions are discussed in Note 10 to the condensed consolidated
financial statements.
Segment and Geographic Information
We have determined that we have one operating segment. Our revenues are generated from sales primarily in the United States. International sales include sales in Europe, Canada, the Middle
East, Central America, South America, Asia, and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are in the United States.
Effects of Inflation
Our assets are, to an extent, liquid in nature, so they are not significantly affected by inflation. However, the rate of inflation, which has increased, affects expenses such as employee
compensation, office space leasing costs and research and development charges, which may not be readily recoverable. 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.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required under this item.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are
designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer
(principal financial officer and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2024. Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were not operating effectively as of March 31, 2024. Our disclosure controls and procedures were not effective because of the “material weakness” described below.
We have identified three existing material weaknesses in internal control over financial reporting from prior periods. A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Because the items
described below could have resulted in material misstatement of our annual or interim financial statements, we determined this constitutes a material weakness.
As of March 31, 2024, the Company has still identified the following material weaknesses:
|
|
1. |
The Company lacked expertise and resources to analyze and properly apply U.S. GAAP to complex and non-routine transactions such as complex financial instruments and derivatives and complex sales
distributing agreements with select vendors.
|
|
|
2. |
The Company lacked internal resources to analyze and properly apply U.S. GAAP to accounting for financial instruments included in service agreements with select vendors.
|
|
|
3. |
The Company has failed to design and implement controls around all accounting and IT processes and procedures and, as such, we believe that all its accounting and IT processes and procedures need to be
re-designed and tested for operating effectiveness.
|
As a result, management concluded that its internal control over reporting was not effective as of March 31, 2024.
Remediation Plan
Our management is committed to remediating these material weaknesses and has implemented several steps to enhance our internal controls and ensure appropriate resourcing with the required
knowledge and expertise to conduct our business activities. Management hired a third-party consultant to help us design and document internal controls and perform a risk assessment of our processes over financial reporting. The risk assessment
performed resulted in a qualitative and quantitative view of all processes that will help inform remediation efforts and prioritize high risk processes for remediation. The third-party consultant has also provided recommendations to
standardize, automate and implement effectively designed internal controls over financial reporting. We intend to remediate and implement internal controls for high-risk processes over the course of 2024. We also intend to hire and segregate
certain duties so that control activities are appropriate and fully mitigate risk. The material weaknesses will not be considered remediated until a sustained period of time has passed to allow management to test the design and operational
effectiveness of the corrective actions. Until the material weaknesses are remediated, we plan to continue to
perform additional analyses and other procedures to ensure that our consolidated financial
statements are prepared in accordance with U.S GAAP. In addition, we may discover additional material weaknesses that require additional time and resources to remediate and we may decide to take additional measures to address the material
weaknesses or modify the remediation steps described above.
We are also working with an outside vendor to improve our IT general controls over our enterprise resource planning system and set up a proper framework for IT general controls to be executed
with the objective to remediate the weaknesses regarding internal controls and provide the framework for testing going forward.
The existence of any material weakness or significant deficiency requires management to devote significant time and incur significant expense to remediate any such material weaknesses or
significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also
result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause shareholders to lose confidence in our reported financial information, all of
which could materially and adversely affect our business and stock price.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024, that materially affect, or are reasonably likely to materially
affect, our internal control over financial reporting, except as disclosed in “Remediation Plan” above.
For information regarding legal proceedings at March 31, 2024, see Note 13 to the condensed consolidated financial statements, which information is incorporated herein by reference.
There have been no material changes from our risk factors as previously reported in Part I, Item 1A “Risk Factors” in our 2023 Annual Report.
None.
Not applicable.
Not applicable.
During the three months ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated any contract, instruction or written plan
for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1 trading arrangement (as defined in the SEC’s rules).
|
Agreement and Plan of Merger, dated as of August 23, 2023, by and among SEP Acquisition Corp., SEP Acquisition Holdings Inc., and SANUWAVE Health, Inc. (Incorporated by reference to
Exhibit 2.1 to the Form 8-K filed with the SEC on August 23, 2023).
|
|
|
Amendment Number one to Agreement and Plan of Merger, dated February 27, 2024, by and between SEP Acquisition Corp. and Sanuwave Health, Inc. (Incorporated by reference to Exhibit 2.1
to the Form 8-K filed with the SEC on February 28, 2024).
|
|
|
Amendment Number Two to Agreement and Plan of Merger, dated as of April 25, 2024, by and between SEP Acquisition Corp. and Sanuwave Health, Inc. (Incorporated by reference to Exhibit
2.1 to the Form 8-K filed with the SEC on April 26, 2024).
|
|
|
Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Form 10-SB filed with the SEC on December 18, 2007).
|
|
|
Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to Appendix A to the Definitive Schedule 14C filed with the SEC on October 16, 2009).
|
|
|
Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to Exhibit A to the Definitive Schedule 14C filed with the SEC on April 16, 2012).
|
|
Bylaws (Incorporated by reference to Exhibit 3.02 to the Form 10-SB filed with the SEC on December 18, 2007).
|
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of the Company dated March 14, 2014 (Incorporated by reference to Exhibit 3.1
to the Form 8-K filed with the SEC on March 18, 2014).
|
|
|
Certificate of Amendment to the Articles of Incorporation, dated September 8, 2015 (Incorporated by reference to Exhibit 3.6 to the Form 10-K filed with the SEC on March 30, 2016).
|
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock of the Company dated January 12, 2016 (Incorporated by reference to Exhibit 3.1 to
the Form 8-K filed with the SEC on January 19, 2016).
|
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock of the Company dated January 31, 2020 (Incorporated by reference to Exhibit 3.1 to
the Form 8-K filed with the SEC on February 6, 2020).
|
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock of the Company dated January 31, 2020 (Incorporated by reference to Exhibit 3.1
to the Form 8-K filed with the SEC on February 6, 2020).
|
|
|
Certificate of Designation of Series D Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on May 20, 2020).
|
|
|
Certificate of Amendment of the Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on January 5, 2021).
|
|
|
Certificate of Amendment of the Articles of Incorporation, dated January 31, 2023 (Incorporated by reference to Exhibit 3.12 to the Form S-1/A filed with the SEC on January 31, 2023).
|
|
|
Form of Future Advance Convertible Promissory Note issued to certain purchasers, dated January 21, 2024 (Incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on
January 25, 2024).
|
|
|
Forms of Common Stock Purchase Warrants issued to certain purchasers, dated January 21, 2024 (Incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the SEC on January 25,
2024).
|
|
|
Securities Purchase Agreement, dated January 21, 2024, by and among the Company and the purchasers identified on the signature pages thereto (Incorporated by reference to Exhibit 10.1
to the Form 8-K filed with the SEC on January 25, 2024).
|
|
|
Security Agreement, dated January 21, 2024, by and among the Company and certain lenders (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on January 25,
2024).
|
|
|
Subordination Agreement, dated January 21, 2024, by and among the Company, NH Expansion Credit Fund Holdings LP and certain creditors (Incorporated by reference to Exhibit 10.3 to the
Form 8-K filed with the SEC on January 25, 2024).
|
|
|
Registration Rights Agreement, dated January 21, 2024, by and among the Company and certain lenders (Incorporated by reference to Exhibit 10.4 to the Form 8-K filed with the SEC on
January 25, 2024).
|
|
|
Form of waiver letter with purchasers in January 2024 offering (Incorporated by reference to Exhibit 10.5 to the Form 8-K filed with the SEC on January 25, 2024).
|
|
|
Form of letter agreement with purchasers in January 2024 offering (Incorporated by reference to Exhibit 10.6 to the Form 8-K filed with the SEC on January 25, 2024).
|
|
|
Consent, Limited Waiver and Fifth Amendment to Note and Warrant Purchase Agreement with NH Expansion Credit Fund Holdings LP and the noteholders party thereto, dated March 6, 2024
(Incorporated by reference to Exhibit 10.7 to the Form 8-K filed with the SEC on March 7, 2024).
|
|
|
Separation and Release Agreement, dated March 29, 2024 (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on April 1, 2024).
|
|
Offer Letter of Peter Sorensen, dated March 26, 2024 (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on April 1, 2024).
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
|
|
|
Section 1350 Certification of the Principal Executive Officer.
|
|
|
Section 1350 Certification of the Chief Financial Officer.
|
|
|
101.INS*
|
XBRL Instance.
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema.
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation.
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition.
|
|
101.LAB*
|
XBRL Taxonomy Extension Labels.
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation.
|
|
104
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
|
*Filed herewith.
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 thereunto duly authorized.
|
SANUWAVE HEALTH, INC.
|
|||
|
Dated: May 9, 2024
|
By:
|
/s/
Morgan Frank
|
|
|
Morgan Frank
|
|||
|
Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
|
|||
|
Dated: May 9, 2024
|
By:
|
/s/ Peter Sorensen
|
|
|
Peter Sorensen
|
|||
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|||
23
TABLE OF CONTENTS
Part I -- Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities Anduse Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits