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 June 30, 2025, as compared to the same period in 2024 . Revenue for the three months ended June 30, 2025, totaled $10.2 million , an increase of 42% , as compared to $7.2 million for the same period of 2024 . Revenue for the six months ended June 30, 2025, totaled $19.5 million , an increase of 51% , as compared to $12.9 million for the same period of 2024 . Net income for the three months ended June 30, 2025, was $1.1 million compared to net income of $6.6 million for the same period in 2024 . The decrease in our net income for the three months ended June 30, 2025, was primarily related to the a gain on extinguishment of debt for the three months ended June 30, 2024 that did not recur during the three months ended June 30, 2025 and the change in fair value of derivative liabilities . For the three months ended June 30, 2025, our operating income totaled $1.9 million , which is flat compared to the same period of 2024 . Net loss for the six months ended June 30, 2025, was $4.6 million compared to a net income of $2.0 million for the same period in 2024 . The change from net income for the six months ended June 30, 2025 to net loss for the six months ended June 30, 2024, was primarily related to a gain on extinguishment of debt for the six months ended June 30, 2024 that did not recur during the six months ended June 30, 2025 and the change of fair value of derivative liabilities. For the six months ended June 30, 2025, our operating income totaled $2.9 million , which is an improvement of $1.9 million compared to the same period of 2024 . The increase in operating income was mainly driven by an increase in revenue and gross margin for the six months ended June 30, 2025. 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. 23 Table of Contents 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 income (loss). Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2025 2024 2025 2024 Net Income (Loss) $ 1,055 $ 6,561 $ (4,621) $ 2,033 Non-GAAP Adjustments: Interest expense 1,874 3,783 3,726 7,343 Depreciation and amortization 299 262 573 480 EBITDA 3,228 10,606 (322) 9,856 Non-GAAP Adjustments for Adjusted EBITDA: Change in fair value of derivative liabilities (990) (3,717) 3,911 (1,216) Other non-cash or infrequent charges: Stock-based compensation 1,132 - 2,116 - Gain on extinguishment of debt - (5,310) - (5,205) Severance agreement and legal settlement - - - 585 Release of historical accrued expenses - (579) - (579) License and option agreement - - - (2,500) Prepaid legal fees expensed from termination of Merger Agreement $ - $ 457 $ - $ 457 Adjusted EBITDA $ 3,370 $ 1,457 $ 5,705 $ 1,398 24 Table of Contents Results of Operations Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands) 2025 2024 $ % 2025 2024 $ % Revenue $ 10,164 $ 7,162 $ 3,002 42 % $ 19,506 $ 12,948 $ 6,558 51 % Cost of revenue 2,206 1,922 284 15 % 4,164 3,506 658 19 % Gross margin 7,958 5,240 2,718 52 % 15,342 9,442 5,900 62 % Gross margin % 78 % 73 % 79 % 73 % Operating expenses: General and administrative 4,039 1,839 2,200 120 % 8,506 5,514 2,992 54 % Selling and marketing 1,674 1,034 640 62 % 3,205 2,266 939 41 % Research and development 194 195 (1) -1 % 402 358 44 12 % Depreciation and amortization 174 180 (6) -3 % 366 362 4 1 % Operating income 1,877 1,992 (115) -6 % 2,863 942 1,921 204 % Other income (expense) (822) 4,569 (5,391) -118 % (7,484) 1,091 (8,575) -786 % Net income (loss) $ 1,055 $ 6,561 $ (5,506) -84 % $ (4,621) $ 2,033 $ (6,654) -327 % Revenue Revenues for the t hree months ended June 30, 2025, were $10.2 million , compared to $7.2 million for the same period of 2024 , an increase of $3.0 million or 42% . 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 29% in the t hree months ended June 30, 2025, as compared to the same period of 2024 . The quantity of UltraMIST ® systems sold increased by 61% in the t hree months ended June 30, 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 June 30, 2025, as compared to the same period of 2024; the average selling price of disposables increased 6% in the t hree months ended June 30, 2025, and the average selling price of systems increased 1% in the t hree months ended June 30, 2025. Revenue from UltraMIST ® totaled 99% of total revenue in the t hree months ended June 30, 2025, and over 95% in the same period of 2024 . Revenues for the six months ended June 30, 2025, were $19.5 million , compared to $12.9 million for the same period of 2024 , an increase of $6.6 million or 51% . 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 31% in the six months ended June 30, 2025, as compared to the same period of 2024 . The quantity of UltraMIST ® systems sold increased by 86% in the six months ended June 30, 2025, as compared to the same period of 2024. Pricing of the UltraMIST ® system and disposables also showed growth in the six months ended June 30, 2025, as compared to the same period of 2024; the average selling price of disposables increased 7% in the six months ended June 30, 2025, and the average selling price of systems increased 4% in the six months ended June 30, 2025. Revenue from UltraMIST ® totaled 99% of total revenue in the six months ended June 30, 2025, and over 94% in the same period of 2024 . Cost of Revenues Cost of revenues for the t hree months ended June 30, 2025, was $2.2 million , compared to $1.9 million for the same period of 2024 . Gross profit as a percentage of revenues was 78% for the t hree months ended June 30, 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. Cost of revenues for the six months ended June 30, 2025, was $4.2 million , compared to $3.5 million for the same period of 2024 . Gross profit as a percentage of revenues was 79% for the six months ended June 30, 2025, compared to 73% for 25 Table of Contents 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 June 30, 2025, were $4.0 million as compared to $1.8 million for the same period of 2024, an increase of $2.2 million, or 120%. The increase in the three months ended June 30, 2025, as compared to the same period of 2024, was primarily due to increased headcount expenses of $1.1 million and non-cash charges for stock-based compensation expense totaling $0.9 million. There was a release of historical accrued expenses relating to headcount expenses for the three months ended June 30, 2024 of $0.6 million which did not recur in the three months ended June 30, 2025. General and administrative expenses for the six months ended June 30, 2025, were $8.5 million as compared to $5.5 million for the same period of 2024, an increase of $3.0 million, or 54%. The increase in the six months ended June 30, 2025, as compared to the same period of 2024, was primarily due to non-cash charges for stock-based compensation expense totaling $1.7 million and increased headcount expenses of $1.2 million. There was a release of historical accrued expenses relating to headcount expenses for the six months ended June 30, 2024 of $0.6 million which did not recur in the three months ended June 30, 2025. Selling and Marketing Selling and marketing expenses for the t hree months ended June 30, 2025, were $1.7 million as compared to $1.0 million for the same period of 2024 , an increase of $0.6 million , or 62% . The year-over-year increase in sales and marketing expenses in the t hree months ended June 30, 2025, was primarily due to increased headcount expenses of $0.4 million, including commissions as revenues increased, and non-cash charges for stock-based compensation of $0.2 million. Selling and marketing expenses for the six months ended June 30, 2025, were $3.2 million as compared to $2.3 million for the same period of 2024 , an increase of $0.9 million , or 41% . The year-over-year increase in sales and marketing expenses the six months ended June 30, 2025, was primarily due to increased headcount expenses of $0.7 million and non-cash charges for stock-based compensation of $0.4 million; partially offset by decreases in Travel & Entertainment expenses of $0.1 million and Service Contracts of $0.1 million . Research and Development Research and development expenses for each of the t hree months ended June 30, 2025, and June 30, 2024, were $0.2 million. The research and development costs in the t hree months ended June 30, 2025, remained approximately consistent with the costs in the same period of 2024 . Research and development expenses for each of the six months ended June 30, 2025, and June 30, 2024, were $0.4 million. The research and development costs in the six months ended June 30, 2025, remained approximately consistent with the costs in the same period of 2024 . 26 Table of Contents Other (Expense) Income, net Other (expense) income, net consists of the following: Three Months Ended June 30, Change Six Months Ended June 30, Change 2025 2024 $ % 2025 2024 $ % Interest expense $ (1,874) $ (3,783) $ 1,909 50 % $ (3,726) $ (7,343) $ 3,617 49 % Change in fair value of derivative liabilities 990 3,717 (2,727) 73 % (3,911) 1,216 (5,127) 422 % Gain on extinguishment of debt - 5,310 (5,310) - % - 5,205 (5,205) - % Other expense (27) (685) 658 96 % (28) (787) 759 96 % Other income 89 10 79 790 % 181 2,800 (2,619) (94 %) Other (expense) income, net $ (822) $ 4,569 $ (5,391) 118 % $ (7,484) $ 1,091 $ (8,575) 786 % Other (expense) income, net decreased by $5.4 million to other expense of $0.8 million for the t hree months ended June 30, 2025, as compared to other income of $4.6 million for the same period of 2024 . The decrease was primarily driven by a decrease in gain on extinguishment of debt of $5.3 million and a decrease from the change in the fair value of derivative liabilities of $2.7 million , partially offset by a decrease in interest expense of $1.9 million . The change in fair value of derivative liability relates to the valuation of warrants previously issued by the Company. Other (expense) income, net decreased by $8.6 million to an expense of $7.5 million for the six months ended June 30, 2025, as compared to other income of $1.1 million for the same period of 2024 . The decrease was primarily driven by a decrease in gain on extinguishment of debt of $5.2 million and a decrease from the change in the fair value of derivative liabilities of $5.1 million , partially offset by a decrease in interest expense of $3.6 million . The change in fair value of derivative liability relates to the valuation of warrants previously issued by the Company. Other income for the six months ended June 30, 2024 mainly consists of the one-time payment of $2.5 million related to the Patent and License Agreement as described in Note 16. Liquidity and Capital Resources From inception through the year ended December 31, 2023, we incurred losses from operations each year. As of June 30, 2025, we had an accumulated deficit of $256.0 million . Historically, our operations have primarily been funded from the sale of capital stock, issuances of notes payable, and convertible debt securities. We have incurred recurring net losses in prior years, currently have a significant accumulated deficit, have negative working capital, and the Senior Secured Note (as defined in Note 8) 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 this Form 10-Q. During the three and six months ended June 30, 2025, and prior fiscal year ended December 31, 2024, we achieved operating income. This is attributable to the implementation and execution of several strategic initiatives, primarily, revenue growth initiatives and a capital raise from a private placement in October 2024, which have positively impacted our operations. Despite the positive operating income in the current year, we continue to monitor our financial position closely. In addition to the operational improvements, we are addressing our financial obligations, including the significant portion of debt that matures in September 2025. Management is actively engaged in discussions with lenders and financial institutions to refinance this debt, which could 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 27 Table of Contents 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: Six Months Ended June 30, (in thousands) 2025 2024 Cash flows (used in) provided by operating activities $ (524) $ 432 Cash flows (used in) investing activities $ (1,321) $ (206) Cash flows provided by financing activities $ 104 $ 316 Cash used in operating activities for the six months ended June 30, 2025, totaled $0.5 million and consisted primarily of a net loss of $4.6 million and a decrease in net operating assets of $4.1 million, partially offset by non-cash charges of $3.9 million related to a change in the fair value of derivative liabilities, $2.1 million related to stock-based compensation expense, and $1.1 million related to amortization of debt issuance and debt discounts. Net operating assets consisted primarily of inventory, accrued expenses, prepaid expenses and accounts receivable to support the growth of our operations. In addition, we received $0.4 million in tenant improvement funds, as described in Note 7 to the financial statement, which partially offsets leasehold improvement investments. The related leasehold improvements are included in purchases of property and equipment under investing activities. Cash provided by operating activities for the six months ended June 30, 2024 totaled $0.4 million and consisted primarily of net income of $2.0 million, partially offset by non-cash charges of $1.2 million related to a change in the fair value of derivative liabilities and $3.3 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. Cash used in investing activities for the six months ended June 30, 2025, totaled $1.3 million and consisted primarily of purchases of property and equipment of $1.3 million, of which $0.9 million was related to leasehold improvements at our new headquarters. Cash used in investing activities for the six months ended June 30, 2024 , totaled $0.2 million and primarily consisted of purchases of property and equipment related to manufacturing equipment. 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. 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. 28 Table of Contents 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.