SANUWAVE Health, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data) June 30, 2024 December 31, 2023 ASSETS Current Assets: Cash and cash equivalent $ 2,460 $ 1,797 Accounts receivable, net of allowance of $ 1,194 and $ 1,237 , as of June 30, 2024 and December 31, 2023, respectively 3,154 3,314 Inventory 2,731 2,951 Prepaid expenses and other current assets 379 1,722 Total Current Assets 8,724 9,784 Property, equipment and other, net 947 938 Intangible assets, net 4,082 4,434 Goodwill 7,260 7,260 Total Non-current Assets 12,289 12,632 Total Assets $ 21,013 $ 22,416 LIABILITIES Current Liabilities: Senior secured debt, in default $ 23,424 $ 18,278 Convertible promissory notes payable 3,953 5,404 Convertible promissory notes payable, related parties 2,454 1,705 Asset-backed secured promissory notes - 3,117 Asset-backed secured promissory notes, related parties - 1,458 Promissory note payable, related party 500 - Accounts payable 3,891 5,705 Accrued expenses 4,794 5,999 Factoring liabilities 2,321 1,490 Warrant liability 16,864 14,447 Accrued interest 396 5,444 Accrued interest, related parties 841 669 Current portion of contract liabilities 130 92 Other 397 947 Total Current Liabilities 59,965 64,755 Non-current Liabilities Lease liabilities 304 492 Contract liabilities 350 347 Total Non-current Liabilities 654 839 Total Liabilities $ 60,619 $ 65,594 Commitments and Contingencies (Footnote 14) STOCKHOLDERS’ DEFICIT Preferred Stock, par value $ 0.001 , 5,000,000 shares authorized; 6,175 shares Series A, 293 shares Series B, 90 shares Series C and 8 shares Series D authorized; no shares issued and outstanding at June 30, 2024 and December 31, 2023 $ - $ - Common stock, par value $ 0.001 , 2,500,000,000 shares authorized; 1,181,272,961 and 1,140,559,527 issued and outstanding at June 30, 2024 and December 31, 2023, respectively 1,182 1,140 Additional paid-in capital 177,218 175,842 Accumulated deficit ( 218,016 ) ( 220,049 ) Accumulated other comprehensive income (loss) 10 ( 111 ) Total Stockholders’ Deficit ( 39,606 ) ( 43,178 ) Total Liabilities and Stockholders’ Deficit $ 21,013 $ 22,416 The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements. 4 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (In thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue $ 7,162 $ 4,675 $ 12,948 $ 8,450 Cost of Revenues 1,922 1,202 3,506 2,464 Gross Margin 5,240 3,473 9,442 5,986 Operating Expenses: General and administrative 1,839 1,238 5,514 3,997 Selling and marketing 1,034 978 2,266 2,390 Research and development 195 139 358 270 Depreciation and amortization 180 187 362 376 Total Operating Expenses 3,248 2,542 8,500 7,033 Operating Income (Loss) 1,992 931 942 ( 1,047 ) Other (Expense)/Income: Interest expense ( 3,396 ) ( 3,706 ) ( 6,633 ) ( 7,218 ) Interest expense, related party ( 387 ) ( 675 ) ( 710 ) ( 1,441 ) Gain on extinguishment of debt 5,310 - 5,205 - Change in fair value of derivative liabilities 3,717 ( 3,821 ) 1,216 ( 10,618 ) Other expense ( 685 ) 9 ( 787 ) ( 18 ) Other income 10 - 2,800 - Total Other Income (Expense) 4,569 ( 8,193 ) 1,091 ( 19,295 ) Net Income (Loss) 6,561 ( 7,262 ) 2,033 ( 20,342 ) Other Comprehensive Loss Foreign currency translation adjustments 10 ( 9 ) 121 ( 13 ) Total Comprehensive Income (Loss) $ 6,571 $ ( 7,271 ) $ 2,154 $ ( 20,355 ) Net income (loss) per share: Basic $ 0.01 $ ( 0.01 ) $ — $ ( 0.04 ) Diluted $ — $ ( 0.01 ) $ — $ ( 0.04 ) Number of shares used in per share calculation: Basic 1,182,598 582,329 1,172,424 579,179 Diluted 1,387,688 582,329 1,373,899 579,179 The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements. 5 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (UNAUDITED) (In thousands, except share data) Three Months Ended June 30, 2024 Common Stock Number of Shares Issued and Outstanding Par Value Additional Paid- in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Balances as of March 31, 2024 1,140,559,527 $ 1,140 $ 175,842 $ ( 224,577 ) $ - $ ( 47,595 ) Shares issued for settlement of warrants 5,414,815 6 - - - 6 Shares issued for settlement of debt 35,298,619 36 1,376 - - 1,412 Foreign currency translation adjustment - - - - 10 10 Net income - - - 6,561 - 6,561 Balances as of June 30, 2024 1,181,272,961 $ 1,182 $ 177,218 $ ( 218,016 ) $ 10 $ ( 39,606 ) Three Months Ended June 30, 2023 Common Stock Number of Shares Issued and Outstanding Par Value Additional Paid- in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Balances as of March 31, 2023 555,637,651 $ 556 $ 153,046 $ ( 207,322 ) $ ( 71 ) $ ( 53,791 ) Shares issued for services 6,000,000 6 218 - - 224 Foreign currency translation adjustment - - - - ( 9 ) ( 9 ) Net loss - - - ( 7,262 ) - ( 7,262 ) Balances as of June 30, 2023 561,637,651 $ 562 $ 153,264 $ ( 214,584 ) $ ( 80 ) $ ( 60,838 ) The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements. 6 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (UNAUDITED) (In thousands, except share data) Six Months Ended June 30, 2024 Common Stock Number of Shares Issued and Outstanding Par Value Additional Paid- in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Balances as of December 31, 2023 1,140,559,527 $ 1,140 $ 175,842 $ ( 220,049 ) $ ( 111 ) $ ( 43,178 ) Shares issued for settlement of warrants 5,414,815 6 - - - 6 Shares issued for settlement of debt 35,298,619 36 1,376 - - 1,412 Foreign currency translation adjustment - - - - 121 121 Net income - - - 2,033 - 2,033 Balances as of June 30, 2024 1,181,272,961 $ 1,182 $ 177,218 $ ( 218,016 ) $ 10 $ ( 39,606 ) Six Months Ended June 30, 2023 Common Stock Number of Shares Issued and Outstanding Par Value Additional Paid- in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total 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 Foreign currency translation adjustment - - - - ( 13 ) ( 13 ) Net loss - - - ( 20,342 ) - ( 20,342 ) Balances as of June 30, 2023 561,637,651 $ 562 $ 153,264 $ ( 214,584 ) $ ( 80 ) $ ( 60,838 ) The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements. 7 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Six Months Ended June 30, 2024 2023 Cash Flows - Operating Activities: Net Income (Loss) $ 2,033 $ ( 20,342 ) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 480 515 Bad debt expense 99 313 Shares issued for services - 224 Gain on extinguishment of debt ( 5,205 ) - Change in fair value of derivative liabilities ( 1,216 ) 10,618 Amortization of debt issuance costs and original issue discount 3,274 3,955 Accrued interest 1,859 3,606 Changes in operating assets and liabilities Accounts receivable ( 340 ) 898 Inventory 220 ( 31 ) Prepaid expenses and other assets 118 ( 336 ) Accounts payable ( 1,259 ) 718 Accrued expenses 328 ( 1,337 ) Contract liabilities 41 ( 16 ) Net Cash Provided by/(Used) in Operating Activities 432 ( 1,215 ) Cash Flows - Investing Activities Purchase of property and equipment ( 206 ) ( 169 ) Net Cash Flows Used in Investing Activities ( 206 ) ( 169 ) Cash Flows - Financing Activities Proceeds from convertible promissory notes - 1,202 Payment of note payable ( 2,175 ) - Proceeds from convertible notes payable 1,300 - Proceeds from promissory note payable, related party 500 - Proceeds from bridge notes advance - 1,476 Proceeds/(Payments) from factoring, net 831 ( 1,167 ) Payments of principal on finance leases ( 140 ) ( 85 ) Net Cash Flow Provided by Financing Activities 316 1,426 Effect of Exchange Rates on Cash 121 ( 13 ) Net Change in Cash During Period 663 29 Cash at Beginning of Period 1,797 1,153 Cash at End of Period $ 2,460 $ 1,182 Supplemental Information: Cash paid for interest $ 2,055 $ 908 Non-cash Investing and Financing Activities: Shares issued for settlement of debt 1,412 - Write off deferred merger costs 1,226 - Warrants issued in conjunction with convertible promissory notes 3,633 570 Capitalize default interest into Senior secured debt 3,850 - Conversion of asset-based secured promissory notes to convertible promissory notes 4,584 - Embedded conversion feature on convertible promissory notes payable - 157 Common shares issued for advisory shares - 302 The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements. 8 Table of Contents SANUWAVE HEALTH, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 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 unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all the information and disclosures required by U.S. GAAP for comprehensive financial statements. The financial information as of June 30, 2024, and for the three and six months ended June 30, 2024, and 2023 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 2024, are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2024. The condensed consolidated balance sheet on December 31, 2023, has been derived from the audited consolidated financial statements at that date but does not include all the information and disclosures required by U.S. GAAP for comprehensive financial statements. These financial statements should be read in conjunction with the Company’s December 31, 2023, Annual Report on Form 10-K filed with the SEC on March 21, 2024 (the “2023 Annual Report”). 2. Going Concern Our recurring losses from operations, the events of default on the Company’s notes payable, and dependency upon future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q. We will be required to raise additional funds to finance our operations and remain a going concern; we may not be able to do so, and/or the terms of any financing may not be advantageous to us. The continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources for the commercialization of UltraMIST and PACE systems which will require additional capital resources to remain a going concern. Management’s plans may include obtaining additional capital in 2024. The Company could obtain additional capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing stockholders. In addition, there can be no assurances that the Company’s plans to obtain additional capital will be successful on the terms or timeline it expects, or at all. If these efforts are unsuccessful, the Company may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms. The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. The Company’s condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. 9 Table of Contents 3. Summary of Significant Accounting Policies Significant accounting policies followed by the Company are summarized below and should be read in conjunction with those described in Note 3 of the consolidated financial statements in our 2023 Annual Report. Estimates - These condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depend on future events, the preparation of condensed consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These condensed consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein. Significant estimates include the recording of allowances for credit losses, the net realizable value of inventory, fair value of goodwill and other intangible assets, the determination of the valuation allowances for deferred taxes, litigation contingencies, and the estimated fair value of financial instruments, including warrants and embedded conversion options. Revenue Recognition - The core principle of Accounting Standards Codification (“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, consumables and part sales include devices and applicators (new and refurbished). Performance obligations are satisfied at the point in time when the customer obtains control of the goods, which is generally at the point in time that the product is shipped. Other Revenue - Other revenue primarily includes warranties, repairs, and billed freight. The Company allocates the device sales price to the product and the 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. Deferred Offering Costs - Deferred stock offering costs represent amounts paid for legal, consulting, and other offering expenses directly attributable to the offering of securities in conjunction with the recapitalization under the Merger Agreement, as defined and further described in Note 4, and are deferred and charged against the gross proceeds of the offering. In the event of a significant delay or cancellation of a planned offering of securities, all the costs would be expensed. In June 2024, the Company terminated the Merger Agreement and the deferred offering costs of $ 0.5 million were expensed. Recent Accounting Pronouncements - In December 2023, the Financial Accounting Standards Board issued ASC Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Update No. 2023-09 aims to enhance the transparency and decision usefulness of income tax disclosures. Update No. 2023-09 modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state, and foreign). Update 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. Update No. 2023-09 is effective for fiscal years beginning after December 15, 2024. We expect to adopt Update No. 2023-09 prospectively. We are currently evaluating the potential impact of adopting this new guidance on our condensed consolidated financial statements and related disclosures. 4. Merger Agreement On August 23, 2023, the Company entered into an Agreement and Plan of Merger (the “ Merger Agreement ”) by and among SEP Acquisition Corp., a Delaware corporation (“ SEPA ”), SEP Acquisition Holdings Inc., a Nevada corporation 10 Table of Contents and a wholly owned subsidiary of SEPA. Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA was to be effected. On June 25, 2024, the Company delivered a notice to SEPA terminating the Merger Agreement. 5. Net Income (Loss) per Share Basic net income (loss) per share is computed based on the weighted average number of shares outstanding including nominally priced warrants. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. Diluted net income (loss) per share is calculated based on the weighted average of ordinary shares outstanding and the number of additional shares that would have been outstanding if the potentially dilutive securities had been issued. The Company uses the treasury stock method to calculate the number of shares for the nominally priced warrants, and the as-converted method to calculate the number of shares for the convertible promissory notes. The following table sets forth the computation of basic and diluted net income (loss) per share attributable to the shareholders of the Company: Three Months Ended Six Months Ended (in Thousands, except per share data) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Numerator: Net Income (Loss) $ 6,561 $ ( 7,262 ) $ 2,033 $ ( 20,342 ) Number of shares used in per share calculation: Common shares 1,169,507 560,638 1,155,033 557,488 Common shares issuable assuming exercise of nominally priced warrants 13,091 21,691 17,391 21,691 Total shares used for calculating basic income (loss) per share 1,182,598 582,329 1,172,424 579,179 Weighted-average effect of dilutive securities: Common shares issuable on convertible promissory notes including interest 205,090 — 201,475 — Total shares for purposes of calculating diluted net income (loss) per share 1,387,688 582,329 1,373,899 579,179 Net income (loss) per share: Basic $ 0.01 $ ( 0.01 ) $ — $ ( 0.04 ) Diluted $ — $ ( 0.01 ) $ — $ ( 0.04 ) To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net income (loss) per share. As a result of the net loss for the six months ended June 30, 2023, all potentially dilutive shares in such periods were anti-dilutive and therefore excluded from the computation of diluted net loss per share. Six Months Ended (in thousands) June 30, 2024 June 30, 2023 Common stock options 15,737 19,136 Common stock purchase warrants 1,492,500 1,247,911 Convertible notes payable, including interest 20,566 677,050 1,528,803 1,944,097 11 Table of Contents 6. Accrued Expenses Accrued expenses consist of the following: (in thousands) June 30, 2024 December 31, 2023 Registration penalties $ 1,583 $ 1,583 License fees — 892 Board of directors fees 1,202 942 Employee compensation 1,808 2,298 Other 201 284 $ 4,794 $ 5,999 7. Senior Secured Debt, In Default The following table summarizes outstanding senior secured debt, in default: June 30, 2024 December 31, 2023 (in thousands) Principal Debt Discount Carrying Value Accrued Interest Principal Debt Discount Carrying Value Accrued Interest Senior secured debt $ 26,079 $ ( 2,655 ) $ 23,424 $ — $ 21,562 $ ( 3,284 ) $ 18,278 $ 3,206 Senior secured promissory note payable, in default (“Senior Secured Note”) – In August 2020, the Company entered into a Note and Warrant Purchase and Security Agreement (the “NWPSA”). In accordance with the NWPSA, the Company issued a $ 15 million Senior Secured Promissory Note Payable (the “Senior Secured Note”) and a warrant exercisable for shares of the Company’s common stock in exchange for cash to support operations, repay outstanding debt and close on the acquisition of the UltraMIST assets from Celularity Inc. (Celularity) among other transactions. In February 2022, the Company entered into a Second Amendment to Note and Warrant Purchase and Security Agreement (the “Second NWPSA”) for $ 3.0 million, for a total of $ 18.0 million outstanding. Along with the issuance of the note, the Company also issued warrants to purchase 16.2 million shares of common stock with an exercise price of $ 0.18 and 20.6 million shares of common stock. Interest is charged at the greater of the prime rate or 3 % plus 9 %. The principal increases at a rate of 3 % of the outstanding principal balance (PIK interest) on each quarterly interest payment date. The original maturity date of the Senior Secured Note is September 20, 2025, and it can be prepaid. In March 2024, the Company entered into a Consent, Limited Waiver and Fifth Amendment to Note and Warrant Purchase and Security Agreement (the “Fifth Amendment”). The Fifth Amendment provides (i) consent to enter into a License and Option Agreement and consummation of a License and Option Transaction a waiver of any event of default that may occur under the NWPSA, because of the License and Option Agreement or License and Option Transaction and (iii) amended the NWPSA to release certain patents from the collateral. The Fifth Amendment also provides for a forbearance of exercising remedies in connection with certain existing events of default under the NWPSA until the earlier of (x) the occurrence of another event of default under the NWPSA and (y) April 30, 2024. During the forbearance period, the outstanding obligations under the NWPSA continue to accrue interest at the default rate. As of June 30, 2024, the Company is in default on the minimum liquidity provisions in the Senior Secured Note and, as a result, it is classified in current liabilities in the accompanying condensed consolidated balance sheets. The Company is accruing interest at the default interest rate of an incremental 5 %. The debt issuance costs, and debt discount related to the Senior Secured Note were capitalized as a reduction in the principal amount and are being amortized to interest expense over the life of the Senior Secured Note. The amortization of the debt issuance costs and debt discount, included in interest expense, for the three and six months ended June 30, 2024, totaled $ 2.1 million and $ 4.0 million, respectively. Interest expense on the Senior Secured Note totaled $ 1.7 million and $ 3.3 million for the three and six months ended June 30, 2023, respectively. 12 Table of Contents On July 15, 2024, the Company entered into the Sixth Amendment to Note and Warrant Purchase and Security Agreement (the “Sixth Amendment”), which was a modification of debt. The Sixth Amendment added, as of June 30, 2024, a consent fee of $ 0.7 million to the principal amount of the Senior Secured Note issued pursuant to the NWPSA. On and after April 1, 2024, for each fiscal quarter during which any interest is payable in cash, deferred interest and default interest shall be calculated based on the principal amount of the Senior Secured Note as of the beginning of the quarter and shall include any default interest accrued to date. The Sixth 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 occurence of another event of default under the NWPSA and (y) December 31, 2024. During the forbearance period, the outstanding obligations under the NWPSA continue to accrue interest at the default rate. 8. Promissory Notes Payable The following two tables summarize outstanding notes payable as of June 30, 2024, and December 31, 2023: As of June 30, 2024 (In thousands, except conversion price) Conversion Price Principal Remaining Debt Discount Carrying Value Historical convertible promissory notes payable, related parties, in default $ 0.10 1,373 - 1,373 Convertible notes payable $ 0.04 6,082 ( 2,129 ) 3,953 Convertible notes payable, related parties $ 0.04 1,662 ( 581 ) 1,081 Total Convertible Promissory Notes Payable $ 9,117 $ ( 2,710 ) $ 6,407 As of December 31, 2023 (In thousands, except conversion price) Conversion Price Principal Remaining Debt Discount Carrying Value Acquisition convertible promissory note, in default $ 0.10 4,000 - 4,000 Historical convertible promissory note, related party, in default $ 0.10 1,373 - 1,373 Convertible notes payable $ 0.04 2,639 ( 1,235 ) 1,404 Convertible notes payable, related parties $ 0.04 450 ( 118 ) 332 Total Convertible Promissory Notes Payable $ 8,462 $ ( 1,353 ) $ 7,109 Convertible Notes Payable and Convertible Notes Payable, Related Parties – In August 2022, November 2022, May 2023, December 2023, January 2024, and June 2024, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”), for the sale in a private placement of (i) Future Advance Convertible Promissory Notes (the “Notes”) in an aggregate principal amount of approximately $ 16.2 million in August, approximately $ 4.0 million in November, $ 1.2 million in May, $ 1.9 million in December 2023, $ 4.6 million in January 2024 related to the conversion of the Asset-Backed Secured Promissory Notes (described in Note 9) and $ 1.3 million in June 2024 (ii) Common Stock Purchase Warrants to purchase an additional 728.1 million shares of common stock with an exercise price of $ 0.067 per share and (iii) Common Stock Purchase Warrants to purchase an additional 728.1 million shares of common stock with an exercise price of $ 0.04 per share. Interest expense for the three and six months ended June 30, 2024, totaled $ 1.2 million and $ 2.8 million, respectively. Interest expense for the three and six months ended June 30, 2023, totaled $ 2.4 million and $ 4.6 million, respectively. The Notes have a term of 12 months from the date of issue. Pursuant to the Notes, the Company promised to pay in cash and/or in shares of common stock, at a conversion price of $ 0.04 (the “Conversion Price”), the principal amount and interest at a rate of 15 % per annum on any outstanding principal. The Conversion Price of the Notes is subject to adjustment, including if the Company issues or sells shares of common stock for a price per share less than the Conversion Price of the Notes or if the Company lists its shares of common stock on The Nasdaq Capital Market and the average volume weighted average price of such common stock for the five trading days preceding such listing is less than $ 0.04 per 13 Table of Contents share; provided, however, that the Conversion Price shall never be less than $ 0.01 . The Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens. In May 2024 the Company utilized its election to convert the May issued Convertible Notes Payable into shares of common stock upon the Notes' maturity. The May notes totaling $ 1.2 million in principal and $ 0.2 million interest were converted to 35,298,619 shares of common stock. Promissory Note Payable, Related Parties - In June 2024 the Company entered into a $ 0.5 million promissory note with a related party. Interest is being accrued at 12 % and the note matures on December 3, 2024. 9 . Asset-Backed Secured Promissory Notes In July 2023, the Company issued Asset-Backed Secured Promissory Notes (the “ABS Promissory Notes”) in an aggregate principal amount of $ 4.6 million to certain accredited investors (the “Purchasers”) at an original issue discount of 33.33 %. The ABS Promissory Notes bear an interest rate of 0 % per annum and mature on January 21, 2024 (the “Maturity Date”). The Company received total proceeds of approximately $ 3.0 million. The Company entered into a Security Agreement providing for a continuing and unconditional security interest in any and all property of the Company. This security interest is subordinate to the Senior Secured Debt described in Note 7. Interest expense for the six months ended June 30, 2024, totaled $ 0.1 million prior to conversion at the Maturity Date. On January 21, 2024, pursuant to the side letter, which the parties agreed that upon the Maturity Date, the Company will issue each Purchaser a Convertible Note Payable with the same principal amount as the principal amount of such Purchasers’ ABS Promissory Notes. Pursuance to this side letter the ABS Promissory Notes converted to convertible promissory notes, as described in Note 8. The Company recorded a net loss on extinguishment of debt totaling $ 0.1 million for the six months ended June 30, 2024 . 10. Fair Value Measurements The Company uses various inputs to measure the outstanding warrants and certain embedded conversion features associated with a convertible debt on a recurring basis to determine the fair value of the liabilities. The following tables classify the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy: Fair value measured at June 30, 2024 (in thousands) Fair value at June 30, 2024 Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Warrant liability $ 16,864 $ - $ - $ 16,864 Fair value measured at December 31, 2023 (in thousands) Fair value at December 31, 2023 Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Warrant liability $ 14,447 $ - $ - $ 14,447 Embedded conversion option 93 - - 93 Total fair value $ 14,540 $ - $ - $ 14,540 There were no transfers among Levels 1, 2 or 3 during the three and six months ended June 30, 2024, and 2023. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include 14 Table of Contents changes in fair value that were attributable to both observable (e.g. changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs. Warrant Liability The Company’s liability classified warrants as of June 30, 2024, and the value of initial warrant liability from the June financing, were valued using a probability weighted expected value considering the proposed reverse stock split of the Company's common stock (the "Reverse Stock Split") that will effectuate the exchange of Notes and Common Stock Purchase Warrants for shares of the Company's common stock (the "Note and Warrant Exchange"), and the previous Black Scholes valuation model, with significant value stemming from the Note and Warrant Exchange. Significant inputs under the Note and Warrant Exchange included the expected exchange ratio of 0.90 for $ 0.04 warrants and 0.85 for $ 0.067 warrants, the value of the Company’s common stock, the expected timing of the closing of the proxy vote for the Reverse Stock Split of a 500 :1 to 300 :1 reverse split (estimated by August 15, 2024), and the probability of the Note and Warrant Exchange occurring ( 85 % probability). The Company’s liability classified warrants as of December 31, 2023 and the value of initial warrant liability from the conversion of the ABS Promissory Notes, were valued using a probability weighted expected value considering the Merger Agreement and the previous Black Scholes valuation model, with significant value stemming from the Merger Agreement. Significant inputs under the Merger Agreement valuation included the expected exchange ratio 0.003 , the value of SEPA’s Class A Common Stock, the expected timing of the closing of the Merger, and the probability of the Merger closing. A summary of the warrant liability activity for the six months ended June 30, 2024, is as follows: (in thousands, except per share data) Warrants Outstanding Fair Value per Share Fair Value (in thousands) Balance at December 31, 2023 1,221,308 $ 0.01 $ 14,447 Issuance 292,882 0.01 3,633 Exercised warrants ( 8,600 ) $ 0.01 — Gain on remeasurement of warrant liability - ( 1,216 ) Balance at June 30, 2024 1,505,590 $ 0.01 $ 16,864 11. Revenue The disaggregation of revenue is based on type and geographical region. The following table presents revenue from contracts with customers: Three Months Ended June 30, 2024 Three Months Ended June 30, 2023 United States International Total United States International Total Consumables and parts revenue $ 4,920 $ 31 $ 4,951 $ 2,913 $ 18 $ 2,931 System revenue 2,112 - 2,112 1,323 79 1,402 License fees and other - 15 15 75 5 80 Product Revenue $ 7,032 $ 46 $ 7,078 $ 4,311 $ 102 $ 4,413 Rental Income 84 - 84 262 - 262 Total Revenue $ 7,116 $ 46 $ 7,162 $ 4,573 $ 102 $ 4,675 15 Table of Contents Six Months Ended June 30, 2024 Six Months Ended June 30, 2023 United States International Total United States International Total Consumables and parts revenue $ 9,161 $ 97 $ 9,258 $ 5,487 $ 50 $ 5,537 System revenue 3,413 71 3,484 2,157 115 2,272 License fees and other - 20 20 81 15 96 Product Revenue $ 12,574 $ 188 $ 12,762 $ 7,725 $ 180 $ 7,905 Rental Income 186 - 186 545 - 545 Total Revenue $ 12,760 $ 188 $ 12,948 $ 8,270 $ 180 $ 8,450 12 . Concentration of Credit Risk and Limited Suppliers The Company currently purchases most of its product component materials from single suppliers and the loss of any of these suppliers could result in a disruption in the Company’s production. The percentage of purchases from major vendors of the Company that exceeded ten percent of total purchases for the three and six months ended June 30, 2024, and 2023 were as follows: Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Purchases: Vendor A 32 % 13 % 20 % 17 % Vendor B n/a 16 % n/a 11 % 13. License and Option Agreement In March 2024, the Company entered into an exclusive license and option agreement with a third-party licensee in connection with a portfolio of Sanuwave, Inc. patents related to the field of intravascular shockwave applications. The Company received a one-time payment of $ 2.5 million related to this patent license, which was recorded in other income during the six months ended June 30, 2024. Sanuwave, Inc. granted the Licensee an exclusive license to the Patents and an option to acquire the Patents for an additional one-time payment in the single-digit millions of dollars. If the Licensee does not exercise its option to acquire the Patents during a specified option period, the license terminates and all rights revert back to Sanuwave, Inc. 14. Commitments and Contingencies In the ordinary course of business, the Company from time to time becomes involved in various legal proceedings involving a variety of matters. The Company does not believe there are any pending legal proceedings that will have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. The Company expenses legal fees in the period in which they are incurred. Termination Agreement – In February 2024, the Company entered into a termination agreement with an advisor to agree on termination fees owed with respect to a previous engagement agreement. The Company agreed to a contingent payment of $ 0.7 million upon the closing of the Merger disclosed in Note 4. Upon the Company's termination of the Merger Agreement in June 2024, the related contingent consideration liability was derecognized. Acquisition dispute – In May 2021, the Company received notification alleging that it is not in compliance with the license agreement with Celularity entered into in connection with the acquisition of the UltraMIST assets. The Company has settled this dispute in June 2024 for a settlement amount of $ 2.2 million, which resulted in the removal of $ 4.0 million in convertible promissory note payable, $ 2.4 million in accrued interest, $ 0.9 million of accrued expenses, $ 0.5 million of other liabilities, and $ 0.4 million in accounts receivable, which resulted in the recognition of a gain on extinguishment of debt of $ 5.3 million. 16 Table of Contents 15. Subsequent Event On July 18, 2024, the Company commenced the Consent Solicitation from its stockholders with respect to the following proposals which were approved on August 7, 2024: Proposal 1: To approve an amendment to the Company's Articles of Incorporation to effect a reverse stock split of the Company's outstanding Common Stock at a reverse stock split ratio ranging from any whole number between 1-for-300 and 1-for-500, subject to and as determined by the Board. Proposal 2: To approve the SANUWAVE Health, Inc. 2024 Equity Incentive Plan. 17 Table of Contents