SANUWAVE Health, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as of and for the year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the SEC on March 21, 2024 (the “2023 Annual Report”). Executive Summary We continued to realize significant revenue growth during the three months ended September 30, 2024 , as compared to the same period in 2023 . Revenue for the three months ended September 30, 2024 , totaled $9.4 million, an increase of 89% , as compared to $5.0 million for the same period of 2023 . Revenue for the nine months ended September 30, 2024 , totaled $22.3 million, an increase of 66% , as compared to $13.4 million for the same period of 2023 . Net loss for the three months ended September 30, 2024 , was $20.7 million compared to a net loss of $23.7 million for the same period in 2023 . The decrease in our net loss for the three months ended September 30, 2024 , was primarily related to an increase in operating income and a decrease in change of fair value of derivative liabilities. For the three months ended September 30, 2024 , our operating income totaled $2.0 million, which is an improvement of $2.5 million compared to the same period of 2023 . Net loss for the nine months ended September 30, 2024 , was $18.6 million, compared to a net loss of $44.0 million for the same period in 2023 . The decrease in our net loss for the nine months ended September 30, 2024 , was primarily related to an increase in operating income, a decrease in change of fair value of derivative liabilities, a gain on the extinguishment of debt, and a one-time receipt related a third-party license and option agreement. For the nine months ended September 30, 2024 , our operating income totaled $2.9 million, which is an improvement of $4.5 million compared to the same period of 2023 . All share numbers, including the number of shares underlying warrants, options and convertible debt, and per share amounts presented in these financial statements, including these footnotes reflect a one-for-three hundred seventy five (1:375) reverse stock split of the Company's common stock effected on October 18, 2024 (the "Reverse Stock Split"). The Company's authorized shares of common and preferred stock along with the par value did not change. No fractional shares will be issued as a result of the reverse stock split. Any fractional shares that would have resulted from the reverse stock split will be settled in cash. The reverse stock split will affect all common stockholders uniformly and will not alter any stockholder's percentage interest in the Company's common stock, except to the extent that the reverse stock split results in some stockholders experiencing an adjustment of a fractional share as described above. Non-GAAP Financial Measures Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we present certain financial measures that facilitate management's review of the operational performance of the Company and as a basis for strategic planning; however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, or a replacement for, financial measures presented in accordance with U.S. GAAP. The Company uses Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA to assess its operating performance. Adjusted EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization adjusted for the change in fair value of derivatives and any significant non-cash or non-recurring one-time charges. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with U.S. GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP financial measures are presented in a consistent manner for each period, unless otherwise disclosed. The Company uses these measures for the purpose of evaluating its historical and prospective financial performance, as well as its performance relative to competitors. These measures also help the Company to make operational and strategic decisions. The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results through the eyes of management, and to better understand its historical and future financial performance. These 20 Table of Contents non-GAAP financial measures are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other U.S. GAAP measures. EBITDA and Adjusted EBITDA have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are that EBITDA and Adjusted EBITDA: • Do not reflect every expenditure, future requirements for capital expenditures or contractual commitments. • Do not reflect all changes in our working capital needs. • Do not reflect interest expense, or the amount necessary to service our outstanding debt. As presented in the U.S. GAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measure excludes the impact of certain charges that contribute to our net loss. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Net Income/(Loss) $ (20,657) $ (23,700) $ (18,624) $ (44,042) Non-GAAP Adjustments: Interest expense 3,661 3,845 11,004 12,504 Depreciation and amortization 256 266 736 780 EBITDA (16,740) (19,589) (6,884) (30,758) Non-GAAP Adjustments for Adjusted EBITDA: Change in fair value of derivative liabilities 18,849 19,325 17,633 29,943 Other non-cash or non-recurring charges: Gain on extinguishment of debt - - (5,205) - Severance agreement and legal settlement - - 585 - Release of historical accrued expenses - - (579) (1,250) Shares for services - - - 224 License and option agreement - - (2,500) - Prepaid legal fees expensed from termination of Merger Agreement - - 457 - Adjusted EBITDA $ 2,109 $ (264) $ 3,507 $ (1,841) 21 Table of Contents Results of Operations For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change (in thousands) 2024 2023 $ % 2024 2023 $ % Revenues: Total Revenue $ 9,360 $ 4,953 $ 4,407 89 % $ 22,308 $ 13,404 $ 8,904 66 % Cost of Revenues 2,293 1,412 881 62 % 5,799 3,876 1,923 50 % Gross Margin 7,067 3,541 3,526 100 % 16,509 9,528 6,981 73 % Gross Margin % 76 % 71 % 401 bps 74 % 71 % 292 bps Operating Expenses: General and administrative 2,545 2,681 (136) (5 %) 8,059 6,678 1,381 21 % Selling and marketing 2,202 1,039 1,163 112 % 4,468 3,430 1,038 30 % Research and Development 161 165 (4) -2 % 519 436 83 19 % Depreciation and amortization 206 187 19 10 % 568 563 5 1 % Operating Income (Loss) 1,953 (531) 2,484 -468 % 2,895 (1,579) 4,474 283 % Other Income (Expense) (22,610) (23,169) 559 2 % (21,519) (42,463) 20,944 49 % Net Income (Loss) $ (20,657) $ (23,700) $ 3,043 13 % $ (18,624) $ (44,042) $ 25,418 58 % Revenues and Gross Margin Revenues for the three month-period ended September 30, 2024 , were $9.4 million compared to $5.0 million for the same period of 2023 , an increase of $4.4 million, or 89% . The increase was primarily driven by the continued increased sales of our UltraMIST® system. The increase in revenues was partially due to an increase in the average selling price of our consumables and parts revenue of 26% year over year, and the remainder of the growth was related to an increase in the number of consumables and systems sold year over year. Gross margin as a percentage of revenue increased to 76% during the three months ended September 30, 2024 , from 71% in the same period of 2023 . Revenues for the nine month-period ended September 30, 2024 , were $22.3 million compared to $13.4 million for the same period of 2023 , an increase of $8.9 million, or 66% . The increase was primarily driven by the continued increased sales of our UltraMIST® system. The increase in revenues was due to an increase in the average selling price of our consumables and parts revenue year over year, and the remainder of the growth was related to an increase in the number of consumables and systems sold year over year. Gross margin as a percentage of revenue increased to 74% during the nine months ended September 30, 2024 , from 71% in the same period of 2023 . General and Administrative Expenses General and administrative expenses decreased $0.1 million or 5% for the three months ended September 30, 2024 , compared with the same period of 2023 . The decrease for the three months ended September 30, 2024 , was primarily due to a decrease in insurance and consulting costs. General and administrative expenses increased $1.4 million, or 21%, for the nine months ended September 30, 2024 , compared with the same period of 2023 . The increase for the nine months ended September 30, 2024 , was primarily due to severance costs, a non-recurring legal settlement, increased headcount expenses. Selling and Marketing Expenses Selling and marketing expenses increased by $1.2 million, or 112%, for the three months ended September 30, 2024 , as compared with the same period of 2023 . The increase was primarily due to increased head count and commission expenses as the sales team and activity grew in comparison to the same period of 2023 . Selling and marketing expenses increased by $1.0 million, or 30%, for the nine months ended September 30, 2024 , as compared with the same period of 2023 . The increase was primarily due to increased head count and commission expenses as the sales team and activity grew in comparison to the same period of 2023 . 22 Table of Contents Research and Development Expenses Research and development expenses decreased slightly for the three months ended September 30, 2024 , as compared with the same period of 2023 . Research and development expenses as a percentage of revenue decreased to 1.7% during the three months ended September 30, 2024 , compared to 3.3% for the same period in 2023 . Research and development expenses increased $83,000, or 19%, for the nine months ended September 30, 2024 , as compared with the same period of 2023 . Research and development expenses as a percentage of revenue decreased to 2.3% during the nine months ended September 30, 2024 , compared to 3.2% for the same period in 2023 . Other (Expense)/Income, net Three months ended September 30, Change Nine months ended September 30, Change (in thousands) 2024 2023 $ % 2024 2023 $ % Interest expense $ (3,661) $ (3,845) $ 184 5 % $ (11,004) $ (12,504) $ 1,500 12 % Gain on extinguishment of debt - - - nm 5,205 - 5,205 nm Change in fair value of derivatives (18,849) (19,325) 476 2 % (17,633) (29,943) 12,310 41 % Other (expense) income (100) 1 (101) nm 1,913 (16) 1,929 nm Other (expense), net $ (22,610) $ (23,169) $ 559 2 % $ (21,519) $ (42,463) $ 20,944 49 % nm - not meaningful Other expense decreased by $0.6 million to $22.6 million for the three months ended September 30, 2024 , as compared to the same period for 2023 . The change was primarily due to a decrease in change in fair value of derivatives expense of $0.5 million. Other expense decreased by $20.9 million to $21.5 million for the nine months ended September 30, 2024 , as compared to the same period for 2023 . The decrease was primarily due to a decrease in change in fair value of derivatives expense of $12.3 million, recognition of a non-recurring gain on extinguishment of debt of $5.3 million and the receipt of $2.5 million from a third-party license and option agreement. Liquidity and Capital Resources Since inception, we have incurred losses from operations each year. As of September 30, 2024 , we had an accumulated deficit of $239 million . Historically, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. The events of default on our senior secured debt and working capital deficit have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q. We expect to devote substantial resources for the commercialization of the 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. We 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 our existing stockholders. In addition, there can be no assurances that our plans to obtain additional capital will be successful on the terms or timeline we expect, or at all. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms. 23 Table of Contents Statement of Cash Flows For the nine months ended September 30, (in thousands) 2024 2023 Cash flows provided by (used in) operating activities $ 1,714 $ (3,253) Cash flows used in investing activities $ (254) $ (156) Cash flows provided by (used in) financing activities $ (119) $ 3,356 Cash provided by operating activities during the nine months ended September 30, 2024 , totaled $1.7 million as compared to cash used by operating activities of $3.3 million in the previous year period. This improvement in cash provided by operations was primarily driven by the receipt of $2.5 million related to a license agreement and option agreement, the increase in revenues, and improvements in operations management including accounts receivable, inventory and accounts payable. Critical Accounting Estimates We have used various accounting policies to prepare the condensed consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 3 to the consolidated financial statements in Part II Item 8. “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 21, 2024. The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The following accounting estimates are deemed critical: Litigation Contingencies We may be involved in legal actions involving product liability, intellectual property and commercial disputes, tax disputes, and governmental proceedings and investigations. The outcomes of these legal actions are not completely within our control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages that could require significant expenditures or result in lost revenues or limit our ability to conduct business in the applicable jurisdictions. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. The Company records a liability in the condensed consolidated financial statements for loss contingencies when a loss is known or considered probable, and the amount may be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. Our significant legal proceedings are discussed in Note 13 to the condensed consolidated financial statements. Derivative Liabilities from Embedded Conversion Options and Warrants The Company classified certain convertible instruments as having embedded conversion options which qualified as derivative financial instruments to be separately accounted for. The Company also further determined that certain warrants also qualified as derivative financial instruments. Various valuation models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on the condensed consolidated balance sheets. The models include subjective input assumptions that can materially affect the fair value estimates and as such are subject to uncertainty. Our significant input assumptions are discussed in Note 10 to the condensed consolidated financial statements. 24 Table of Contents Segment and Geographic Information We have determined that we have one operating segment. Our revenues are generated from sales primarily in the United States. International sales include sales in Europe, Canada, the Middle East, Central America, South America, Asia, and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are in the United States. Effects of Inflation Our assets are, to an extent, liquid in nature, so they are not significantly affected by inflation. However, the rate of inflation, which has increased, affects expenses such as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our condensed consolidated financial condition and results of operations. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required under this item.