SANUWAVE Health, Inc. 10-K

Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 688 ) F-1 Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2023 and 2022 F-4 Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-7 38 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of SANUWAVE Health, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of SANUWAVE Health, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive loss, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Explanatory Paragraph – Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring losses and needs to raise additional funds to meet its obligations, sustain its operations, and to resolve the events of default on the Company’s debt. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Financial Instruments (Embedded Conversion Options and Warrant Liability) Critical Audit Matter Description As described in Notes 11, 12, and 13 to the consolidated financial statements, the Company has entered into Securities Purchase Agreements and Asset-Backed Secured Promissory Notes (the “Transactions”). The Company determined certain embedded conversion features associated with the Transactions were required to be bifurcated and recorded at fair value. The warrants issued in connection with the Transactions were also recorded at fair value. The fair value of the embedded conversion options and the warrant liability were valued using valuation techniques and key inputs as described in the footnotes. F-1 Table of Contents The principal considerations for our determination that the valuation of the embedded conversion options and warrant liability is a critical audit matter were the significant judgments made by management in determining the fair value of the embedded conversion options and warrant liability. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions. The audit also involved the use of professionals with specialized skill and knowledge. How the Critical Audit Matter was Addressed in the Audit Our audit procedures related to the valuation of the financial instruments included the following, among others: ◾ We obtained an understanding of the design of the Company's controls over valuation of financial instruments, including controls over management's review of the valuation models, and the significant assumptions used in determining the fair value of the financial instruments. ◾ With assistance of our valuation specialists, we audited the fair value of the embedded conversion options and warrant liability, valuation methodology, and key assumptions used in determining the fair value of the embedded conversion options and warrant liability by: a. Evaluating the appropriateness of the valuation models and techniques used in determining the fair value; b. Assessing the reasonableness of the significant valuation inputs, including the probability weighted expected value considering the merger agreement with SEPA Acquisition Corp. (“SEPA”), the risk adjusted expected exchange ratio, the value of SEPA’s Class A common stock, the expected timing of the closing of the merger, and the probability of the merger closing; c. Assessing that the significant valuation assumption inputs, in the Black Scholes valuation model, of the discounted stock price and implied volatility are consistent with those that would be used by market participants through the testing of source information; and d. Checking the mathematical accuracy of the calculation, developing independent estimates and comparing to those selected by management, where applicable, and recalculating management’s fair value, verifying it was reasonable. ◾ We audited the completeness and accuracy of the underlying data supporting the significant valuation assumption inputs. /s/ Marcum llp Marcum LLP We have served as the Company’s auditor since 2018. New York, NY March 21, 2024 F-2 Table of Contents PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2023 and 2022 (In thousands, except share data) 2023 2022 ASSETS Current Assets: Cash $ 1,797 $ 1,153 Accounts receivable, net of allowance of $ 1,237 and $ 1,037 , respectively 3,314 4,029 Inventory 2,951 868 Prepaid expenses and other current assets 1,722 570 Total Current Assets 9,784 6,620 Non-Current Assets: Property, equipment and right of use assets, net 938 856 Intangible assets, net 4,434 5,137 Goodwill 7,260 7,260 Total Non-Current Assets 12,632 13,253 Total Assets $ 22,416 $ 19,873 LIABILITIES Current Liabilities: Senior secured debt, in default $ 18,278 $ 14,416 Convertible promissory notes payable 5,404 16,713 Convertible promissory notes payable, related parties 1,705 7,409 Asset-backed secured promissory notes payable 3,117 - Asset-backed secured promissory notes payable, related parties 1,458 - Accounts payable 5,705 4,400 Accrued expenses 5,999 8,512 Factoring liabilities 1,490 2,130 Warrant liability 14,447 1,416 Accrued interest 5,444 4,052 Accrued interest, related parties 669 788 Current portion of contract liabilities 92 60 Other 947 319 Total Current Liabilities 64,755 60,215 Non-Current Liabilities: Lease liabilities 492 438 Contract liabilities 347 230 Total Non-Current Liabilities 839 668 Total Liabilities $ 65,594 $ 60,883 Commitments and Contingencies (Footnote 21) STOCKHOLDERS’ DEFICIT Preferred stock, par value $ 0.001 , 5,000,000 shares authorized, 6,175 Series A, 293 Series B, 90 Series C, and 8 Series D designated shares, respectively; no shares issues and outstanding at 2023 and 2022 $ - $ - Common stock, par value $ 0.001 , 2,500,000,000 shares authorized, 1,140,559,527 and 548,737,651 issued and outstanding at 2023 and 2022 , respectively 1,140 549 Additional paid-in capital 175,842 152,750 Accumulated deficit ( 220,049 ) ( 194,242 ) Accumulated other comprehensive loss ( 111 ) ( 67 ) Total Stockholders’ Deficit ( 43,178 ) ( 41,010 ) Total Liabilities and Stockholders’ Deficit $ 22,416 $ 19,873 The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 Table of Contents SAUWAVE HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Years ended December 31, 2023 and 2022 (In thousands, except share and per share data) 2023 2022 Revenue $ 20,398 $ 16,742 Cost of revenues 6,035 4,331 Gross Margin 14,363 12,411 Operating Expenses: General and administrative 8,674 12,556 Selling and marketing 4,898 7,474 Research and development 579 567 Depreciation and amortization 752 766 Total Operating Expenses 14,903 21,363 Operating Loss ( 540 ) ( 8,952 ) Other Income (Expense) Interest expense ( 12,946 ) ( 12,771 ) Interest expense, related party ( 2,677 ) ( 1,361 ) Change in fair value of derivative liabilities ( 9,621 ) 16,654 Loss on issuance of debt - ( 3,434 ) Loss on extinguishment of debt - ( 418 ) Other expense ( 19 ) ( 9 ) Total Other Expense ( 25,263 ) ( 1,339 ) Net Loss Before Income Taxes ( 25,803 ) ( 10,291 ) Income tax expense 4 2 Net Loss $ ( 25,807 ) $ ( 10,293 ) Other Comprehensive Loss Foreign currency translation adjustments ( 44 ) 6 Total Comprehensive Loss $ ( 25,851 ) $ ( 10,287 ) Loss per Share: Net loss per share, basic and diluted $ ( 0.03 ) $ ( 0.02 ) Weighted average shares outstanding, basic and diluted 793,850,994 549,470,787 The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (In thousands, except share data) Common Stock Shares Issued and Outstanding Par Value Additional Paid- in Capital Accumulated Deficit Accumulated Other Comprehensive 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 senior note 20,666,993 20 3,700 - - 3,720 Shares issued for settlement of debt and warrants 19,444,446 20 1,341 - - 1,361 Shares issued for services 12,097,500 12 876 - - 888 Net loss - - - ( 10,293 ) - ( 10,293 ) Foreign currency translation adjustment - - - - 6 6 Balances as of December 31, 2022 548,737,651 $ 549 $ 152,750 $ ( 194,242 ) $ ( 67 ) $ ( 41,010 ) Shares issued for services 12,900,000 $ 13 $ 514 $ - $ - $ 527 Shares issued for settlement of August 2022 debt 464,440,813 464 18,113 - - 18,577 Shares issued for settlement of November 2022 debt 114,481,063 114 4,465 - - 4,579 Net loss - - - ( 25,807 ) - ( 25,807 ) Foreign currency translation adjustment - - - - ( 44 ) ( 44 ) Balance as of December 31, 2023 1,140,559,527 $ 1,140 $ 175,842 $ ( 220,049 ) $ ( 111 ) $ ( 43,178 ) The accompanying notes to the consolidated financial statements are an integral part of these financial statements F-5 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2023 and 2022 (In thousands) 2023 2022 Cash Flows - Operating Activities: Net loss $ ( 25,807 ) $ ( 10,293 ) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 1,028 952 Bad debt expense 781 253 Shares issued for services 224 888 Gain/loss on extinguishment of debt - 418 Income tax expense 4 2 Change in fair value of derivative liabilities 9,621 ( 16,654 ) Loss on issuance of debt - 3,434 Amortization of debt issuance and debt discounts 6,911 4,950 Changes in operating assets and liabilities Accounts receivable ( 53 ) ( 1,748 ) Inventory, prepaid expenses and other assets ( 3,006 ) ( 72 ) Accounts payable 1,546 ( 2,550 ) Accrued interest and accrued interest, related parties 6,306 3,182 Accrued expenses and contract liabilities ( 2,093 ) 69 Net Cash Used by Operating Activities ( 4,538 ) ( 17,169 ) Cash Flows - Investing Activities Proceeds from sale of property and equipment 21 332 Net Cash Flows Provided by Investing Activities 21 332 Cash Flows - Financing Activities Proceeds from convertible promissory notes 3,026 16,227 Proceeds from asset-backed secured promissory notes payable 2,994 - Proceeds from senior secured promissory note - 2,940 (Payments)/Proceeds from factoring ( 639 ) 695 Proceeds from warrant exercises - 100 Proceeds from short term borrowings - 640 Repayments of debt principal - ( 2,981 ) Principal payments on finance leases ( 170 ) ( 237 ) Net Cash Flows Provided by Financing Activities 5,211 17,384 Effect of Exchange Rates on Cash ( 50 ) ( 13 ) Net Change in Cash During Period 644 534 Cash at Beginning of Period 1,153 619 Cash at End of Period $ 1,797 $ 1,153 Supplemental Information: Cash paid for interest $ 1,958 $ 3,712 Non-Cash Investing and Financing Activities: Warrants issued in conjunction with senior secured promissory note payable and convertible promissory notes payable $ 1,682 $ 4,177 Conversion of convertible notes payable and accrued interest to common stock 23,156 - Embedded conversion feature on convertible debt 835 2,760 Common shares issued for advisory shares 302 - Settlement of debt and warrants with stock - 1,361 Common shares issued in conjunction with senior secured debt - 3,720 Warrant issuance in conjunction with convertible notes - 1,708 Reclassification of warrant liabilities to equity due to cashless warrant exercise - 2,166 Working capital balances refinanced into convertible notes payable - 2,363 The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023 and 2022 1. Nature of the Business and Basis of Presentation SANUWAVE Health, Inc. and Subsidiaries (“SANUWAVE” or the “Company”) is focused on the commercialization of its patented noninvasive and biological response activating medical systems for the repair and regeneration of skin, musculoskeletal tissue, and vascular structures. Basis of Presentation - The accompanying 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”) and with the instructions to for 10-K and Regulation S-X. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The functional currencies of the Company’s foreign operations are their local currencies. The financial statements of the Company’s foreign subsidiary have been translated into United States dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. Translation adjustments are reported in other comprehensive loss in the consolidated statements of comprehensive loss and as cumulative translation adjustments in accumulated other comprehensive loss in the consolidated balance sheets. Segment information - We have determined that we have one operating segment. Our revenues are primarily generated from sales in the United States. All significant expenses are generated, and all significant assets are located in the United States. Reclassification - Certain accounts in the prior period consolidated financial statements have been reclassified to conform to the presentation of the current year consolidated financial statements. These reclassifications had no effect on the previously reported operating results. 2. Going Concern Our recurring losses from operations, the events of default on the Company’s notes payable, and dependency upon future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of 12 months from the filing of the Form 10-K. We will be required to raise additional funds to finance our operations and remain a going concern; we may not be able to do so, and/or the terms of any financings may not be advantageous to us. The continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources for the expansion and continued commercialization of our UltraMIST and PACE systems which will require additional capital resources. The operating losses and the events of default on the Company’s notes payable indicate substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the filing of this Annual Report on Form 10-K. Management’s plans are to obtain additional capital in 2024 primarily through the closure of the Merger Agreement, as described in Note 4. The Company could also obtain funding 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. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions if obtained as discussed above should provide the necessary funding for us. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms. The accompanying 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 consolidated financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our 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. F-7 Table of Contents 3. Summary of Significant Accounting Policies The significant accounting policies followed by the Company are summarized below: Estimates – These 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 consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein. Significant estimates include the recording of allowances for credit losses, the net realizable value of inventory, fair value of goodwill and intangible assets, the determination of the valuation allowances for deferred taxes, litigation contingencies, estimated fair value of stock-based compensation, and the estimated fair value of embedded financial instruments, including warrants and embedded conversion options. Accounts receivable — Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that will not be fully collected. The allowance is based on the assessment of the following factors: customer creditworthiness; historical payment experience; age of outstanding receivables. Management routinely assesses the financial strength of its customers and, consequently, believes accounts receivable are stated at the net realizable value and credit risk exposure is limited. Inventory - Inventory consists of purchased medical equipment and parts and is stated at the lower of average cost, which is valued using the first in, first out (“FIFO”) method, or net realizable value less allowance for selling and distribution expenses. The Company analyzes its inventory levels and writes down inventory that has, or is expected to, become obsolete. Goodwill — Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under Accounting Standards Codification (ASC) Topic 350, Intangibles-Goodwill and Other . The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter. The Company performed a qualitative evaluation at the reporting unit level and determined there was no goodwill impairment as of December 31, 2023, and 2022. Intangible Assets — Intangible assets arising from the Company’s acquisition are amortized on a straight‑line basis over the estimated useful life of each asset. Customer relationships have a useful life of seven years . Patents and tradenames have a useful life of nineteen years . Impairment of long-lived assets – The Company reviews long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the asset’s carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. The Company determines fair value by using a combination of comparable market values and discounted cash flows, as appropriate. Leases – The Company determines whether an arrangement is a lease at inception. When lease arrangements include lease and non-lease components, the Company accounts for lease and non-lease components (e.g. common area maintenance) separately based on their relative standalone prices. For leases where the Company is the lessee, Right of Use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases did not provide an implicit interest rate, the Company used the equivalent borrowing rate for a secured financing with the term of equal to the remaining life of the lease at inception. Any lease arrangements with an initial term of 12 months or less are not recorded on our consolidated balance sheets, and the Company recognizes lease costs for these lease arrangements on a straight-line basis over the lease term. In the event a lease arrangement would provide us with options to exercise one or more renewal terms or to terminate the lease arrangement, we would include these options when we are reasonably certain to exercise them in the lease term used to establish ROU assets and lease liabilities. None of our lease agreements include an option to purchase the leased asset, residual value guarantees, or material restrictive covenants. The Company has other lease arrangements that are adjusted periodically based on an inflation index or rate. The future variability of these payments and adjustments are unknown, and therefore they are not included as minimum lease payments used to determine ROU assets and lease liabilities. Variable rental payments are recognized in the period in which the obligation is incurred. F-8 Table of Contents Fair value of financial instruments - The carrying values of accounts payable, and other short-term obligations approximate their fair values, because of the short-term maturities of these instruments. The Company utilizes the guidance of ASC Topic 820-10, Fair Value Measurements (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The framework that is set forth in this standard is applicable to the fair value measurements where it is permitted or required under other accounting pronouncements. The ASC 820-10 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories: Level 1 – Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets and liabilities: Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly: and Level 3 – Unobservable inputs that are not corroborated by market data, therefore requiring the Company to develop its own assumptions. Sequencing policy – The Company follows a sequencing policy for which in the event partial reclassifications of contracts subject to ASC Topic 815-40-25, Derivatives and Hedging , is necessary, due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated based on earliest issuance date of potentially dilutive instruments with the earliest grants receiving first allocation of shares. Convertible promissory notes – The Company evaluates its convertible instruments to determine if those contracts, or embedded components of those contracts, qualify as derivative financial instruments to be separately accounted for in accordance with ASC Topic 815 “Derivatives and Hedging” (“ASC 815”). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. Conversion options are recorded as a discount to the host instrument and are amortized as amortization of debt discount on the consolidated statements of comprehensive loss over the life of the underlying instrument. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes because of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Debt discount – The Company records a debt discount related to warrants issued with debt at fair value and recognizes the cost using the straight-line method, which approximates the effective interest method, over the term of the related debt as interest expense, which is reported in the Other Income (Expense) section in our consolidated statements of comprehensive loss. This debt discount is reported as a reduction of the related debt liability. Contract Liabilities – Device product sales are bundled with an initial one-year warranty and the Company offers a separately priced multi-year warranty. Because the warranty represents an obligation, revenue is deferred as a contract liability and recognized over the time that the Company satisfies its performance obligations, which is generally the warranty term. Revenue Recognition - The core principle of ASC Topic 606 “Revenue from Contracts with Customers” (“ASC 606”) requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company allocates the transaction price to all contractual performance obligations included in the contract. If a contract has more than one performance obligation, we allocate the transaction price to each performance obligation based on standalone selling price, which depicts the amount of consideration we expect to be entitled in exchange for satisfying each performance obligation. The Company recognizes revenue primarily from the following types of contracts: System Sales, Consumables and Part Sales - System sales, accessory 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 embedded 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. F-9 Table of Contents Shipping and handling costs - Shipping charges billed to customers are included in revenues. Shipping and handling costs incurred have been recorded in cost of goods sold totaling $ 484 thousand and $ 324 thousand for the years ended December 31, 2023, and 2022, respectively. Research and development - Research and development costs are expensed as incurred. Research and development costs include costs of research, engineering, and technical activities to develop a new product, researching an expanded product use or making significant improvements to existing products, including the costs of clinical development. Stock-based compensation - The Company uses the fair value method of accounting for its employee stock option program. Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the award measured on the grant date. The Company recognizes the estimated fair value of the award as compensation cost on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The Company generally issues new shares of common stock to satisfy option and warrant exercises. The expected life of options granted represents the period of time that options granted are expected to be outstanding and are derived from the contractual terms of the options granted calculated under the simplified method. The risk-free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of the grant. The expected volatility is based on the average volatility of the Company’s common stock. The expected dividend yield is based on our historical dividend experience, however, since our inception, we have not declared dividends. Forfeitures are recognized as they occur. Comprehensive income (loss) – Comprehensive income (loss) results from the translation of the Company’s foreign entity’s financial statements from their functional currency to U.S. dollars for consolidation in the accompanying consolidated financial statements. New accounting pronouncements - In December 2023, the FASB issued ASC Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Update No. 2023-09 aims to enhance the transparency and decision usefulness of income tax disclosures. Update No. 2023-09 modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state, and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. Update No. 2023-09 is effective for fiscal years beginning after December 15, 2024. We expect to adopt Update No. 2023-09 prospectively. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was subsequently revised by ASU 2018-19. The ASU introduces a 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 impact on the consolidated financial statements. 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. 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. F-10 Table of Contents 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; (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 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. 5. Loss per Share The 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 years ended December 31, 2023, and 2022. In accordance with ASC Topic 260-10-45-13, Earnings Per Share , 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: (in thousands) December 31, 2023 December 31, 2022 Common shares 772,160 526,530 Common shares issuable assuming exercise of nominally priced warrants 21,691 22,941 Weighted Average Shares Outstanding 793,851 549,471 Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net loss per share. As a result of the net loss for the years ended December 31, 2023, and 2022, all potentially dilutive shares were anti-dilutive and therefore excluded from the computation of diluted net loss per share. Anti-dilutive equity securities consist of the following: (in thousands) December 31, 2023 December 31, 2022 Common stock options 16,287 21,246 Common stock purchase warrants 1,199,882 1,186,522 Convertible notes payable, including interest 161,773 603,425 1,377,942 1,811,193 F-11 Table of Contents 6. Inventory Inventory consisted of the following: (in thousands) December 31, 2023 December 31, 2022 Finished goods $ 416 $ 570 Parts and accessories 2,882 641 Reserve for slow moving inventory ( 347 ) ( 343 ) Total Inventory $ 2,951 $ 868 7 . Intangible Assets Carrying value of intangible assets consisted of the following: December 31, 2023 December 31, 2022 Weighted- Average Useful Life (in years) (in thousands) Gross Accumulated Amortization Gross Accumulated Amortization Definite-lived Intangibles Customer relationships $ 3,820 $ ( 1,854 ) $ 3,820 $ ( 1,308 ) 2.9 Patent 2,312 ( 413 ) 2,312 ( 292 ) 6.4 Tradenames 693 ( 124 ) 693 ( 88 ) 1.9 Intangible Assets $ 6,825 $ ( 2,391 ) $ 6,825 $ ( 1,688 ) 3.8 Amortization expense for each of the years ended December 31, 2023, and 2022 totaled $ 704 thousand. Future amortization expense is expected to be the following (dollars in thousands): Year ended December 31, Amortization 2024 704 2025 704 2026 704 2027 487 2028 158 Thereafter 1,677 8. Accrued Expenses Accrued expenses consisted of the following: (in thousands) December 31, 2023 December 31, 2022 Registration penalties $ 1,583 $ 1,583 License fees 892 892 Board of directors fees 942 415 Employee compensation 2,298 4,585 Other 284 1,037 Total Accrued Expenses $ 5,999 $ 8,512 9. Factoring Liabilities In June 2021, the Company entered into a factoring agreement with an unrelated third party, pursuant to which the Company may sell certain of its accounts receivables for 86.25 % of the value of the receivable. Advances available under the facility are capped at the lesser of $ 3.0 million or a formula amount, as defined in the agreement. Interest on advances is assessed at a fixed amount upon funding, which is equivalent to an annualized rate of 15.0 % for the first 30 days, and daily thereafter at an annualized rate of 14.4 %. The agreement’s term is one month and automatically renews for additional one-month periods, unless either party provides 30 days’ notice of termination. The accounts receivable is sold with recourse back to the Company, therefore, the Company accounts for the arrangement as traditional financing. F-12 Table of Contents (In thousands) December 31, 2023 December 31, 2022 Receivables transferred $ 1,794 $ 2,564 Reserve amount held ( 304 ) ( 434 ) Factoring liability $ 1,490 $ 2,130 10. Senior Secured Debt, in Default The following table summarizes outstanding senior secured debt: December 31, 2023 December 31, 2022 (In thousands) Principal Debt Discount Carrying Value Principal Debt Discount Carrying Value Senior secured debt $ 21,562 $ ( 3,284 ) $ 18,278 $ 19,211 $ ( 4,795 ) $ 14,416 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 into 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. Interest is charged at the greater of the prime rate or 3 % plus 9 %, paid quarterly . 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 June 2022, the Company entered into the Third Amendment to the Note and Warrant Purchase and Security Agreement (the “Third NWPSA”). The Third NWPSA provides for (i) the extension of the agent’s and holder’s forbearance of exercising its remedies arising from Existing Defaults (as defined in the NWPSA) to the earlier of (x) the occurrence of an Event of Default (as defined in the NWPSA) or (y) August 30, 2022, and (ii) the extension to file a registration statement with the Securities and Exchange Commission to register the resale of the Advisor Shares (as defined in the NWPSA) no later than August 30, 2022. In June 2023, the Company entered into a Fourth Amendment to the NWPSA, which provides the Company an extension of the holder forbearing from exercising the remedies arising from the existing defaults to the earlier of the occurrence of an event of default and December 31, 2023. The amendment also added a consent fee of 2 % of the original principal amount of the NWPSA, payable in cash at maturity, accounted for as additional debt issuance costs. The amendment also defers interest that would otherwise have been due on June 30, 2023, and September 30, 2023. The interest will instead be compounded and added to the principal amount of the notes and bear interest at a rate of 20.25 % per annum. The amendment also requires the Company to complete an equity financing that results in gross cash proceeds of at least $ 2.5 million by July 15, 2023. This financing successfully closed on July 21, 2023. 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 the License and Option Transaction (as disclosed in Note 22) (ii) a waiver of any event of default that may occur under the NWPSA, because of the License and Option Agreement or License and Option Transaction and (iii) amended the NWPSA to release certain patents from the collateral. The Fifth Amendment also provides for a forbearance of exercising remedies in connection with certain existing events of default under the NWPSA until the earlier of (x) the occurrence of another event of default under the NWPSA and (y) April 30, 2024. During the forbearance period, the outstanding obligations under the NWPSA continue to accrue interest at the default rate. As of December 31, 2023, the Company is in default on the minimum liquidity provisions in the Senior Secured Note and, as a result, it is classified in current liabilities in the accompanying consolidated balance sheets. The Company is accruing interest at the default interest rate of an incremental 5 %. F-13 Table of Contents 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. Accrued interest related to the Senior Secured Note was $ 3.2 million and $ 1.9 million on December 31, 2023, and December 31, 2022, respectively. Interest expense on the Senior Secured Note totaled $ 6.9 million and $ 5.9 million for the years ended December 31, 2023, and 2022, respectively. 11. Convertible Promissory Notes and Convertible Promissory Notes, Related Parties December 31, 2023 (In thousands, except conversion price) Conversion Price Principal Debt Discount 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 2,639 ( 1,235 ) - 1,404 2022 Convertible notes payable, related parties $ 0.04 450 ( 118 ) - 332 Total Convertible promissory notes $ 8,462 $ ( 1,353 ) $ - $ 7,109 December 31, 2022 (In thousands, except conversion price) Conversion Price Principal Debt Discount Conversion Option Carrying Value Acquistion convertible promissory note, in default $ 0.10 $ 4,000 - - $ 4,000 Convertible promissory note payable, related parties, 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 2022 Convertible Notes Payable and 2022 Convertible Notes Payable, Related Parties - In August 2022 , November 2022, May 2023 and December 2023, the Company entered into a 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 $ 16.2 million in August 2022,$ 4.0 million in November 2022, $ 1.2 million in May 2023, and $ 1.9 million in December 2023 (ii) Common Stock Purchase Warrants to purchase an additional 581.6 million shares of common stock with an exercise price of $ 0.067 per share and (iii) Common Stock Purchase Warrants to purchase an additional 581.6 million shares of common stock with an exercise price of $ 0.04 per share. Interest expense for the years ended December 31, 2023 and 2022, totaled $ 6.4 million and $ 4.4 million, respectively. 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 by less than $ 0.01 . The Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens. In August 2023 and November 2023, the Company utilized its election to convert the August and November issued 2022 Convertible Notes Payable into shares of common stock upon the Notes’ maturity. The August notes totaling $ 16.2 million in principal and $ 2.4 million in interest were converted to 464,440,813 shares of common stock. The November notes totaling $ 4.0 million in principal and $ 0.6 million in interest were converted to 114,481,063 shares of common stock. Acquisition Convertible promissory notes payable - In August 2020, the Company entered into an asset purchase agreement with Celularity to acquire Celularity’s UltraMIST assets. A portion of the aggregate consideration of $ 24 million paid for the assets included the issuance of a promissory note to Celularity in the principal amount of $ 4 million (the “Seller Note”). The Seller Note matured on August 6, 2021 , and was not repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the Seller Note and, accordingly, it began accruing additional interest of 5.0 % in addition to the 12.0 % initial rate, as of the date of the default. As of December 31, 2023, and 2022, the Seller Notes had outstanding accrued interest of $ 2.2 million and $ 1.5 million , respectively. The Company evaluated embedded conversion features within the convertible promissory note and determined that the conversion feature does not require to be bifurcated. Upon adoption of ASC 2020-06 effective January 1, 2021, the convertible promissory note is accounted for as a single liability due to the elimination of the beneficial conversion feature accounting model. F-14 Table of Contents Convertible promissory notes payable, related party - In August 2020, the Company issued a convertible promissory note payable in the amount of $ 1.4 million. The note matured on August 6, 2021 , and was not repaid and is currently in default. As of December 31, 2023, and 2022, the note had outstanding accrued interest of $ 636 thousand and $ 444 thousand, respectively. In October 2023, the Company signed a settlement letter agreement for the payment of $ 1.4 million principal to settle this convertible note. Payment is due on the earlier of March 31, 2024, or the closing of the Merger described in Note 4. If the Company fails to make payment, the lender retains all rights with respect to the convertible promissory note. 12. Asset-Backed Secured Promissory Notes In July 2023, the Company issued Asset-Backed Secured Promissory Notes (the “ABS Promissory Notes”) in an aggregate principal amount of $ 4.6 million to certain accredited investors (the “Purchasers”) at an original issue discount of 33.33 %. The ABS Promissory Notes bear an interest rate of 0 % per annum and mature on January 21, 2024 (the “Maturity Date”). The Company received total proceeds of approximately $ 3.0 million. The Company entered into a Security Agreement providing for a continuing and unconditional security interest in any and all property of the Company. This security interest is subordinate to the Senior Secured Debt described in Note 10. Interest expense for the year ended December 31, 2023, totaled $ 812 thousand. The Company and the Purchasers also entered into a side letter pursuant to which the parties agreed that upon the Maturity Date, or upon a fundamental transaction as defined by the ABS Promissory Notes, the Company will issue each Purchaser a Future Advance Convertible Promissory Note with the same principal amount as the principal amount of such Purchasers’ ABS Promissory Notes, plus any accrued and unpaid interest and two Common Stock Purchase Warrants, substantially in the forms of the Notes and Common Stock Purchase Warrants disclosed in Note 11. In evaluating the accounting for the ABS Promissory Notes and Side Letter (the “Side Letter”), pursuant to relevant guidance, the Side Letter was determined to not represent a freestanding financial instrument as it is not legally detachable and separately exercisable. The redemption features under the Side Letter are considered embedded derivatives, including a right for contingent redemption upon an event of default, automatic redemption upon maturity of the ABS Promissory Notes, and redemption is triggered upon a fundamental transaction. As a result, the Company determined these features met the criteria of an embedded derivative. December 31, 2023 (In thousands) Principal Debt Discount Embedded Derivative Carrying Value ABS promissory notes $ 3,122 $ ( 53 ) $ 48 $ 3,117 ABS promissory notes, related parties 1,462 ( 49 ) 45 1,458 Total ABS Promissory Notes $ 4,584 $ ( 102 ) $ 93 $ 4,575 13. Fair Value Measurements The Company uses various inputs to measure the outstanding warrants and certain embedded conversion features associated with convertible debt on a recurring basis to determine the fair value of the liabilities. The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy: Fair value measurement at December 31, 2023 (in thousands) Fair value Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Warrant liability $ 14,447 - - $ 14,447 Conversion option 93 - - 93 Total Fair Value $ 14,540 $ - $ - $ 14,540 F-15 Table of Contents Fair value measurement at December 31, 2022 (in thousands) Fair value Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Warrant liability $ 1,416 - - $ 1,416 Conversion option 2,340 - - 2,340 Total Fair Value $ 3,756 $ - $ - $ 3,756 There were no transfers between Level 1, 2, or 3, during the years ended December 31, 2023, and 2022. Both observable and unobservable inputs were used to determine fair value of the positions that the Company classified within the Level 3 category. Unrealized gains and losses associated with the liabilities within the Level 3 category include changes in fair value that were attributable to both observable and unobservable inputs. Warrant Liability The Company’s liability classified warrants as of December 31, 2023, and initial valuation of December 2023 warrants, 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 risk adjusted 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 February 29, 2024), and the probability of the Merger closing ( 90 % probability). Significant Black Scholes valuation model inputs related to the Company’s warrants are listed below: Initial Valuation May 2023 Issuance December 31, 2022 Weighted average expected life in years 5.00 4.68 Weighted average volatility 84 % 92 % Value of underlying shares $ 0.019 $ 0.005 Weighted average risk free interest rate 3.50 % 4.00 % Expected dividend yield - - A summary of the Level 3 warrant activity is as follows: (in thousands, except per share data) Warrants Outstanding Fair Value per Share Warrant Liability Fair Value Balance December 31, 2021 62,617 $ 0.15 $ 9,614 Cashless exercise ( 27,037 ) 0.09 ( 3,130 ) Issuance of warrants classified as liablities 1,031,276 0.06 4,873 Change in fair value - - ( 9,941 ) Balance December 31, 2022 1,066,856 $ 0.06 $ 1,416 Warrants exercised - - - Issuance of warrants classified as liablities 154,452 0.01 1,655 Change in fair value - - 11,376 Balance December 31, 2023 1,221,308 $ 0.01 $ 14,447 Embedded Conversion Option 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 embedded derivative liability at issuance for the ABS Promissory Notes was estimated as the difference in fair value of the ABS Promissory Notes, including the conversion obligation under the Side Letter and the value of the ABS Promissory Notes in the absence of the conversion obligation. The value of the ABS Promissory Notes without the conversion obligation was estimated using a discounted cash flow analysis with an estimated market yield. F-16 Table of Contents The Company’s embedded conversion liability for the initial valuation of the December 2023 financing, and as of December 31, 2023, was valued using a probability weighted expected value considering the Merger Agreement and the previous Black Scholes model, with significant value being assigned to the Merger Agreement assumptions. Significant inputs included the risk adjusted expected exchange ratio ( 0.003 ), value of SEPA class A common stock, expected timing of the closing of the merger (estimated by February 29, 2024), and probability of the merger transaction closing ( 90 % probability). The fair value of conversion option liability assumptions for initial valuation of May 2023, and December 31, 2022, under the Black Scholes model are listed below: Initial Valuation May 2023 Issuance December 31, 2022 Conversion price (1) $ 0.04 $ 0.04 Value of underlying shares $ 0.019 $ 0.005 Interest Rate (annual) (2) 4.70 % 4.64 % Volatility (annual) (3) 114 % 503 % Time to maturity 1.00 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 the historical daily volatility of the Company as of each presented period ending date. As of December 31, 2022, the Company applied a discount rate to the historical volatility. A summary of the conversion option liability activity is as follows: (in thousands) Conversion Liability Balance December 31, 2021 $ 6,255 Issuance of Convertible Notes 2,760 Settlement of convertible notes ( 218 ) Change in fair value ( 6,457 ) Balance December 31, 2022 $ 2,340 Issuance of Convertible Notes ( 519 ) Change in fair value ( 1,728 ) Balance December 31, 2023 $ 93 14. Contract Liabilities The Company has contract liabilities from contracts with customers as follows: During the years ended December 31, 2023, and 2022, the Company recognized revenue related to these contract liabilities of $ 60 thousand and $ 253 thousand, respectively, that were included in the beginning contract liability balances for each of those periods. The following table summarizes the changes in contract liabilities: Year Ended December 31, (in thousands) 2023 2022 Beginning balance $ 290 $ 341 New service agreements 209 202 Revenue recognized ( 60 ) ( 253 ) Total Contract Liabilities $ 439 $ 290 F-17 Table of Contents 15. Common Stock Purchase Warrants A summary of the warrant activity is as follows: (in thousands, except per share data) Warrants Weighted Average Exercise Price Weighted Average Remaining Life (years) Warrants at December 31, 2021 204,883 $ 0.20 2.54 Issuances 1,031,276 0.06 Exercised ( 27,943 ) 0.09 Forfeited or expired - - Outstanding at December 31, 2022 1,208,216 $ 0.07 3.55 Issuances 154,451 0.06 Exercised - - Forfeited or expired ( 141,095 ) - Outstanding at December 31, 2023 1,221,572 $ 0.06 4.01 16. Common Stock In December 2022, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 800,000,000 to 2,500,000,000 . In January 2023, the Company filed the amendment to the Articles of Incorporation with the state of Nevada to affect the increase in authorized shares. 17. Concentration of Credit Risk and Limited Suppliers Major customers are defined as customers whose accounts receivable, or sales individually consist of more than ten percent of total trade receivable or total sales, respectively. There were no accounts receivable concentrations on December 31, 2023, or 2022. 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 our production. The percentage of purchases from major vendors of the Company that exceeded ten percent of total purchases were as follows: Year ended December 31, 2023 2022 Purchases: Vendor A 19 % 19 % Vendor B 19 % 0 % 18. Revenue The disaggregation of revenue is based on type and geographical region. The following table presents revenue from contracts with customers: Year ended December 31, 2023 Year ended December 31, 2022 United States International Total United States International Total Consumables and parts revenue $ 13,143 $ 79 $ 13,222 $ 9,790 $ 72 $ 9,862 System revenue 5,841 116 5,957 5,179 149 5,328 License fees and other 41 35 76 283 38 321 Product Revenue $ 19,025 $ 230 $ 19,255 $ 15,252 $ 259 $ 15,511 Rental Income 1,143 - 1,143 1,231 - 1,231 Total Revenue $ 20,168 $ 230 $ 20,398 $ 16,483 $ 259 $ 16,742 F-18 Table of Contents 19. Stock-Based Compensation On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Stock Incentive Plan”). The Stock Incentive Plan permits grants of awards to selected employees, directors, and advisors of the Company in the form of restricted stock or options to purchase shares of common stock. Options granted may include non-statutory options as well as qualified incentive stock options. The Stock Incentive Plan is administered by the board of directors of the Company. The Stock Incentive Plan gives broad powers to the board of directors of the Company to administer and interpret the form and conditions of each option. The stock options granted under the Stock Incentive Plan are generally non-statutory options which generally vest over a period of up to three years and have a ten-year term. The options are granted at an exercise price determined by the board of directors of the Company to be the fair market value of the common stock on the date of the grant. As of December 31, 2023, and 2022, the Stock Incentive Plan reserved a total of 35,000,000 shares of common stock for grant. On December 31, 2023, there were 5,598,216 shares of common stock available for grant under the Stock Incentive Plan. 20. Income Taxes The Company files income tax returns in the United States Federal jurisdiction and various state and foreign jurisdictions. The Company is subject to United States Federal and state income tax examinations by tax authorities for any years that have net operating losses open until the net operating losses are used. The components of the net loss before income taxes are as follows: Year ended December 31, (In thousands) 2023 2022 Domestic $ ( 25,783 ) $ ( 10,279 ) Foreign ( 20 ) ( 12 ) Net loss before income taxes $ ( 25,803 ) $ ( 10,291 ) In accordance with ASC Topic 740, Income Taxes (“ASC 740”), the Company accounts for income taxes utilizing the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the deferred tax assets, including loss carryforwards, when it is more likely than not that some portion or all a deferred tax asset will not be realized. The income tax provision (benefit) from continuing operations consists of the following: (In thousands) December 31, 2023 December 31, 2022 Current: Federal $ - $ - State 4 2 Foreign - - Current Tax Provision $ 4 $ 2 Deferred: Federal $ ( 3,564 ) $ ( 5,657 ) State ( 459 ) 753 Foreign ( 3 ) ( 1 ) Change in valuation allowance 4,026 4,905 Deferred Tax Provision $ - $ - As of December 31, 2023, and 2022, the Company did no t have any undistributed earnings of our foreign subsidiaries. As a result, no additional income or withholding taxes have been provided for. The Company does not anticipate any impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) and as such, the Company has not recorded any impact associated with either GILTI or BEAT. F-19 Table of Contents The income tax provision (benefit) amounts differ from the amounts computed by applying the United States Federal statutory income tax rate of 21 % for the years ended December 31, 2023, and 2022. Adjustments to determine income tax expense are as follow: (In thousands) Years ended December 31, 2023 2022 Tax benefit at statutory rate $ ( 5,485 ) $ ( 2,161 ) Increase (reduction) in income taxes resulting from: State income tax benefits, net of federal benefit ( 307 ) ( 473 ) Non-deductible gain on warrant adjustment valuation 2,102 ( 3,270 ) Change in valuation allowance 4,026 4,905 Registration penalties - 67 Other ( 332 ) 934 Income Tax Expense $ 4 $ 2 F-20 Table of Contents The tax effects of temporary differences that give rise to the deferred tax assets are as follows: (In thousands) December 31, 2023 December 31, 2022 Deferred Tax Assets Net operating loss carryforwards $ 42,484 $ 38,323 Net operating loss carryforwards - foreign 27 24 Excess of tax basis over book value of property and equipment 70 9 Excess of tax basis over book value of intangible assets 1,162 1,325 Lease liability 192 150 Stock-based compensation 1,495 1,487 Accrued employee compensation 338 750 Capitalized equity costs 235 - Capitalized research and development 1,273 116 Net change in reserve accounts - 1,031 Gross deferred tax asset 47,276 43,215 Valuation Allowance ( 47,096 ) ( 43,070 ) Net Deferred Tax Asset 180 145 Deferred Tax Liabilities Right-of-use asset ( 180 ) ( 145 ) Gross deferred tax liability ( 180 ) ( 145 ) TOTAL $ - $ - On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) into law. The Inflation Reduction Act imposes an excise tax of 1% on the fair market value of net stock repurchases made after December 31, 2022. The impact of this provision will be dependent on the extent of share repurchases made in future periods. We continue to analyze the impacts of the Inflation Reduction Act; however, it is not expected to have a material impact on our financial statements. Additionally, the Inflation Reduction Act includes a new corporate alternative minimum tax which is not currently applicable to the Company. The Tax Cuts and Jobs Act (“TCJA”) requires taxpayers to capitalize and amortize research and development (“R&D”) expenditures under section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during 2022 and resulted in capitalized R&D costs of $ 1.3 million as of December 31, 2023. The Company will amortize these costs for tax purposes over five years for R&D performed in the U.S. and over 15 years for R&D performed outside the U.S. In 2023, all R&D was performed in the U.S. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realization of deferred tax assets, management considers, whether it is “more likely than not”, that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. ASC 740 requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of December 31, 2023, and 2022. F-21 Table of Contents The Company’s ability to use its net operating loss carryforwards could be limited and subject to annual limitations. Since a full analysis under Section 382 of the Internal Revenue Code has not been performed, the Company may realize a “more than 50% change in ownership” which could limit its ability to use its net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take advantage of all or portions of its net operating loss carryforwards for Federal income tax purposes. The Federal net operating loss carryforwards of approximately $ 77.9 million from years ending December 31, 2005, through December 31, 2017, will begin to expire in 2025 . The Federal net operating loss carryforward for the years ended December 31, 2018, through 2023 of approximately $ 99.9 million will not expire. The state net operating loss carryforwards of approximately $ 75.1 million from years ending December 31, 2005, through December 31, 2023, will expire at various dates through 2043 . The foreign net operating loss carryforward on December 31, 2023, of $ 0.1 million will begin to expire in 2024 . A provision of ASC 740 specifies that companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. ASC 740 requires the evaluation of tax positions taken or expected to be taken while preparing the Company’s tax returns to determine whether the tax positions would “more-likely-than-not” be sustained if challenged by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements as of December 31, 2023, and 2022. The Company does not expect any significant changes in the unrecognized tax benefits within twelve months of the reporting date. The Company will recognize in income tax expense, interest and penalties related to income tax matters. For the years ended December 31, 2023, and 2022, the Company did no t have any amounts recorded for interest and penalties. 21. Commitments and Contingencies Litigation 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 Companies expenses legal fees in the period in which they are occurred. 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 2022, the Company received notification alleging that it is not in compliance with the license agreement with Celularity entered 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 to the Company cannot be fully determined at this time. F-22 Table of Contents Lease Commitments As of December 31, 2023, the maturities of the Company’s operating and financing leases, which have initial or remaining lease terms more than one year, consist of the following: (In thousands) Operating Leases Finance Leases Year ended December 31, 2024 $ 141 $ 189 2025 122 216 2026 67 44 2027 59 - 2028 - - Total Lease Payments 389 449 22. Subsequent Event In March 2024, the Company entered into an exclusive license and option agreement (the “License and Option Agreement”) with a third party licensee (the “Licensee”) in connection with a portfolio of Sanuwave, Inc. patents related to the field of intravascular shockwave applications (the “Patents”). In exchange for a one-time payment of $ 2.5 million, 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. F-23 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None