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, 2024 included in our Annual Report on Form 10-K, filed with the SEC on March 20, 2025 (the “2024 Annual Report”). Executive Summary We continued to realize significant revenue growth during the three months ended March 31, 2025, as compared to the same period in 2024 . Revenue for the three months ended March 31, 2025, totaled $9.3 million , an increase of 61% , as compared to $5.8 million for the same period of 2024 . Net loss for the three months ended March 31, 2025, was $5.7 million compared to a net loss of $4.5 million for the same period in 2024 . The increase in our net loss for the three months ended March 31, 2025, was primarily related to an increase in change of fair value of derivative liabilities. For the three months ended March 31, 2025, our operating income totaled $1.0 million , which is an improvement of $2.0 million compared to the same period of 2024 . Recent Developments On March 7, 2025, our common stock began trading on The Nasdaq Global Market under the ticker symbol “SNWV.” Non-GAAP Financial Measures Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we present certain financial measures that facilitate management's review of the operational performance of the Company and as a basis for strategic planning; however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) (“U.S. GAAP”). These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, or a replacement for, financial measures presented in accordance with U.S. GAAP. The Company uses Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA to assess its operating performance. Adjusted EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization adjusted for the change in fair value of derivatives and any significant non-cash or non-recurring infrequent charges. EBITDA and Adjusted EBITDA should not be considered as alternatives to net loss 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 infrequent 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 U.S. GAAP measures, allows them to see the Company’s results through the eyes of management, and to better understand its historical and future financial performance. These non-GAAP financial measures are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other U.S. GAAP measures. EBITDA and Adjusted EBITDA have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are that EBITDA and Adjusted EBITDA: • 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. 21 Table of Contents 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 March 31, (in thousands) 2025 2024 Net (Loss) Income $ (5,676) $ (4,528) Non-GAAP Adjustments: Interest expense 1,852 3,560 Depreciation and amortization 274 218 EBITDA (3,550) (750) Non-GAAP Adjustments for Adjusted EBITDA: Change in fair value of derivative liabilities 4,901 2,501 Other non-cash or infrequent charges: Stock-based compensation 975 - Loss on extinguishment of debt - 105 Severance agreement and legal settlement - 585 License and option agreement - (2,500) Adjusted EBITDA $ 2,326 $ (59) Results of Operations Three Months Ended March 31, Change (in thousands) 2025 2024 $ % Revenue $ 9,342 $ 5,786 $ 3,556 61 % Cost of revenue 1,958 1,584 374 24 % Gross margin 7,384 4,202 3,182 76 % Gross margin % 79 % 73 % Operating expenses: General and administrative 4,467 3,675 792 22 % Selling and marketing 1,531 1,232 299 24 % Research and development 208 163 45 28 % Depreciation and amortization 192 182 10 5 % Operating income (loss) 986 (1,050) 2,036 194 % Other expense, net (6,662) (3,478) (3,184) -92 % Net loss $ (5,676) $ (4,528) $ (1,148) -25 % Revenue Revenues for the t hree months ended March 31, 2025, were $9.3 million , compared to $5.8 million for the same period of 2024 , an increase of $3.6 million or 61% . The increase in net sales was primarily driven by the growth in quantity of UltraMIST ® disposables and systems sold as well as a strategic focus on price discipline. The quantity of UltraMIST ® disposables sold increased by 32% in the t hree months ended March 31, 2025, as compared to the same period of 2024 . The quantity of UltraMIST ® systems sold increased by 128% in the t hree months ended March 31, 2025, as compared to the same period of 2024. Pricing of the UltraMIST ® system and disposables also showed growth in the t hree months ended March 31, 2025, as compared to the same period of 2024; the average selling price of disposables increased 8% in the t hree months ended March 31, 2025, and the average selling price of systems increased 8% in the t hree months ended March 31, 22 Table of Contents 2025. Revenue from UltraMIST ® totaled 99% of total revenue in the t hree months ended March 31, 2025, and over 90% in the same period of 2024 . Cost of Revenue Cost of revenues for the t hree months ended March 31, 2025, was $2.0 million , compared to $1.6 million for the same period of 2024 . Gross profit as a percentage of revenues was 79% for the t hree months ended March 31, 2025, compared to 73% for the same period in 2024 . This increase in gross margin was largely driven by improved pricing initiatives on our UltraMIST ® systems and applicators. General and Administrative General and administrative expenses for the three months ended March 31, 2025, were $4.5 million as compared to $3.7 million for the same period of 2024, an increase of $0.8 million, or 22%. The increase in the three months ended March 31, 2025, as compared to the same period of 2024, was primarily due to non-cash charges for stock-based compensation expense totaling $0.8 million. Selling and Marketing Selling and marketing expenses for the t hree months ended March 31, 2025, were $1.5 million as compared to $1.2 million for the same period of 2024 , an increase of $0.3 million , or 24% . The year-over-year increase in sales and marketing expenses in the t hree months ended March 31, 2025, was largely driven by increased headcount and non-cash charges for stock-based compensation. Research and Development Research and development expenses for each of the t hree months ended March 31, 2025, and March 31, 2024, were $0.2 million. The research and development costs in the t hree months ended March 31, 2025, remained approximately consistent with the costs in the same period of 2024 . Other Income (Expense), net Other expense, net consists of the following: Three Months Ended March 31, Change 2025 2024 $ % Interest expense $ (1,852) $ (3,560) $ 1,708 48 % Change in fair value of derivative liabilities (4,901) (2,501) (2,400) (96 %) Loss on extinguishment of debt - (105) 105 nm Other expense (1) (102) 101 99 % Other income 92 2,790 (2,698) (97 %) Other expense, net $ (6,662) $ (3,478) $ (3,184) (92 %) nm - not meaningful Other expenses totaled $6.7 million for the t hree months ended March 31, 2025, as compared to $3.5 million for the same period of 2024 , an increase of $3.2 million . The increase was primarily driven by a decrease in other income of $2.7 million and an increased loss from the change in the fair value of derivative liabilities of $2.4 million , partially offset by a decrease in interest expense of $1.7 million. The change in fair value of derivative liability relates to valuation of warrants previously issued by the Company. Other income for the three months ended March 31, 2024 mainly consists of the one-time payment of $2.5 million related to the Patent License as described in Note 16. Liquidity and Capital Resources Since inception, we have incurred losses from operations each year. As of March 31, 2025, we had an accumulated deficit of $257.1 million . Historically, our operations have primarily been funded from the sale of capital stock, issuances of notes payable, and convertible debt securities. 23 Table of Contents The Company has incurred recurring operating losses in prior years, has negative working capital, and the Senior Secured Note becomes due in September 2025, which raises substantial doubt about our ability to continue as a going concern for a period of 12 months from the filing of the Form 10-Q. During the current and prior fiscal year, the Company has achieved operating income, reflecting a significant improvement in its financial performance. The Company is addressing its financial obligations, including the significant portion of debt that is coming due in September 2025. Management is actively engaged in discussions with lenders and financial institutions to refinance this debt, which would extend the maturity of the debt and provide additional liquidity to support ongoing operations and strategic initiatives. Although no assurances can be given that our plans to obtain refinancing will be successful or on the terms or timeline we expect, or at all, management believes that the actions taken to date, along with the planned initiatives, will enable the Company to meet its obligations as they become due and to continue as a going concern.. 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 following table presents summarized cash flow information: Three Months Ended March 31, (in thousands) 2025 2024 Cash flows (used in) provided by operating activities $ (1,517) $ 1,100 Cash flows used in investing activities $ (162) $ (114) Cash flows (used in) provided by financing activities $ (57) $ 42 Cash used in operating activities for the three months ended March 31, 2025, totaled $1.5 million and consisted primarily of a net loss of $5.7 million and a decrease in net operating assets of $2.5 million, partially offset by non-cash charges of $4.9 million related to a change in the fair value of derivative liabilities, $1.0 million related to stock-based compensation expense, and $0.5 million related to amortization of debt issuance and debt discounts. Net operating assets consisted primarily of inventory, accrued expenses, and accounts receivable to support the growth of our operations. Cash provided by operating activities for the three months ended March 31, 2024 totaled $1.1 million and consisted primarily of a net loss of $4.5 million, partially offset by non-cash charges of $2.5 million related to a change in the fair value of derivative liabilities and $1.6 million related to amortization of debt issuance and debt discounts, as well as the receipt of $2.5 million related to the License and Option Agreement, as further discussed in Note 16 to the financial statements. 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 2024 Annual Report on Form 10-K filed with the SEC on March 20, 2025. 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 24 Table of Contents 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 17 to the condensed consolidated financial statements. Derivative Liabilities from Warrants The Company determined that certain warrants 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. The Company's volatility is the most significant assumption and changes over time with the market. Our significant input assumptions are discussed in Note 10 to the condensed consolidated financial statements. Segment and Geographic Information We have determined that we have one operating segment. Our revenues are generated from sales primarily in the United States. International sales include sales in Europe, Canada, the Middle East, Central America, South America, Asia, and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are in the United States. For further information on the Company's operating segment, refer to Note 18 to the condensed consolidated financial statements. 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 remains elevated, 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 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.