SANUWAVE Health, Inc. 10-Q

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, 2021 included in our Annual Report on Form 10-K, filed with the SEC on May 13, 2022 (the “2021 Annual Report”). Overview We are a shock wave technology company using a patented system of noninvasive, high-energy, acoustic shock waves for regenerative medicine and other applications. Our initial focus is regenerative medicine utilizing noninvasive, acoustic shock waves to produce a biological response resulting in the body healing itself through the repair and regeneration of tissue, musculoskeletal, and vascular structures. Our lead regenerative product in the United States is the dermaPACE® device, used for treating diabetic foot ulcers (“DFU”), which was subject to two double-blinded, randomized Phase III clinical studies. On December 28, 2017, the U.S. Food and Drug Administration (“FDA”) granted the Company’s request to classify the dermaPACE® System as a Class II device via the de novo process. As a result of this decision, the Company was able to immediately market the product for the treatment of DFU as described in the de novo request, subject to the general control provisions of the Food, Drug and Cosmetic Act and the special controls identified in this order. On August 6, 2020, we entered into an asset purchase agreement (the “Asset Purchase Agreement” or “Acquisition”) with Celularity Inc. (“Celularity”) pursuant to which we acquired Celularity’s UltraMIST® assets (“UltraMIST®” or the “Assets”). The UltraMIST® System provides through a fluid mist a low-frequency, non-contact, and pain free ultrasound energy deep inside the wound bed that promotes healing from within. The ultrasound acoustic waves promote healing by reducing inflammation and bacteria in the wound bed, while also increasing the growth of new blood vessels to the area. The UltraMIST® System treatment must be administered by a healthcare professional. This proprietary technology has been cleared by the FDA for the promotion of wound healing through wound cleansing and maintenance debridement combined with ultrasound energy deposited inside the wound that stimulated tissue regeneration. In connection with the Asset Purchase Agreement, on August 6, 2020, we entered into a license and marketing agreement with Celularity pursuant to which Celularity granted to the Company a license to the Celularity wound care biologic products, Biovance® and Interfyl® (the “License Agreement”). The License Agreement provides the Company with an exclusive license to use, market, distribute and sell Biovance® in the “Field” and “Territory” (each as defined in the License Agreement), and a non-exclusive license to use, market, distribute and sell Interfyl® in the Field and in the Territory. The License Agreement has an initial five-year term, after which it automatically renews for additional one-year periods, unless either party gives written notice at least 180 days prior to the expiration of the current term. In May 2021, the Company received notification alleging that it is not in compliance the License Agreement with Celularity. See further discussion in Note 11 - Contingencies in the accompanying condensed consolidated financial statements. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to the estimate of the fair value of embedded conversion options and warrants. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The results of our operations for any historical period are not necessarily indicative of the results of our operations for any future period. 18 Table of Contents In addition, there are other items within our financial statements that require estimation but are not deemed critical as defined above. Changes in these and other items could still have a material impact upon our financial statements. Our significant accounting policies are more fully described in Note 3 to our Consolidated Financial Statements filed with our 2021 Annual Report. For a description of recent accounting policies and the impact on our financial statements, refer to Note 3 in the accompanying condensed consolidated financial statements. Financial Overview Since inception in 2005, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. We have devoted and expect to continue to devote substantial resources for the commercialization of the dermaPACE® System and intend to continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. We also expect to require additional working capital as sales of our UltraMIST® product continue to grow. The Company had an accumulated deficit of $183.9 million through December 31, 2021 and has a current year to date net loss of $1.7 million. These factors and the events of default on the promissory notes discussed above create substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the financial statement issuance date. Our operating losses create substantial doubt about our ability to continue as a going concern. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing may provide the necessary funding for us to continue as a going concern for the 12 months. The continuation of our business is dependent upon raising additional capital to fund operations. Management’s plans are to obtain additional capital in 2022 through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, the 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 shareholders. 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. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for us for the next 12 months. 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. 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 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. Our 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 we be unable to continue as a going concern. Since our inception, we have incurred losses from operations each year. As of June 30, 2022, we have an accumulated deficit of $185.7 million. Although the size and timing of our future operating losses are subject to significant uncertainty, we anticipate that our operating losses will continue over the next few years as we continue to incur expenses related to commercialization of our dermaPACE® system for the treatment of DFU in the United States. If we are able to successfully commercialize, market and distribute the dermaPACE® system, then we believe we may be able to partially or completely offset these losses in the future with revenues from sales of our UltraMist® systems and applicators. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing, as discussed above, may provide the necessary funding for us to continue as a going concern for the next 12 months. We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to be generated from, any of our products, due to the numerous risks and uncertainties associated with developing and marketing products, including the uncertainty of: 19 Table of Contents • the scope, rate of progress and cost of our clinical trials; • future clinical trial results; • the cost and timing of regulatory approvals; • supplier and customer disputes; • the establishment of successful marketing, sales and distribution channels and partnerships, including our efforts to expand our marketing, sales and distribution reach through joint ventures and other contractual arrangements; • the cost and timing associated with establishing reimbursement for our products; • the effects of competing technologies and market developments; and • the industry demand and patient wellness behavior. Any failure to complete the development of our product candidates in a timely manner, or any failure to successfully market and commercialize our product candidates, would have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with us and our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business” in our 2021 Annual Report. The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity which has decreased demand for a broad variety of products, including from our customers. We have experienced a disruption of our supply channels which will continue for an unknown period of time until the global supply chain can return to the pre- disease status. Also, the pandemic may cause continued or additional actions by hospitals and clinics such as limiting elective procedures and treatments and limiting clinical trial activities and data monitoring. These factors have had and we expect that they will continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. 20 Table of Contents Results of Operations For the Three Months Ended For the Six Months Ended June 30, Change June 30, Change 2022 2021 $ % 2022 2021 $ % Revenues: Total Revenue $ 3,882 $ 2,909 $ 973 33 % $ 7,077 $ 5,025 $ 2,052 41 % Cost of Revenues 1,096 1,048 48 5 % 1,986 2,103 (117 ) -6 % Gross Margin 2,786 1,861 925 50 % 5,091 2,922 2,169 74 % Operating Expenses: General and administrative 2,937 2,923 14 0 % 5,078 6,045 (967 ) -16 % Selling and marketing 1,672 2,520 (848 ) -34 % 3,387 4,300 (913 ) -21 % Research and development 171 272 (101 ) -37 % 337 626 (289 ) -46 % Gain on disposal of assets (136 ) - (136 ) N/A (690 ) - (690 ) N/A Depreciation and amortization 210 192 18 9 % 386 391 (5 ) -1 % Operating Loss (2,068 ) (4,046 ) 1,978 -49 % (3,407 ) (8,440 ) 5,033 -60 % Other Income (Expense), net 4,770 (4,563 ) 9,333 -205 % 1,685 (5,090 ) 6,775 -133 % Income tax expense - (6 ) 6 - 22 (22 ) Net Income (Loss) $ 2,702 $ (8,615 ) 11,317 -131 % $ (1,722 ) $ (13,552 ) 11,830 -87 % Revenues and Gross Margin Revenues for the three month-period ended June 30, 2022 were $3.9 million compared to $2.9 million for the same period of 2021, an increase of $1.0 million. Revenues for the six months ended June 30, 2022 were $7.1 million compared to $5.0 million for the same period in 2021, an increase of $2.1 million. The increase for both periods was driven by the continued increased sales of UltraMIST® devices and single-use accessories. Gross margin as a percentage of revenue increased to 71.8% from 64.0% during three-month period ended June 30, 2022 as compared with the same period of 2021, and to 71.9% from 58.1% during the six-month period ended June 30, 2022 as compared with the same period of 2021. The increase in gross margin percentages for the quarter was driven by higher sales of single-use accessories, which have a higher gross margin percentage, offset by the discontinuation of Biologics sales in the first quarter of 2022, which had a lower gross margin percentage. Research and Development Expenses Research and development expenses decreased 37.1% to $171 thousand from $272 thousand during the three-months period ended June 30, 2022, as compared with the same period of 2021 and decreased 46.2% to $337 thousand from $626 thousand during the six-month period ended June 30, 2022 as compared with the same period of 2021. The decrease was primarily due to lower employee compensation in 2022. Selling and Marketing Expenses Selling and marketing expenses decreased by $850 thousand or 33.7% for the three-month period ended June 30, 2022, as compared with the same period of 2021. Selling and marketing expenses decreased by $913 thousand or 21.2% for the six-month period ended June 30, 2022, as compared with the same period of 2021. The decrease was primarily due to a reduction in sales and marketing headcount during 2022. General and Administrative Expenses General and administrative expenses were essentially flat for the three-month periods ended June 30, 2022 and 2021. General and administrative expenses decreased $1.0 million or 16.0% for the six-month period ended June 30, 2022, compared with the same period of 2021. The decrease for both the three- and six-month periods ended June 30, 2022 were primarily due to a reduction in the registration penalties and legal fees that were incurred during the same period in 2021. 21 Table of Contents Liquidity and Capital Resources We expect to devote substantial resources for the commercialization of the dermaPACE® System and intend continue to research and develop the next generation of our technology as well as the non-medical uses of the PACE technology, both of which will require additional capital resources. The Company had an accumulated deficit of $183.9 million through December 31, 2021, and has a current year to date net loss of $1.7 million. These factors and the events of default on the notes payable create substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the financial issuance date. Historically, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. The continuation of our business is dependent upon raising additional capital to fund operations; we may not be able to do so, and/or the terms of any financings may not be advantageous to us. During the six months ended June 30, 2022, cash used by operating activities totaled approximately $5.4 million, which was driven in part by the net loss for the period along with losses on extinguishment and issuance of debt offset largely by the change in the fair value of the derivative liabilities. Cash provided by investing activities during the first six months of 2022 consisted primarily of the proceeds received in the sale of assets of $948 thousand. Cash provided by financing activities for the period consisted primarily of $2.9 million received from the NH Note Expansion in February 2022 and proceeds from short-term notes of $545 thousand in May from the C6 note refinancing and the short-term loan in June of $1.6 million. Segment and Geographic Information We have determined that we have one operating segment. Our revenues are generated from sales in United States, Europe, Canada, Middle East, Central America, South America, Asia and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are located 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 2021 Annual Report for additional discussions of these obligations. Off-Balance Sheet Arrangements Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities. Effects of Inflation Due to the fact that our assets are, to an extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation, which has been increasing, 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. 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. 22 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required under Regulation S-K for “smaller reporting companies.”