10-Q 1 ef20012495_10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to

Commission File Number 000-52985

SANUWAVE Health, Inc.
(Exact name of registrant as specified in its charter)

Nevada
  
20-1176000
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)

11495 Valley View Road
Eden Prairie, MN
  
55344
(Address of principal executive offices)
  
(Zip Code)

(770) 419-7525
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which
registered
None
N/A
 N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes  ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒ Yes  ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 
Large accelerated filer ☐
Accelerated filer ☐
 
Non-accelerated filer ☒
Smaller reporting company  ☒
   
Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   ☐     No  ☒  

As of November 8, 2023 there were issued and outstanding 1,026,078,464 shares of the registrant’s common stock, $0.001 par value per share.

SANUWAVE Health, Inc.
 
Table of Contents

 
Page
PART I – FINANCIAL INFORMATION
 
Item 1.
 4
 
 
 
 4
 
 
 
 5
   
 
 6
   
 
 8
 
 
 
 9
 
 
Item 2.
 18
 
 
Item 3.
 23
 
 
Item 4.
 23
 
 
PART II – OTHER INFORMATION
 
 
Item 1.
 24
 
 
Item 1A.
 24
 
 
Item 2.
 25
 
 
Item 3.
 26
 
 
Item 4.
 26
 
 
Item 5.
 26
 
 
Item 6.
 26
 
 
 
 28
 
2
Special Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. and its subsidiaries (“SANUWAVE,” the “Company,” “we,” “us,” and “our”) contains forward-looking statements. All statements in this Quarterly Report on Form 10-Q, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding: our proposed business combination with SEP Acquisition, Corp., results of operations, liquidity, and operations, restrictions and new regulations on our operations and processes, including the execution of clinical trials; the Company’s future financial results, operating results, and projected costs; market acceptance of and demand for UltraMIST and PACE® systems; management’s plans and objectives for future operations; industry trends; regulatory actions that could adversely affect the price of or demand for our approved products; our intellectual property portfolio; our business, marketing and manufacturing capacity and strategy; estimates regarding our capital requirements, the anticipated timing of the need for additional funds, and our expectations regarding future capital-raising transactions, including through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing agreements, or raising capital through the conversion of outstanding warrants or issuances of securities; product liability claims; economic conditions that could adversely affect the level of demand for or cost of our products; timing of clinical studies and any eventual U.S. Food and Drug Administration (“FDA”) approval of new products and new uses of our existing products; financial markets; the competitive environment; supplier and customer disputes; and our plans to remediate our material weaknesses in our disclosure controls and procedures and our internal control over financial reporting. These forward-looking statements are based on management’s estimates, projections, and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 31, 2023. Other risks and uncertainties are and will be disclosed in the Company’s subsequent SEC filings, including this Quarterly Report on Form 10-Q. These and many other factors could affect the Company’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. The Company undertakes no obligation to revise or update any forward-looking statements. The following information should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 31, 2023.
 
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” are to the consolidated business of the Company.

3
PART I -- FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS
 
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)

   
September 30, 2023
    
December 31, 2022
  
ASSETS
            
Current Assets:
            
Cash
  
$
1,095
    
$
1,153
  
Accounts receivable, net of allowance of $1,247 and $1,037, respectively
    
3,231
      
4,029
  
Inventory
    
1,713
      
868
  
Prepaid expenses and other current assets
    
1,355
      
570
  
Total Current Assets
    
7,394
      
6,620
  
Property, equipment and other, net
    
1,079
      
856
  
Intangible assets, net
    
4,609
      
5,137
  
Goodwill
    
7,260
      
7,260
  
Total Non-current Assets     12,948       13,253  
Total Assets
  
$
20,342
    
$
19,873
  
                 
LIABILITIES
                
Current Liabilities:
                
Senior secured debt, in default
 
$
17,645
    
$
14,416
  
Convertible promissory notes payable
    7,553       16,713  
Convertible promissory notes payable, related parties
    2,495       7,409  
Asset-backed secured promissory notes
     6,576       -  
Asset-backed secured promissory notes, related parties
     3,094       -  
Accounts payable
    
4,623
      
4,400
  
Accrued expenses
    
6,359
      
8,512
  
Factoring liabilities
     1,814       2,130  
Warrant liability
    
28,106
      
1,416
  
Accrued interest
    
5,369
      
4,052
  
Accrued interest, related parties
    
729
      
788
  
Current portion of contract liabilities
    
68
      
60
  
Other
    
1,003
      
291
  
Total Current Liabilities
    
85,434
      
60,187
  
Non-current Liabilities
                
Lease liabilities
    
550
      
438
  
Contract liabilities
    
284
      
230
  
Deferred tax liability
    
28
      
28
  
Total Non-currrent Liabilities
    
862
      
696
  
Total Liabilities
  
$
86,296
    
$
60,883
  
                 
Commitments and Contingencies (Footnote 13)
            
                 
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 no shares issued and outstanding at September 30, 2023 and December 31, 2022
  
$
-
    
$
-
  
Common stock, par value $0.001, 2,500,000,000 shares authorized; 1,026,078,464 and 548,737,651 issued and outstanding at September 30, 2023 and December 31, 2022, respectively
    
1,026
      
549
  
Additional paid-in capital
    
171,377
      
152,750
  
Accumulated deficit
    
(238,284
)
    
(194,242
)
Accumulated other comprehensive loss
    
(73
)
    
(67
)
Total Stockholders’ Deficit
    
(65,954
)
    
(41,010
)
Total Liabilities and Stockholders’ Deficit
  
$
20,342
    
$
19,873
  

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

4
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(UNAUDITED)
(In thousands, except share data)
 
   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2023
    
2022
    
2023
    
2022
  
Revenue
  
$
4,953
    
$
4,166
    
$
13,404
    
$
11,242
  
Cost of Revenues
    
1,412
      
1,157
      
3,876
      
3,141
  
Gross Margin
    
3,541
      
3,009
      
9,528
      
8,101
  
                                 
Operating Expenses:
                                
General and administrative
     2,681       3,498       6,678       9,484  
Selling and marketing
     1,039       1,650       3,430       5,037  
Research and development
    
165
      
157
      
436
      
494
  
Depreciation and amortization
     187       189       563       575  
Total Operating Expenses
    
4,072
      
5,494
      
11,107
      
15,590
  
                                 
Operating Loss
    
(531
)
    
(2,485
)
    
(1,579
)
    
(7,489
)
                                 
Other (Expense)/Income:
                                
Interest expense
    
(2,907
)
    
(3,382
)
    
(10,125
)
    
(9,421
)
Interest expense, related party
     (938 )     (439 )     (2,379 )     (551 )
Change in fair value of derivative liabilities
    
(19,325
)
    
5,252
      
(29,943
)
    
16,597
  
Loss on issuance of debt
    
-
      
-
      
-
      
(3,434
)
Loss on extinguishment of debt
     -       (86 )     -       (297 )
Other (expense) income
     1       1       (16 )     (1 )
Total Other (Expense)/Income
    
(23,169
)
    
1,346
      
(42,463
)
    
2,893
  
                                 
Net Loss before Income Taxes
    
(23,700
)
    
(1,139
)
    
(44,042
)
    
(4,596
)
                                 
Provision for Income Taxes
    
-
      
-
      
-
      
-
  
                                 
Net Loss
    
(23,700
)
    
(1,139
)
    
(44,042
)
    
(4,596
)

                               
Other Comprehensive Loss
                               
Foreign currency translation adjustments
    
7
      
-
      
(6
)
    
6
  
                                 
Total Comprehensive Loss
  
$
(23,693
)
  
$
(1,139
)
  
$
(44,048
)
  
$
(4,590
)
                                 
Loss per Share:
                                
Basic and diluted
   $ (0.03 )   $ (0.00 )   $ (0.06 )   $ (0.01 )
Weighted average shares outstanding
                                
Basic and diluted
    892,956,020
       561,069,625
       683,771,214
       542,484,779
  

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

5
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(In thousands, except share data)

Three Months Ended September 30, 2023
  
   
Common Stock
                          
   
Number of
                      
Accumulated
        
   
Shares
                       Other        
   
Issued and
          
Additional Paid-
    
Accumulated
     Comprehensive        
   
Outstanding
    
Par Value
    
in Capital
     Deficit     Loss     Total
  
                                     
Balances as of June 30, 2023
    
561,637,651
    
$
562
    
$
153,264
    
$
(214,584
)
  
$
(80
)
  
$
(60,838
)
Shares issued for settlement of debt
    
464,440,813
      
464
      
18,113
       -
       -
      
18,577
  
Net loss
    
-
      
-
      
-
      
(23,700
)
    
-
      
(23,700
)
Foreign currency translation adjustment     -       -       -       -       7       7  
                                                 
Balances as of September 30, 2023
    
1,026,078,464
    
$
1,026
    
$
171,377
    
$
(238,284
)
  
$
(73
)
  
$
(65,954
)

Three Months Ended September 30, 2022
  
   
Common Stock
                          
   
Number of
                      
Accumulated
        
    Shares                       Other        
   
Issued and
          
Additional Paid-
    
Accumulated
     Comprehensive        
    Outstanding    
Par Value
    
in Capital
     Deficit     Loss     Total  
                                     
Balances as of June 30, 2022
    
529,293,205
    
$
529
    
$
151,409
    
$
(187,406
)
  
$
(67
)
  
$
(35,535
)
Shares issued for settlement of debt and warrants
     19,444,446       20
       1,341       -       -       1,361  
Net loss
    
-
      
-
      
-
      
(1,139
)
    
-
      
(1,139
)
                                                 
Balances as of September 30, 2022
    
548,737,651
    
$
549
    
$
152,750
    
$
(188,545
)
  
$
(67
)
  
$
(35,313
)

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
 
6
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(In thousands, except share data)
 
Nine Months Ended September 30, 2023
  
 
  
Common Stock
                          
    Number of                       Accumulated        
    Shares                       Other        
    Issued and           Additional Paid-     Accumulated    
Comprehensive
        
    Outstanding
    Par Value
    in Capital     Deficit     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
  
Shares issued for settlement of debt
     464,440,813       464       18,113       -       -       18,577  
Net loss
    
-
       -
       -
       (44,042 )     -
       (44,042 )
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
(6
)
    
(6
)
 
                                                
Balances as of September 30, 2023
    
1,026,078,464
    
$
1,026
    
$
171,377
    
$
(238,284
)
  
$
(73
)
  
$
(65,954
)

Nine Months Ended September 30, 2022
  
 
  
Common Stock
                          
    Number of                       Accumulated        
    Shares                       Other        
    Issued and           Additional Paid-     Accumulated     Comprehensive        
    Outstanding     Par Value     in Capital     Deficit     Loss     Total  
 
                                    
Balances as of December 31, 2021
    
481,619,621
    
$
482
    
$
144,582
    
$
(183,949
)
  
$
(73
)
  
$
(38,958
)
Cashless warrant exercise
    
14,000,000
      
14
      
2,152
      
-
      
-
      
2,166
  
Warrant exercise
     909,091       1       99       -       -       100  
Shares issued in conjunction with Note Payable
     20,666,993       20       3,700       -       -       3,720  
Shares issued for settlement of debt and warrants
     19,444,446       20       1,341       -       -       1,361  
Shsares issued for services
     12,097,500       12       876       -       -       888  
Net loss
    
-
      
-
      
-
      
(4,596
)
    
-
      
(4,596
)
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
6
      
6
  
 
                                                
Balances as of September 30, 2022
    
548,737,651
    
$
549
    
$
152,750
    
$
(188,545
)
  
$
(67
)
  
$
(35,313
)

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

7
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

   
Nine Months Ended September 30,
  
   
2023
    
2022
  
Cash Flows - Operating Activities:
            
Net loss
  
$
(44,042
)
  
$
(4,596
)
Adjustments to reconcile net loss to net cash used by operating activities
                
Depreciation and amortization
    
780
      
681
  
Bad debt expense
    
547
      
62
  
Shares issued for services
     224       888  
Change in fair value of derivative liabilities
     29,943      
(16,597
)
Loss on extinguishment of debt
     -       297  
Loss on issuance of debt
     -       3,434  
Amortization of debt issuance costs and original issue discount
    
5,656
      
2,998
  
Accrued interest
    
5,529
      
2,004
  
Gain on sale of property and equipment, net
     -       51  
Changes in operating assets and liabilities
                
Accounts receivable - trade
    
253
      
69
  
Inventory
    
(844
)
    
178
  
Prepaid expenses and other assets
    
(487
)
    
(656
)
Accounts payable
    
464
      
(1,693
)
Accrued expenses
    
(1,326
)
    
(202
)
Contract liabilities
    
50
      
(94
)
Net Cash Used in Operating Activities
    
(3,253
)
    
(13,176
)
                 
Cash Flows - Investing Activities
                
Proceeds from sale of property and equipment
    
13
      
1,022
  
Purchase of property and equipment
     (169 )     -  
Net Cash Flows (Used in)/Provided by Investing Activities
    
(156
)
    
1,022
  
                 
Cash Flows - Financing Activities
                
Proceeds from senior promissory notes
     -       2,940  
Proceeds from convertible promissory notes payable
     1,202       12,366  
Proceeds from bridge notes payable
     2,994       640  
Payments to factoring agent, net
     (710 )     (227 )
Proceeds from warrant exercises
    
-
      
100
  
Payments of principal on finance leases
    
(130
)
    
(174
)
Payments of principal on convertible promissory notes and SBA loans
     -       (2,981 )
Net Cash Flows Provided by Financing Activities
    
3,356
      
12,664
  
                 
Effect of Exchange Rates on Cash
    
(5
)
    
(17
)
                 
Net Change in Cash During Period
    
(58
)
    
493
  
                 
Cash at Beginning of Period
    
1,153
      
619
  
Cash at End of Period
  
$
1,095
    
$
1,112
  
                 
Supplemental Information:
                
Cash paid for interest
  
$
984
    
$
3,345
  
                 
Non-cash Investing and Financing Activities:
                
Warrants issued in conjunction with senior secured promissory note payable and convertible promissory notes payable
  $ 570     $ 4,117  
Conversion of convertible notes payable to common stock
     18,577       -  
Common shares issued for advisory shares
    302       -  
Embedded conversion feature on convertible promissory notes payable and bridge notes payable
     (520 )     2,309  
Reclassification of warrant liability due to cashless warrant exercise
    -       2,166  
Working capital balances refinanced into convertible notes payable
     -       2,273  
Settlement of debt and warrants with stock
     -       1,361  
Common shares issued in conjunction with senior secured promissory note payable
     -       3,720  

 The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

8
SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023

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 September 30, 2023, and for the three and nine months ended September 30, 2023, and 2022 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 nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023.
 
The condensed consolidated balance sheet on December 31, 2022, 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, 2022, Annual Report on Form 10-K filed with the SEC on March 31, 2023 (the “2022 Annual Report”).

Reclassifications - Certain accounts in the prior period condensed consolidated financial statements have been reclassified to conform to the presentation of the current period condensed consolidated financial statements. These reclassifications had no effect on the previously reported operating results.

2.
Going Concern

The 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. The Company expects 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 are to obtain additional capital in 2023, or early 2024, primarily through closing the Merger, as defined in Note 4. For additional information regarding the Merger, please see Note 4. The Company could also 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
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 4 of the consolidated financial statements in our 2022 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 doubtful accounts, the net realizable value of inventory, useful lives of long-lived assets, fair value of goodwill and other intangible assets, the determination of the valuation allowances for deferred taxes, estimated fair value of stock-based compensation, 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, Accessory and Part Sales - System sales, accessory and part sales include devices and applicators (new and refurbished). Performance obligations are satisfied at the point in time when the customer obtains control of the goods, which is generally at the point in time that the product is shipped.

Licensing Fees - Licensing transactions include distribution licenses and intellectual property licenses. Licensing revenue is recognized as the Company satisfies its performance obligations, which may vary with the terms of the licensing agreement.

Other Revenue - Other revenue primarily includes warranties, repairs, and billed freight. The Company allocates the device sales price to the product and the embedded warranty by reference to the stand-alone extended warranty price. Warranty revenue is recognized over the time that the Company satisfies its performance obligations, which is generally the warranty term. Repairs (parts and labor) and billed freight revenue are recognized at the point in time that the service is performed, or the product is shipped, respectively.

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 in Note 4 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. As of September 30, 2023, $732 thousand in Merger costs were deferred until the closing of the Merger.

Recent Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments, which was subsequently revised by ASU 2018-19. The ASU introduces a new model for assessing impairment of most financial assets. Entities are required to use a forward-looking expected loss model, which replaces the current incurred loss model, resulting in earlier recognition of allowance for losses. The Company adopted this ASU in January 2023, and there was no material impact on the condensed consolidated financial statements.

10
4.
Merger Agreement
 
On August 23, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among SEP Acquisition Corp., a Delaware corporation (“SEPA”), SEP Acquisition Holdings Inc., a Nevada corporation and a wholly owned subsidiary of SEPA (“Merger Sub”). Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA (the “Merger”) will be affected. More specifically, and as described in greater detail below, at the effective time of the Merger (the “Effective Time”):


•
Merger Sub will merge with and into the Company, with the Company being the surviving company following the merger.

•
Each issued and outstanding share of the Company’s common stock, will automatically be converted into Class A common stock of SEPA, par value $0.0001 per share (the “Class A Common Stock”), at the Conversion Ratio (as defined in the Merger Agreement); and

•
Outstanding convertible securities of the Company will be assumed by SEPA and will be converted into the right to receive Class A Common Stock of SEPA.

If the Merger Agreement is consummated SEPA will acquire 100% of the Company’s issued and outstanding equity securities.  The proposed merger will be accounted for as a “reverse recapitalization” in accordance with US GAAP.  Under the reserve recapitalization model, the transaction will be treated as the Company issuing equity for the net assets of SEPA, with no goodwill or intangible assets recorded.  Under this method of accounting, SEPA will be treated as the acquired company for financial reporting purposes.  This determination is primarily based on the fact that following the merger, the Company’s stockholders are expected to have a majority voting power of the combined company, approximately 69 – 70%, the Company will comprise all of the ongoing operations of the combined company, Company representatives will comprise a majority of the governing body of the combined company, and the Company’s senior management will comprise all of the senior management of the combined company.  As a result of the merger, SEAQP will be renamed Sanuwave Health, Inc. 

Merger Consideration - The consideration to be delivered to the Company’s securityholders by SEPA in connection with the consummation of the Merger (the “Closing”) will consist solely of 7,793,000 shares of Class A Common Stock and, in the case of certain Securityholders, of securities convertible into or exercisable for new shares of Class A Common Stock reserved for issuance from the merger consideration (the “Merger Consideration”). The Merger Consideration deliverable to the Company’s stockholders will be allocated pro rata based on their ownership after giving effect to the required conversion or exercise, as applicable, of all the outstanding convertible notes, in-the-money options, and in-the-money warrants immediately prior to the Closing.

Out-of-the-money options and out-of-the-money warrants will be assumed by SEPA and converted into options or warrants, respectively, exercisable for shares of Class A Common Stock based on the Conversion Ratio; however, such out-of-the-money options and warrants shall not be reserved for issuance from the Merger Consideration.

Conditions to Closing - The Merger Agreement contains customary conditions to Closing, including the following mutual conditions of the parties (unless waived): (i) approval of the stockholders of the Company and SEPA; (ii) approvals of any required governmental authorities; (iii) no law or order preventing the Transactions; (iv) the filing of the Charter Amendments; (v) the appointment of SEPA’s post-closing board of directors; (vi) the Registration Statement having been declared effective by the SEC; (vii) approval of the Class A Common Stock of SEPA for listing on Nasdaq; (viii) holders of 80% or more of the Company’s convertible notes with a maturity date occurring after the date of the Closing (the “Closing Date”), measured by number of shares into which such convertible notes may be converted, agreeing to convert their convertible notes into shares common stock immediately prior to the Effective Time; and (ix) holders of 80% or more of the Company’s warrants that would be outstanding on the Closing Date, measured by number of shares subject to all such warrants in the aggregate, agreeing to convert their warrants into shares of common stock immediately prior to the Effective Time.

In addition, unless waived by the Company, the obligations of the Company to consummate the business combination are subject to the satisfaction of the following additional Closing conditions, in addition to the delivery by SEPA of customary certificates and other Closing deliverables: (ii) SEPA having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Merger Agreement required to be performed or complied with by it on or prior to the Closing Date; (iii) SEPA having delivered a fairness opinion of the Purchaser Financial Advisor (as defined in the Merger Agreement), in form and substance reasonably satisfactory to the Company; (iv) SEPA having, at the Closing, at least $12,000,000 in cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of any redemptions) and the proceeds of any PIPE Investment; and other customary conditions to Closing as defined in the Merger Agreement.

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5.
Loss per Share

Diluted net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares outstanding for the three and nine months ended September 30, 2023, and 2022. The weighted average number of shares outstanding includes outstanding common stock and shares issuable for nominal consideration. Accordingly, warrants issued with a $0.01 per share exercise price, are included in weighted average shares outstanding as follows:


 
Three Months Ended
     Nine Months Ended  
(in Thousands)
 
September 30, 2023
    
September 30, 2022
     September 30, 2023    
September 30, 2022
  
Weighted average shares outstanding
                        
Common shares
    
871,265
      
540,584
       662,080       519,127  
Common shares issuable assuming exercise of nominally priced warrants
    
21,691
      
20,486
       21,691       23,358  
Weighted average shares outstanding
    
892,956
      
561,070
       683,771       542,485  

Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock and diluted common stock equivalents outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net loss per share. As a result of the net loss for the three and nine months ended September 30, 2023, and nine months ended September 30, 2022, all potentially dilutive shares in such periods were anti-dilutive and therefore excluded from the computation of diluted net loss per share. As a result of the net loss for the three months ended September 30, 2022, all dilutive shares were included in the computation of diluted net income per share.Anti-dilutive equity securities consisted of the following for the nine months ended September 30, 2023, and 2022, respectively:

    Nine Months Ended  
(in Thousands)
 
September 30, 2023
    
September 30, 2022
  
Common stock options
    
19,136
      
21,246
  
Common stock purchase warrants
    
1,106,819
      
984,799
  
Convertible notes payable
    
224,509
      
483,588
  
     
1,350,464
      
1,489,633
  

6.
Accrued Expenses

Accrued expenses consist of the following:

(in Thousands)
  
September 30, 2023
    
December 31, 2022
  
Registration penalties
  
$
1,583
    
$
1,583
  
License fees
    
892
      
892
  
Director and professional fees
    
1,177
      
586
  
Employee compensation
     2,665       4,585  
Other
    
42
      
866
  
 
  
$
6,359
    
$
8,512
  

7.
Senior Secured Debt, In Default

The following table summarizes outstanding senior secured debt, in default:

   
September 30, 2023
    
December 31, 2022
  
(in thousands)
  
Principal
    
Debt Discount
    
Carrying Value
    
Accrued Interest
    
Principal
    
Debt Discount
    
Carrying Value
    
Accrued Interest
  
Senior secured debt
  
$
21,399
    
$
(3,754
)
  
$
17,645
    
$
2,636
    
$
19,211
    
$
(4,795
)
  
$
14,416
    
$
1,890
  

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. Since the combined fair value of the warrants and common stock issued as part of the Second NWPSA exceeded the face value of the note, the additional amount beyond the face value was recorded as a loss on issuance totaling $3.4 million.

Interest is charged at the greater of the prime rate or 3% plus 9%. 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.

As of September 30, 2023, the Company is in default on the minimum liquidity provisions in the Senior Secured Note and, as a result, it is classified in current liabilities in the accompanying condensed consolidated balance sheets. The Company is accruing interest at the default interest rate of an incremental 5%.

In June 2023, the Company entered into a Fourth Amendment to the NWPSA, which provides the Company an extension of the holder forbearing from exercising the remedies arising from the existing defaults to the earlier of the occurrence of an event of default and December 31, 2023.  The amendment also added a consent fee of 2% of the original principal amount of the NWPSA, payable in cash at maturity, and defers interest that would otherwise have been due on June 30, 2023, and September 30, 2023.  The interest will instead be compounded and added to the principal amount of the notes and bear interest at a rate of 20.25% per annum.  The amendment also requires the Company to complete an equity financing that results in gross cash proceeds of at least $2.5 million by July 15, 2023.  This financing successfully closed on July 21, 2023, as further described in Note 9.

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. Interest expense for the three and nine months ended September 30, 2023, totaled $1.8 and $5.1 million, respectively. Interest expense for the three and nine months ended September 30, 2022, totaled $1.4 and $3.7 million, respectively.

8.
Convertible Promissory Notes Payable

 

The following two tables summarize outstanding notes payable as of September 30, 2023, and December 31, 2022:

 
 
  
As of September 30, 2023
  
(In thousands, except conversion price)
  
Conversion
Price
    
Principal
    
Remaining
Debt Discount
    
Remaining
Embedded
Conversion
Option
    
Carrying Value
  
Acquisition convertible promissory note, in default
  
$
0.10
      
4,000
      
-
      
-
      
4,000
  
Convertible promissory notes payable, related parties, in default
  
$
0.10
      
1,373
      
-
      
-
      
1,373
  
2022 convertible notes payable
  
$
0.04
      
3,940
      
(388
)
    
1
      
3,553
  
2022 convertible notes payable, related parties
  
$
0.04
      
1,270
      
(148
)
    
-
      
1,122
  
Total Convertible Promissory Notes Payable
          
$
10,583
    
$
(536
)
  
$
1
    
$
10,048
  

 
  
As of December 31, 2022
  
(In thousands, except conversion price)
  
Conversion
Price
    
Principal
    
Remaining
Debt Discount
    
Remaining
Embedded
Conversion
Option
    
Carrying
Value
  
Acquisition convertible promissory note, in default
  
$
0.10
      
4,000
      
-
      
-
      
4,000
  
Convertible promissory note, related party, in default
  
$
0.10
      
1,373
      
-
      
-
      
1,373
  
2022 convertible notes payable
  
$
0.04
      
13,660
      
(2,532
)
    
1,585
      
12,713
  
2022 convertible notes payable, related parties
  
$
0.04
      
6,515
      
(1,234
)
    
755
      
6,036
  
Total Convertible Promissory Notes Payable
          
$
25,548
    
$
(3,766
)
  
$
2,340
    
$
24,122
  


13
2022 Convertible Notes Payable and 2022 Convertible Notes Payable, Related Parties – In August 2022, November 2022, and May 2023, 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, and approximately $1.2 million in May (ii) Common Stock Purchase Warrants to purchase an additional 535.1 million shares of common stock with an exercise price of $0.067 per share and (iii) Common Stock Purchase Warrants to purchase an additional 535.1 million shares of common stock with an exercise price of $0.04 per share. Interest expense for the three and nine months ended September 30, 2023, totaled $1.3 million and $6.0 million, respectively.

Pursuant to the Notes, the Company promised to pay in cash and/or in shares of common stock, at a conversion price of $0.04 (the “Conversion Price”), the principal amount and interest at a rate of 15% per annum on any outstanding principal. The Conversion Price of the Notes is subject to adjustment, including if the Company issues or sells shares of common stock for a price per share less than the Conversion Price of the Notes or if the Company lists its shares of common stock on The Nasdaq Capital Market and the average volume weighted average price of such common stock for the five trading days preceding such listing is less than $0.04 per share; provided, however, that the Conversion Price shall never be less than $0.01. The Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens.

Pursuant to the Notes issued in August 2022 and November 2022, the Company agreed to reduce its outstanding shares via a reverse stock split to provide the number of authorized and unissued shares of common stock sufficient to permit the conversion of these Notes on or before December 31, 2022. However, the Company obtained a waiver of this requirement through December 31, 2023, from all holders of the August 2022 and November 2022 Notes and amended its Articles of Incorporation to increase its number of authorized shares of common stock from 800,000,000 to 2,500,000,000.

In August 2023, the Company utilized its election to convert the August issued 2022 Convertible Notes Payable into shares of common stock upon the Notes’ maturity.  The $16.2 million in principal and $2.4 million in interest were converted to 464,440,813 shares of common stock.

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 three and nine months ended September 30, 2023, totaled $0.4 million.