UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 20232024

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to

Commission File Number 000-52985

SANUWAVE Health, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 20-1176000
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

11495 Valley View Road
Eden Prairie, MN
 55344
(Address of principal executive offices) (Zip Code)

(770) 419-7525(952) 656-1029
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)
Name of each exchange on which
registered
None
N/A
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:

 Large accelerated filer ☐Accelerated filer ☐
 Non-accelerated filer ☒Smaller reporting company  ☒
  Emerging growth company  ☐

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, 10, 20232024 there were issued and outstanding 548,737,6511,145,974,342 shares of the registrant’s common stock, $0.001 par value per share.

SANUWAVE Health, Inc.
 
Table of Contents

 Page
PART I – FINANCIAL INFORMATION
  
Item 1.4
  
 4
  
 5
  
 6
  
 7
  
 8
  
Item 2.15
  
Item 3.18
  
Item 4.1819
  
PART II – OTHER INFORMATION
  
Item 1.20
  
Item 1A.20
  
Item 2.20
  
Item 3.20
  
Item 4.20
  
Item 5.20
  
Item 6.2120
 

 23

2
Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. and its subsidiaries (“SANUWAVE” orSANUWAVE,” the “Company”“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® systems;; 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, 2022,2023, filed on March 31, 2023.21, 2024. Other risks and uncertainties are and will be disclosed in the Company’s subsequent SEC filings.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, 2022,2023, filed on March 31, 2023.21, 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.

3
PART I -- FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)

 March 31, 2023  December 31, 2022  March 31, 2024  December 31, 2023 
ASSETS            
Current Assets:            
Cash 
$
106
  
$
1,153
 
Accounts receivable, net of allowance of $1.2 and $1.0 million, respectively
  
2,969
   
4,029
 
Cash and cash equivalent
 
$
2,936
  
$
1,797
 
Accounts receivable, net of allowance of $1,237, respectively
  
3,008
   
3,314
 
Inventory  
1,071
   
868
   
2,461
   
2,951
 
Prepaid expenses and other current assets  
371
   
570
   
2,426
   
1,722
 
Total Current Assets  
4,517
   
6,620
   
10,831
   
9,784
 
Property, Equipment and Other, net  
758
   
856
 
Intangible Assets, net  
4,962
   
5,137
 
Property, equipment and other, net
  
975
   
938
 
Intangible assets, net
  
4,258
   
4,434
 
Goodwill  
7,260
   
7,260
   
7,260
   
7,260
 
Total Non-current Assets
  12,980   13,253   12,493   12,632 
Total Assets 
$
17,497
  
$
19,873
  
$
23,324
  
$
22,416
 
                
LIABILITIES                
Current Liabilities:                
Senior secured debt, in default
 
$
14,996
  
$
14,416
  
$
18,910
  
$
18,278
 
Convertible promissory notes payable
  16,953   16,713   7,477   5,404 
Convertible promissory notes payable, related parties
  7,614   7,409   2,527   1,705 
Asset-backed secured promissory notes  -   3,117 
Asset-backed secured promissory notes, related parties
  -   1,458 
Accounts payable  
5,264
   
4,400
   
5,062
   
5,705
 
Accrued expenses  
8,550
   
8,512
   
6,849
   
5,999
 
Due under factoring ageement
  1,631   2,130 
Factoring liabilities  1,561   1,490 
Warrant liability  
9,264
   
1,416
   
19,818
   
14,447
 
Accrued interest  
4,981
   
4,052
   
6,118
   
5,444
 
Accrued interest, related parties  
1,081
   
788
   
786
   
669
 
Current portion of contract liabilities  
62
   
60
   
107
   
92
 
Other  
255
   
291
   
969
   
947
 
Total Current Liabilities  
70,651
   
60,187
   
70,184
   
64,755
 
Non-current Liabilities                
Lease liabilities  
384
   
438
   
395
   
492
 
Contract liabilities  
225
   
230
   
340
   
347
 
Deferred tax liability  
28
   
28
 
Total Non-currrent Liabilities  
637
   
696
 
Total Non-current Liabilities  
735
   
839
 
Total Liabilities $
71,288
  $
60,883
  
$
70,919
  
$
65,594
 
                
Commitments and Contingencies (Footnote 11)
      
Commitments and Contingencies (Footnote 13)
      
                
STOCKHOLDERS’ DEFICIT                
                
Preferred Stock, par value $0.001, 5,000,000 shares authorized; 6,175 shares Series A, 293 shares Series B, 90 shares Series C and 8 shares Series D no shares issued and outstanding at March 31, 2023 and December 31, 2022
 $
-
  $
-
 
Common Stock, par value $0.001, 2,500,000,000 shares authorized; 555,637,651 and 548,737,651 issued and outstanding at March 31, 2023 December 31, 2022, respectively
  
556
   
549
 
Additional Paid-in Capital  
153,046
   
152,750
 
Accumulated Deficit  
(207,322
)
  
(194,242
)
Accumulated Other Comprehensive Loss  
(71
)
  
(67
)
Preferred Stock, par value $0.001, 5,000,000 shares authorized; 6,175 shares Series A, 293 shares Series B, 90 shares Series C and 8 shares Series D no shares issued and outstanding at March 31, 2024 and December 31, 2022
 
$
-
  
$
-
 
Common stock, par value $0.001, 2,500,000,000 shares authorized; 1,140,559,527 issued and outstanding at March 31, 2024 and December 31, 2023, respectively
  
1,140
   
1,140
 
Additional paid-in capital
  
175,842
   
175,842
 
Accumulated deficit
  
(224,577
)
  
(220,049
)
Accumulated other comprehensive loss
  
-
  
(111
)
Total Stockholders’ Deficit  
(53,791
)
  
(41,010
)
  
(47,595
)
  
(43,178
)
Total Liabilities and Stockholders’ Deficit 
$
17,497
  
$
19,873
  
$
23,324
  
$
22,416
 

The accompanying notes to condensed consolidated financial statementstatements are an integral part of these financial statements.

4
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands, except share data)

 Three Months Ended March 31,  Three Months Ended March 31, 
 2023
  2022
  2024
  2023
 
            
Revenue
 
$
3,775
  
$
3,195
  
$
5,786
  
$
3,775
 
Cost of Revenues  
1,262
   
889
   
1,584
   
1,262
 
Gross Margin  
2,513
   
2,306
   
4,202
   
2,513
 
                
Operating Expenses:                
General and administrative  
2,759
   
2,205
   
3,675
   
2,759
 
Selling and marketing  
1,412
   
1,715
   
1,232
   
1,412
 
Research and development  
131
   
166
   
163
   
131
 
Depreciation and amortization  189   176   182   189 
Total Operating Expenses
  
4,491
   
4,262
   
5,252
   
4,491
 
                
Operating Loss  
(1,978
)
  
(1,956
)
  
(1,050
)
  
(1,978
)
                
Other Income (Expense):        
Other (Expense)/Income:        
Interest expense  
(3,512
)
  
(3,136
)
  
(3,237
)
  
(3,512
)
Interest expense, related party  
(766
)
  
(56
)
  
(323
)
  
(766
)
Loss on extinguishment of debt  (105)  - 
Change in fair value of derivative liabilities  
(6,797
)
  
3,482
   
(2,501
)
  
(6,797
)
Loss on issuance of debt  -   (3,434)
Other expense
  (27)  -   (102)  (27)
Gain / (loss) on foreign currency exchange
  
-
   
(1
)
Other income
  2,790   - 
Total Other Expense
  
(11,102
)
  
(3,145
)
  
(3,478
)
  
(11,102
)
                
Net Loss before Income Taxes  
(13,080
)
  
(5,101
)
        
Provision for Income Taxes  
-
   
-
 
                
Net Loss  
(13,080
)
  
(5,101
)
  
(4,528
)
  
(13,080
)
                
Other Comprehensive Loss                
Foreign currency translation adjustments  (4)  -   111   (4)
Total Comprehensive Loss 
$
(13,084
)
 
$
(5,101
)
 
$
(4,417
)
 
$
(13,084
)
                
Loss per Share:                
Basic and Diluted 
$
(0.02
)
 
$
(0.01
)
        
Weighted average shares outstanding, basic and diluted  
575,028,811
   
525,414,534
 
Basic and diluted 
$
(0.00
)
 
$
(0.02
)
Weighted average shares outstanding        
Basic and diluted  
1,162,250,687
   
575,028,811
 

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

5
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(In thousands, except share data)

Three Months Ended March 31, 2023
 
 Preferred Stock  Common Stock             
  Number of     Number of           Accumulated    
  Shares     Shares           Other    
  Issued and     Issued and     Additional Paid-  Accumulated  Comprehensive    
  Outstanding  Par Value  Outstanding  Par Value  in Capital  Deficit  Loss  Total 
                         
Balances as of December 31, 2022
  
-
  
$
-
   
548,737,651
  
$
549
  
$
152,750
  
$
(194,242
)
 
$
(67
)
 
$
(41,010
)
   Shares issued for services
  -   -   6,900,000   7   296   -       303 
Net loss  
-
   
-
   
-
   
-
   
-
   
(13,080
)
  
-
   
(13,080
)
Foreign currency translation adjustment  -   -   -   -   -   -   (4)  (4)
                                 
Balances as of March 31, 2023
  
-
  
$
-
   
555,637,651
  
$
556
  
$
153,046
  
$
(207,322
)
 
$
(71
)
 
$
(53,791
)
Three Months Ended March 31, 2024
 
 Common Stock             
  Number of           Accumulated    
  Shares           Other    
  Issued and     Additional Paid-  Accumulated  Comprehensive    
  Outstanding  Par Value  in Capital  Deficit  Loss  Total 
                   
Balances as of December 31, 2023
  
1,140,559,527
  
$
1,140
  
$
175,842
  
$
(220,049
)
 
$
(111
)
 
$
(43,178
)
Foreign currency translation adjustment  -   -   -   -   111   111 
Net loss
  -   -   -   (4,528)  -   (4,528)
                         
Balances as of March 31, 2024
  
1,140,559,527
  
$
1,140
  
$
175,842
  
$
(224,577
)
 
$
-
  
$
(47,595
)

Three Months Ended March 31, 2022 
  Preferred Stock
  Common Stock             
  
Number of
     Number of           Accumulated    
  Shares
     Shares           Other
    
  
Issued and
     Issued and     Additional Paid-  Accumulated  Comprehensive
    
  
Outstanding
  Par Value
  Outstanding  Par Value
  in Capital  Deficit
  Loss  Total 
                         
Balances as of December 31, 2021
  
-
  
$
-
   
481,619,621
  
$
482
  
$
144,582
  
$
(183,949
)
 
$
(73
)
 
$
(38,958
)
Cashless warrant exercise
  -   -   14,000,000   14   2,152   -   -   2,166 
Warrant exercise  -   -   909,091   1   99   -   -   100 
Shares issued in conjunction with Note Payable  -   -   20,666,993   20   3,700   -   -   3,720 
Net loss  
-
   
-
   
-
   
-
   
-
   
(5,101
)
  
-
   
(5,101
)
Foreign currency translation adjustment  -   -   -   -   -   -   6   6 
                                 
Balances as of March 31, 2022
  
-
  
$
-
   
517,195,705
  
$
517
  
$
150,533
  
$
(189,050
)
 
$
(67
)
 
$
(38,067
)
Three Months Ended March 31, 2023 
 Common Stock         
 Number of       Accumulated   
 Shares       Other
   
 Issued and   Additional Paid- Accumulated Comprehensive
   
 Outstanding Par Value
 in Capital Deficit
 Loss Total 
             
Balances as of December 31, 2022
  
548,737,651
  
$
549
  
$
152,750
  
$
(194,242
)
 
$
(67
)
 
$
(41,010
)
Shares issued for settlement of debt and warrants  6,900,000   7   296   -   -   303 
Foreign currency translation adjustment  -   -   -   -   (4)  (4)
Net loss  
-
   
-
   
-
   
(13,080
)
  
-
   
(13,080
)
                         
Balances as of March 31, 2023
  
555,637,651
  
$
556
  
$
153,046
  
$
(207,322
)
 
$
(71
)
 
$
(53,791
)

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

6
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OF CASH FLOWS
(UNAUDITED)
(In thousands)

 Three Months Ended March 31,  Three Months Ended March 31, 
 2023
  2022
  2024
  2023
 
Cash Flows - Operating Acivities:      
Cash Flows - Operating Activities:      
Net loss
 
$
(13,080
)
 
$
(5,101
)
 
$
(4,528
)
 
$
(13,080
)
Adjustments to reconcile net loss to net cash used by operating activities                
Depreciation and Amortization  
259
   
191
 
Depreciation and amortization
  
218
   
259
 
Bad debt expense  
156
   
-
   
147
   
156
 
Loss on extinguishment of debt  105   - 
Change in fair value of derivative liabilities
  6,797   
(3,482
)
  2,501   
6,797
 
Loss on issuance of debt
  -   3,434 
Amortization of debt issuance costs and original issue discount
  
1,931
   
889
   
1,553
   
1,931
 
Accrued interest  
1,365
   
667
   
955
   
1,365
 
Changes in operating assets and liabilities                
Accounts receivable - trade  
906
   
804
 
Accounts receivable
  
152
   
906
 
Inventory  
(203
)
  
39
   
490
   
(203
)
Prepaid expenses and other assets  
195
   
4
   
192
   
195
 
Accounts payable  
864
   
(866
)
  
(643
)
  
864
 
Accrued expenses  
450
   
444
   
(20
)
  
450
 
Contract liabilties
  
(11
)
  
(155
)
Net Cash Used in Operating Activities  
(371
)
  
(3,132
)
Contract liabilities
  
(22
)
  
(11
)
Net Cash Provided by/(Used) in Operating Activities  
1,100
   
(371
)
                
Cash Flows - Investing Activities                
Proceeds from sale of property and equipment  
-
   
360
 
Purchase of property and equipment
  (18)  -   (114)  (18)
Net Cash Flows Provided by (Used in) Investing Activities  
(18
)
  
360
 
Net Cash Flows Used in Investing Activities
  
(114
)
  
(18
)
                
Cash Flows - Financing Activities                
Proceeds from senior promissory notes
  -   2,940 
Payments to factoring agent, net
  (610)  (505)
Proceeds from warrant exercises  
-
   
100
 
Proceeds/(Payments) from factoring, net
  71   (610)
Payments of principal on finance leases  
(44
)
  
(65
)
  
(29
)
  
(44
)
Net Cash Flows Provided by Financing Activities  
(654
)
  
2,470
 
Net Cash Flows Provided by/ (Used in) Financing Activities  
42
   
(654
)
                
Effect of Exchange Rates on Cash  
(4
)
  
(4
)
  
111
   
(4
)
                
Net Change in Cash During Period  
(1,047
)
  
(306
)
  
1,139
   
(1,047
)
                
Cash at Beginning of Period  
1,153
   
619
   
1,797
   
1,153
 
Cash at End of Period 
$
106
  
$
313
  
$
2,936
  
$
106
 
                
Supplemental Information:                
Cash paid for interest 
$
908
  
$
574
  
$
971
  
$
908
 
                
Non-cash Investing and Financing Activities:                
Reclassification of warrant liability due to cashless warrant exercise 
$
-
  
$
2,167
 
Warrants issued in conjunction with senior secured promissory note payable
  -   2,654 
Common shares issued in conjunction with senior secured promissory note payable
  -   3,720 
Warrants issued in conjunction with convertible promissory notes
  2,784   - 
Conversion of asset-backed secured promissory notes to convertible promissory notes  4,584   - 
Common shares issued for advisory shares
  302   -   -   302 

 The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

7
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20232024

1.
Nature of the Business and Basis of Presentation

SANUWAVE Health, Inc. and Subsidiariessubsidiaries (“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, 2023,2024, and for the three months ended March 31, 2023,2024, and 20222023 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentationstatement have been included. Operating results for the three months ended March 31, 2023,2024, are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023.2024.
 
The condensed consolidated balance sheet on December 31, 2022,2023, 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, 2022,2023, Annual Report on Form 10-K filed with the SEC on March 31, 202321, 2024 (the “2022“2023 Annual Report”).

Reclassifications -Certain accounts in the prior period condensed consolidated financial statements have been reclassified to conform to the presentation of the current period condensed consolidated financial statements. These reclassifications had no effect on the previously reported operating results.

2.Going Concern

TheOur 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 Company expectscontinuation 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 2023 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.

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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 43 of the consolidated financial statements in our 20222023 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 doubtful accounts,credit losses, the net realizable value of inventory, useful lives of long-lived assets, fair value of goodwill and other intangible assets, the determination of the valuation allowances for deferred taxes, estimated fair value of stock-based compensation,litigation contingencies, and the estimated fair value of financial instruments, including warrants and embedded conversion options.

Revenue Recognition - The core principleprinciple of ASCAccounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers” (“ASC 606”) requires that an entity recognize revenuerevenue 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, AccessoryConsumables and Part Sales - System sales, accessoryconsumables 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.

Licensing Fees - Licensing transactions include distribution licenses and intellectual property licenses. Licensing revenue is recognized as the Company satisfies its performance obligations, which may vary with the terms of the licensing agreement.

Other Revenue - Other revenue primarily includes warranties, repairs, and billed freight. The Company allocates the device sales price to the product and the embeddedembedded 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 June 2016,December 2023, the Financial Accounting Standards Board (FASB) issued Accounting StandardsASC Update (ASU) 2016-13, Financial Instruments – Credit LossesNo. 2023-09, Income Taxes (Topic 326)740): MeasurementImprovements to Income Tax Disclosures. Update No. 2023-09 aims to enhance the transparency and decision usefulness of Credit Lossesincome tax disclosures. Update No. 2023-09 modifies the rules on Financial Instruments, which was subsequently revisedincome 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 ASU 2018-19. The ASU introduces afederal, 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 model for assessing impairment of most financial assets. Entities are required to use a forward-looking expected loss model, which replaces the current incurred loss model, resulting in earlier recognition of allowance for losses. The Company adopted this ASU in January 2023, and there was no material impactguidance on theour condensed consolidated financial statements.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 $0.0001 per share (the “Class A Common Stock”), at the Conversion Ratio (as defined in the Merger Agreement); and

•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.

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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.

4.5.Loss per Share

TheDiluted 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, 2023,2024, and 2022. In accordance with Accounting Standards codification (“ASC”) Topic 260-10-45-13, Earnings Per Share, the2023. The weighted average of 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  
1,140,560
   
553,338
 
Common shares issuable assuming exercise of nominally priced warrants  
21,691
   
21,691
 
Weighted average shares outstanding  
1,162,251
   
575,029
 

910
  
Three Months Ended
 
(in Thousands)
 
March 31, 2023
  March 31, 2022 
Weighted average shares outstanding      
Common shares  
553,338
   
498,723
 
Common shares issuable assuming exercise of nominally priced warrants  
21,691
   
26,691
 
Weighted average shares outstanding  
575,029
   
525,415
 

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 diluteddilutive 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, 2023,2024, and 2022,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.Anti-dilutive equity securities consisted of the following for the three months ended March 31, 2023, and 2022, respectively:

  Three Months Ended 
(in Thousands) March 31, 2023
  March 31, 2022
 
Common stock options
  
19,286
   
31,759
 
Common stock purchase warrants
  
1,186,522
   
183,435
 
Convertible notes payable
  
624,577
   
94,172
 
   
1,830,385
   
309,366
 
  Three Months Ended 
(in thousands) March 31, 2024
  March 31, 2023
 
Common stock options
  
16,287
   
19,286
 
Common stock purchase warrants
  
1,427,764
   
1,186,522
 
Convertible notes payable, including interest
  
284,123
   
624,577
 
   
1,728,174
   
1,830,385
 

5.6.Accrued Expenses

Accrued expenses consist of the following:

(in Thousands)
 March 31, 2023
   December 31, 2022
  March 31, 2024
  December 31, 2023
 
Registration penalties $1,583  $1,583  $1,583  $1,583 
License fees  893   892   892   892 
Director and professional fees
  797   586 
Board of directors fees
  1,072   942 
Employee compensation
  4,223   4,585   2,449   2,298 
Other  1,054   866   853   284 
 $8,550  $8,512  $6,849  $5,999 

6.7.Senior Secured Debt, In Default

The following table summarizes outstanding senior secured debt, in default:

 March 31, 2023  December 31, 2022  March 31, 2024  December 31, 2023 
(in thousands) Principal  Debt Discount  Carrying Value  Principal  Debt Discount  Carrying Value  Principal  Debt Discount  Carrying Value  Accrued Interest  Principal  Debt Discount  Carrying Value  Accrued Interest 
Senior secured debt $19,355  $(4,359) $14,996  $19,211  $(4,795) $14,416  $21,726  $(2,816) $18,910  $3,479  $21,562  $(3,284) $18,278  $3,206 

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 intofor 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. Since the combined fair value of the warrants and common stock issued as part of the Second NWPSA exceeded the face value of the note, the additional amount beyond the face value was recorded as a loss on issuance totaling $3.4 million.

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Interest is charged at the greater of the prime rate or 3% plus 9% and paid quarterly.  The cash interest rate for March 31,2023, was 17%. 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.

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As of March 31, 2023,2024, the Company is in default ofon 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 2022, totaled $0.4 million, and $0.5 million, respectively. Accrued interest related to the Senior Secured Note was $2.1 million and $1.9 million on March 31, 2023, and December 31, 2022, respectively. Interest expense on the Senior Secured Note totaled $1.6$1.9 million and $0.8$1.6 million for the three months ended March 31, 2024, and 2023, and 2022, respectively.

7.8.Convertible Promissory Notes Payable

 

The following two tables summarize outstanding notes payable as of March 31, 2023,2024, and December 31, 2022:2023:

 
 As of March 31, 2023  As of March 31, 2024 
(In thousands, except conversion price) 
Conversion
Price
  Principal  
Remaining
Debt Discount
  
Remaining
Embedded
Conversion
Option
  Carrying Value  
Conversion
Price
  Principal  
Remaining
Debt Discount
  Carrying Value 
Acquisition convertible promissory note, in default $0.10   4,000   -   -   4,000  $0.10   4,000   -   4,000 
Convertible promissory notes payable, related parties, in default $0.10   1,373   -   -   1,373 
2022 convertible notes payable $0.04   13,615   (1,532)  870   12,953 
2022 convertible notes payable, related parties $0.04   6,560   (738)  419   6,241 
Historical convertible promissory notes payable, related parties, in default $0.10   1,373   -   1,373 
Convertible notes payable $0.04   5,761   (2,284)  3,477 
Convertible notes payable, related parties $0.04   1,912   (758)  1,154 
Total Convertible Promissory Notes Payable     $25,548  $(2,270) $1,289  $24,567      $13,046  $(3,042) $10,004 

  As of December 31, 2022 
(In thousands, except conversion price) 
Conversion
Price
  Principal  
Remaining
Debt
Discount
  
Remaining
Embedded
Conversion
Option
  
Carrying
Value
 
Acquisition convertible promissory note, in default $0.10   4,000   -   -   4,000 
Convertible promissory note, related party, in default $0.10   1,373   -   -   1,373 
2022 convertible notes payable $0.04   13,660   (2,532)  1,585   12,713 
2022 convertible notes payable, related parties $0.04   6,515   (1,234)  755   6,036 
Total Convertible Promissory Notes     $25,548  $(3,766) $2,340  $24,122 
  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 $0.10   4,000   -   -   4,000 
Historical convertible promissory note, related party, in default $0.10   1,373   -   -   1,373 
Convertible notes payable $0.04   2,639   (1,235)  -   1,404 
Convertible notes payable, related parties $0.04   450   (118)  -   332 
Total Convertible Promissory Notes Payable
     $8,462  $(1,353) $-  $7,109 


2022 Convertible Notes Payable and 2022 Convertible Notes Payable, Related Parties -– In August 2022, and 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 and $4.0approximately $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 504.4695.6 million shares of common stock with an exercise price of $0.067 per share and (iii) Common Stock Purchase Warrants to purchase an additional 504.4695.6 million shares of common stock with an exercise price of $0.04 per share. The Company paid issuance costs totaling approximately $1.4 million.  Interest expense for the three months ended March 31, 2024, and 2023 totaled $2.3$1.6 million $0.8and $2.3 million in contractual interest expense and $1.5 million in amortization of debt discount and issuance costs.respectively.

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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 five trading days 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 addition,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.
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Table of Contents
On January 21, 2024, pursuant to the Notes,side letter, which the parties agreed that upon the Maturity Date, the Company agreedwill issue each Purchaser a Convertible Note Payable with the same principal amount as the principal amount of such Purchasers’ ABS Promissory Notes. Pursuance to reduce its outstanding shares viathis side letter the ABS Promissory Notes converted to convertible promissory notes, as described in Note 8. The Company recorded a reverse stock split to providenet loss on extinguishment of debt totaling $0.1 million for the number of authorized and unissued shares of common stock sufficient to permit the conversion of these Notes on or before Decemberthree months ended March 31, 2022. However, the Company obtained a waiver of this requirement through December 31, 2023, from all holders of the Notes and amended its Articles of Incorporation to increase its number of authorized shares of common stock from 800,000,000 to 2,500,000,000.2024.


8.10.
Fair Value Measurements

In accordance with ASC 820 (Fair Value Measurements and Disclosures), theThe 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, 2023 
    
Quoted prices in
  Significant other  Significant  Fair value measured at March 31, 2024 
 Fair value at  
active markets
  observable inputs  unobservable inputs  Fair value at  
Quoted prices in
active markets
  
Significant other
observable inputs
  
Significant
unobservable inputs
 
(in thousands)
 March 31, 2023  (Level 1)  (Level 2)  (Level 3)  March 31, 2024  (Level 1)  (Level 2)  (Level 3) 
Warrant liability $9,264  $-  $-  $9,264  $19,818  $-  $-  $19,818 
Embedded conversion option  1,289   -   -   1,289 
Total fair value $
10,553  $-  $
-  $
10,553 

 Fair value measured at December 31, 2022 
    Quoted prices in  Significant other  Significant  Fair value measured at December 31, 2023 
 Fair value at  active markets  observable inputs  unobservable inputs  Fair value at  
Quoted prices in
active markets
  
Significant other
observable inputs
  
Significant
unobservable inputs
 
(in thousands)
 December 31, 2022  (Level 1)  (Level 2)  (Level 3)  December 31, 2023  (Level 1)  (Level 2)  (Level 3) 
Warrant liability $1,416  $-  $-  $1,416  $14,447  $-  $-  $14,447 
Embedded conversion option  2,340   -   -   2,340   93   -   -   93 
Total fair value $3,756  $-  $-  $3,756  $14,540  $-  $-  $14,540 

There were no transfers among Levels 1, 2 or 3 during the three months ended March 31, 2023,2024, and 2022.2023. 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

Significant inputs related to theThe Company’s liability classified warrants are listed below.

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Tableas of Contents
  March 31,  December 31,
 
  2023  2022 
Weighted average remaining life in years  4.62   4.68 
Weighted average volatility  92%  92%
Value of underlying shares $0.017  $0.005 
Weighted average risk free interest rate  3.6%  4.0%
Expected dividend yield  0.00%  0.00%
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, 2023,2024, is as follows:


 Warrants  Fair Value  Fair Value 
(in thousands, except per share data) Outstanding  per Share  (in thousands) 
Balance at December 31, 2022  1,066,857  $0.06  $1,416 
Loss on remeasurement of warrant liability  -       7,848 
Balance at March 31, 2023  1,066,857  $0.01  $9,264 


 Warrants  Fair Value  Fair Value 
(in thousands, except per share data) Outstanding  per Share  (in thousands) 
Balance at December 31, 2023  1,221,308  $0.01  $14,447 
Issuance
  227,882   0.01   2,784 
Loss on remeasurement of warrant liability  -       2,587 
Balance at March 31, 2024  1,449,190  $0.01  $19,818 
Embedded Conversion Option Liability
Certain convertible notes include a conversion option that meets the definition of a derivative liability and, accordingly, is required to be bifurcated. The fair value for the conversion option liability was determined using the Black Scholes method.

The fair value of conversion option liability assumptions for the periods ended below:

 March 31, 2023  December 31, 2022 
       
Conversion Price(1)
 $0.04  $0.04 
Value of underlying shares $0.017  $0.005 
Interest Rate (annual) (2)
  4.77%  4.64%
Volatility (annual) (3)
  162.30%  503.00%
Time to Maturity (Years)  0.35   0.60 


(1)Based on the terms provided in the convertible promissory note agreements to convert to common stock of the Company

(2)Interest rate for U.S. Treasury Bonds, as of each presented period ending date, as published by the U.S. Federal Reserve.

(3)Based on a discounted historical daily volatility of the Company as of each presented period ending date.

A summary of the conversion option liability activity is as follows:
 
(in thousands) 
Conversion
Liability
 
Balance December 31, 2022 $2,340 
Change in fair value  (1,051)
Balance March 31, 2023 $1,289 

9.11.Revenue

The disaggregation of revenue is based on type and geographical region. The following table presents revenue from contracts with customers:

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Table of Contents
 Three Months Ended March 31, 2023  Three Months Ended March 31, 2022  Three Months Ended March 31, 2024  Three Months Ended March 31, 2023 
 United States  International  Total  United States  International  Total  United States  International  Total  United States  International  Total 
Accessory and parts revenue $2,574  $32  $2,606  $2,132  $(4) $2,128 
Consumables and parts revenue $4,241  $66  $4,307  $2,574  $32 $2,606 
System revenue  833   36   869   691   16   707   1,301   71   1,372   833   36   869 
License fees and other  7   10   17   8   9   17   -   5   5   7   10   17 
Product Revenue $3,414  $78  $3,492  $2,831  $21  $2,852  $5,542  $142  $5,684  $3,414  $78  $3,492 
Rental Income  283   -   283   343   -   343   102   -   102   283   -   283 
Total Revenue $3,697  $78  $3,775  $3,174  $21  $3,195  $5,644  $142  $5,786  $3,697  $78  $3,775 


10.12.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 ourthe 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, 2023,2024, and 20222023 were as follows:
 
  Three Months Ended 
  March 31, 2023  March 31, 2022 
Purchases:      
Vendor A  20%  19%
Three Months Ended
March 31, 2024March 31, 2023
Purchases:
Vendor A- %20%

11.
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’sCompany 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.

12.Subsequent Events

On May 9, 2023, the Company issued (i) Notes in an aggregate principal amount of approximately $1.2 million, (ii) First Warrants to purchase approximately 30.7 million shares of common stock with an exercise price of $0.067 per share and (iii) Second Warrants to purchase approximately 30.7 million shares of common stock with an exercise price of $0.04 per share, in each case pursuant to the Purchase Agreement. The closing of the private placement occurred on May 9, 2023, and we received total proceeds of $1.2 million.

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 20222023 included in our Annual Report on Form 10-K, filed with the SEC on March 31, 202321, 2024 (the “2022“2023 Annual Report”).

Executive Summary

We realizedcontinued to realize significant revenue growth during the three months ended March 31, 2023.  Revenue totaled $3.8 million, an increase of 18%,2024, as compared to $3.2 million for the same period of 2022.  Gross margins also decreased to 67%periods in 2023.  Revenue for the three months ended March 31, 2023, from 72%2024, totaled $5.8 million, an increase of 53%, as compared to $3.8 million for the same period in 2022, due to third party manufacturer price increases as compared to the prior year.of 2023.

Net loss for the three months ended March 31, 2023,2024, was $13.1$4.5 million, or ($0.02)$0.00 per basic and diluted share, compared to a net loss of $5.1$13.1 million, or ($0.01)$0.02 per basic and diluted share, for the same period in 2022.2023.  The increasedecrease 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, was duewe 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 increased costterms of financingthe 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 fund operations.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:

15
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  For the Three Months Ended 
 March 31,  Change  March 31,  Change 
 2023  2022  $  
% 
(in Thousands) 2024  2023  $  
% 
Revenues:                        
Total Revenue $3,775  $3,195  $580  18% $5,786  $3,775  $2,011  53%
Cost of Revenues  1,262   889   373  42%  1,584   1,262   322  26%
Gross Margin 2,513  2,306  207  9% 4,202  2,513  1,709  68%
Gross Margin % 73% 67% 600 bps    
Operating Expenses:                        
General and administrative 2,759  2,205  554  25% 3,675  2,759  916  33%
Selling and marketing 1,412  1,715  (303) -18% 1,232  1,412  (180) -13%
Research and development 131  166  (35) -21%
Research and Development 163  131  32  24%
Depreciation and amortization  189   176   13  7%  182   189   (7) -4%
Operating Loss (1,978) (1,956) (22) 1% (1,050) (1,978) 928  47%
Other Income (Expense), net  (11,102)  (3,145)  (7,957) 253%
Other Expense  3,478   11,102   (7,624) -69%
Net Loss $(13,080) $(5,101)  (7,979) 156% $(4,528) $(13,080)  8,552  65%
nm - Not Meaningful

Revenues and Gross Margin

Revenues for the three month-period ended March 31, 2023,2024, were $3.8$5.8 million compared to $3.2$3.8 million for the same period of 2022,2023, an increase of $0.6 million.$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 decreasedincreased to 67% from 72%73% during the three-month period ended March 31, 2023. The decrease in gross margin percentage for the three months ended March 31, 2023, was driven by higher cost2024, from 67% in the same period of production from our third-party manufacturers.2023.

General and Administrative Expenses

General and administrative expenses increased $554 thousand$0.9 million or 25%33% for the three months ended March 31, 2023,2024, compared with the same period of 2022.2023. The increase for the three months ended March 31, 2023,2024, was primarily due to increased professional fees, includingseverance costs and non-recurring legal expenses, audit fees, and other consulting fees.settlement.

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Selling and Marketing Expenses

Selling and marketing expenses decreased by $303 thousand$0.2 million or 18%13% for the three months ended March 31, 2023,2024, as compared with the same period of 2022.2023. The decrease was primarily due to a reductionseverance payments in sales headcount during 2023 and additional cost management activities.2023.

15
Research and Development Expenses

Research and development expenses decreased $35 thousand or 21%increased 24% for the three-month periodthree months ended March 31, 2023,2024, as compared with the same period of 2022.2023. Research and development expenseexpenses as a percentage of revenue decreased from 5%stayed flat at 3% during the three-month periodthree months ended March 31, 2022, to 3%2024, and for the same period in 2023. The decrease is primarily due to improved cost management in 2023.


Other (Expense)/Income, (Expense), net
  For the three months ended March 31,  Change 
  2023  2022  $  
% 
              
Interest expense $(4,278) $(3,192) $(1,086)  34%
Change in fair value of derivatives  (6,797)  3,482   (10,279)  -295%
Loss on issuance of debt  -   (3,434)  3,434  nm 
Other expense  (27)  -   (27) nm 
Loss on foreign currency exchange  -   (1)  1  nm 
Other expense, net $(11,102) $(3,145) $(7,957)  253%

  
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 increaseddecreased by $7.9$7.6 million to $11.1$3.5 million for the three months ended March 31, 2023,2024, as compared to the same period for 2022.  This increase2023. The decrease was primarily due to increased convertible promissory notes outstanding from the transactions executed during the second half of 2022 and an increaseda decrease in change in the fair value of warrantsderivatives expense of $4.3 million, recognition of a non-recurring loss on extinguishment of debt of $105 thousand and their embedded conversion liabilities.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, 2023,2024, we had an accumulated deficit of $207$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 20232024 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) 2023  2022 
Cash flows used by operating activities $(371) $(3,132)
Cash flows (used by) provided by investing activities $(18) $360 
Cash flows (used by) provided by financing activities $(654) $2,470 

  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)

17
Cash used inprovided by operating activities during the three months ended March 31, 2023,2024, totaled $0.4$1.1 million as compared to $3.1 millioncash used in operating activities of $371 thousand in the previous period. This improvement in cash used inprovided by operations aligns with our approach for profitable growth.is driven by the receipt of $2.5 million related to a license agreement and option agreement.

Cash used by financing activities of $0.8 million for the three months ended March 31, 2023, was primarily due to our factoring arrangement.  Cash provided by financing activities for the three months ended March 31, 2022, consisted primarily of $2.9 million received from our senior lender.

Critical Accounting Policies and 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 43 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 31, 2023.21, 2024.

16
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 policies and 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 1113 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 valuationsvaluation 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. The materialOur significant input assumptions for the selected subjective inputs have not changed for the reporting period, except for the expected volatility, which is estimated based on the actual volatility during the most recent historical period equalare discussed in Note 10 to the remaining life of the instruments.

Valuation of Intangible Assets and Goodwill
When we acquire a business, the assets acquired, and liabilities assumed are recorded at their respective fair values on the acquisition date. Goodwill is the excess of the purchase price over the estimated fair value of net assets of acquired businesses. Intangible assets primarily include patents, trademarks, and customer relationships. Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, and the assessment of the asset’s life cycle. The estimates could be impacted by legal, technical, regulatory, economic, and competitive risks. The test for impairment of goodwill requires us to make several estimates to determine the fair value of the goodwill. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on ourcondensed consolidated balance sheets and the judgment required in determining fair value. We assess the impairment of goodwill at the consolidated level annually. We also test definite-lived intangible assets for impairment when an event occurs, or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired. Our assessment for goodwill and intangible assets impairment is based on future cash flows that require significant judgment with respect to future revenue and expense growth rates and other assumptions and estimates. We use estimates that are consistent with the highest and best use of the assets based on a market participant’s view of the assets being evaluated. Actual results may differ from our estimates due to several factors including, among others, changes in competitive conditions, regulatory changes, results of clinical trials, and changes in worldwide economic conditions.
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.

Contractual Obligations

Our major outstanding contractual obligations relate to our financing leases for rental equipment, operating leases for our facilities and office equipment, purchase and supplier obligations for product component materials and equipment, and our outstanding debt. Please see our 2022 Annual Report for additional discussions of these obligations.

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Effects of Inflation

Due to the fact that ourOur assets are, to an extent, liquid in nature, so they are not significantly affected by inflation. However, the rate of inflation, which has been increasing,increased, affects expenses such as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market.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.

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

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Item 4.CONTROLS AND PROCEDURES

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, 2023.2024. 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, 2023.2024. 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, 2023,2024, the Company has still identified the following material weaknesses:


1.ExpertiseThe 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.A lack ofThe 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, 2023.2024.

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 working with an external vendorappropriate and fully mitigate risk. The material weaknesses will not be considered remediated until a sustained period of time has passed to properly document our current internal control policies and procedures to provide the framework for increased effectivenessallow management to test internal controls going forward. Wethe design and operational effectiveness of the corrective actions. Until the material weaknesses are also adding automatedremediated, we plan to continue toperform additional analyses and manual controls into and over the Company’s ERP systemother procedures to ensure that order to cash controlsour consolidated financial statements are implemented to mitigate the riskprepared in customer creation, pricing,accordance with U.S GAAP. In addition, we may discover additional material weaknesses that require additional time and accuracy of billing.  We will continue to work with our external vendorresources to remediate and we may decide to take additional measures to address the material weaknesses notedor modify the remediation steps described above.

We are also working with an outside vendor to improve our IT general controls over our ERPenterprise 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.

While the above actionsany material weakness or significant deficiency requires management to devote significant time and planned actions are subjectincur significant expense to ongoingremediate any such material weaknesses or significant deficiencies and management evaluation and will require validation and testingmay not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of the design and operating effectiveness of internal control over a sustained period, we are committed to continuous improvement and will continue to diligently reviewany material weakness in our internal control over financial reporting. The material weaknesses will not be considered remediated until management completes the designreporting 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 implementationcause shareholders to lose confidence in our reported financial information, all of the measures described above, until the controls operate for a sufficient period of time,which could materially and until management has concluded, through testing, that the controls are effective.adversely affect our business and stock price.

There is no assurance that the measures described above will be sufficient to remediate the previously identified material weaknesses and significant deficiencies.
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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, 2023,2024, that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting, except as disclosed in “Remediation Plan” above.

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PART II — OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS.

From timeFor information regarding legal proceedings at March 31, 2024, see Note 13 to time, the Companycondensed consolidated financial statements, which information is subject to various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contract and intellectual property matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company believes that all pending claims, if adversely decided, would not have a material adverse effect on our business, financial position or results of operations.incorporated herein by reference.

Item 1A.RISK FACTORS.

There have been no material changes from our risk factors as previously reported in Part I, Item 1A “Risk Factors – Risks Related to Our Business”Factors” in our 20222023 Annual Report.

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USEANDUSE OF PROCEEDS.
The information required by this item is disclosed in Part II, Item 5. “Other Information” of this Form 10-Q and is incorporated herein by reference.

None.

Item 3.DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

Item 4.MINE SAFETY DISCLOSURES.

Not applicable.

Item 5.OTHER INFORMATION.

Because we are filing this Quarterly Report on Form 10-Q within four business days afterDuring the triggering event, we are makingthree months ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the following disclosure under this Item 5 instead of filing a Current Report on Form 8-K under Item 1.01, Entry into a Material Definitive Agreement; Item 2.03, Creation of a Direct Financial Obligation,Exchange Act) adopted or an Obligation under an Off-Balance Sheet Arrangement of a Registrant; and Item 3.02, Unregistered Sales of Equity Securities:
Securities Purchase Agreement and Common Stock Warrant
On May 9, 2022, SANUWAVE Health, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Purchase Agreement”), with the purchasers identified on the signature pages thereto (the “Purchasers”)terminated any contract, instruction or written plan for the purchase or sale byof our securities that was intended to satisfy the Company in a private placement (the “Private Placement”)affirmative defense conditions of (i) the Company’s future advance convertible promissory notes in an aggregate principal amount of approximately $1.2 million (the “Notes”), and (ii) warrants to purchase an additional 30.7 million shares of common stockRule 10b5-1(c) of the Company with an exercise price of $0.067 per share (the “First Warrants”) and (iii) warrants to purchase an additional 30.7 million shares of common stock of the Company with an exercise price of $0.04 per share (the “Second Warrants,” collectively with the First Warrants, the “Warrants”).  The exercise price of the Warrants is subject to adjustment, including if the Company issuesExchange Act or sells shares of common stock or Share Equivalentsany non-Rule 10b5-1 trading arrangement (as defined in the Warrants) for an effective consideration price less than the exercise price of the Warrants 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 five trading days preceding such listing is less than $0.04 per share; provided, however, that the exercise price of the Warrants shall never be less than $0.01 per share. The Warrants have a five-year term. The closing of the Private Placement occurred on May 9, 2023 (the “Closing Date”)SEC’s rules). At the Closing Date, the Company received total proceeds of $1.2 million.
The securities in the Private Placement were offered and sold in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) thereof. Each Purchaser represented that it was an accredited investor.
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Notes
As described above, on May 9, 2023, the Company issued Notes to the Purchasers in an aggregate principal amount of $1.2 million. Pursuant to the Notes, the Company promised to pay each Purchaser, its designee or registered assigns (the “Holder”) in cash and/or in shares of common stock, at a conversion price of $0.04 (the “Conversion Price”), the principal amount (subject to reduction pursuant to the terms of the Note, the “Principal”) as may be advanced in disbursements (each, a “Disbursement” and together, the “Disbursements” with total principal of outstanding Disbursements equaling Principal), and to pay interest at a rate of fifteen percent (15%) per annum (“Interest”) on any outstanding Principal at the applicable Interest rate from the date of the Notes until the Notes are accelerated, converted, redeemed or otherwise. 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 five trading days preceding such listing is less than $0.04 per share; provided, however, that the Conversion Price shall never by less than $0.01.
In connection with the Private Placement, on May 9, 2023, the Company entered into a security agreement in favor of each Purchaser to secure the Company’s obligations under the Notes (the “Security Agreement”).
The rights of each Purchaser to receive payments under its Notes are subordinate to the rights of NH Expansion Credit Fund Holdings LP (“North Haven Expansion”) pursuant to a subordination agreement, which the Company and the Purchasers entered into with North Haven Expansion on May 9, 2023, in connection with the Private Placement (the “Subordination Agreement”).
Registration Rights Agreement
In connection with the Purchase Agreement, the Company entered into a registration rights agreement with the Purchasers on May 9, 2023 (the “Registration Rights Agreement”), pursuant to which the Company agreed to file a registration statement (the “Registration Statement”) with the SEC no later than sixty (60) days following the Closing Date to register the resale of the number of shares of common stock issuable upon conversion of the Notes and exercise of the Warrants issued pursuant to such Purchase Agreement (the “Registrable Securities”) and to cause the Registration Statement to become effective within one-hundred eighty (180) days following the Closing Date. The Company shall use its best efforts to keep the Registration Statement continuously effective under Securities Act, until all Registrable Securities have been sold, or may be sold without the requirement to be in compliance with Rule 144(c)(1) of the Securities Act and otherwise without restriction or limitation pursuant to Rule 144 of the Securities Act, as determined by the counsel to the Company.
Item 6.EXHIBITS

2.1
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 No.2.1 to the Form 8-K filed with the SEC on August 23, 2023).
Description
2.2
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).
2.3
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).
3.1
Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Form 10-SB filed with the SEC on December 18, 2007).
  
3.2
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).
  
3.3
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).

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3.4
Bylaws (Incorporated by reference to Exhibit 3.02 to the Form 10-SB filed with the SEC on December 18, 2007).
  
3.5
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).
  
3.6
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).
  
3.7
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).
  
3.8
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).

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3.9
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).
  
3.10
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).
  
3.11
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).
  
3.12
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).
  
4.1
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).
4.2
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).
10.1
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).
10.2
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).
10.3
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).
10.4
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).
10.5
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).
10.6
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).
10.7
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).
10.8
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).

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10.9
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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 SANUWAVE HEALTH, INC.
  
Dated: May 11, 20239, 2024By:
By: /s/ Kevin A. Richardson, IIMorgan Frank
  Kevin A. Richardson, IIMorgan Frank
  
Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
   
Dated: May 11, 20239, 2024
By:
/s/ Toni RinowPeter Sorensen
  Toni RinowPeter Sorensen
  
Chief Financial Officer
(Principal Financial and Accounting Officer)


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