Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information management believes to be relevant to understanding the financial condition and results of operations of the Company. The discussion focuses on our financial results of operations for the years ended December 31, 2024 and 2023. You should read this discussion and analysis in conjunction with our consolidated financial statements and related notes thereto for the years ended December 31, 2024, and 2023, which are presented within Part II, Item 8. "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. Amounts reported in thousands within this annual report
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are computed based on the amounts in thousands, and therefore, the sum of the components may not equal the total amount reported in thousands due to rounding.
Executive Summary
We realized significant revenue growth during the year ended December 31, 2024, with a 60% growth in revenue to $32.6 million for the year ended December 31, 2024, as compared to $20.4 million in 2023. Gross margins also increased to 75% from 70% in 2023. As the Company continues to focus on profitable growth, we have also increased our operating income by 1103% to $5.4 million for the year ended December 31, 2024, compared to an operating loss of $0.5 million for the year ended December 31, 2023.
Net loss for the year ended December 31, 2024, was $31.4 million, or $7.03 per basic and diluted share, compared to a net loss of $25.8 million, or $12.19 per basic and diluted share, for the year ended December 31, 2023, an increase of $5.6 million, which was largely driven by a non-cash change in the fair value of derivatives. We believe these improvements set the stage for additional growth as we head into 2025.
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.
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As presented in the GAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measures exclude the impact of certain charges that contribute to our net loss.
For the year ended
Non-GAAP Adjustments:
Depreciation and amortization 1,145 1,028
Non-GAAP Adjustments for Adjusted EBITDA:
Change in fair value of derivative liabilities 31,413 9,621
Other non-cash or infrequent charges:
Gain on extinguishment of debt (6,326) -
Severance agreement and legal settlement 741 -
Release of historical accrued expenses (1,547) (1,866)
Stock-based compensation 1,514 -
Shares issued for services - 224
License and option agreement (2,500) -
Prepaid legal fees expensed from termination of Merger Agreement 457 -
Results of Operations
The following table sets forth our consolidated statement of operations:
For the Years Ended December 31, Change
Gross margin % 75 % 70 %
Operating expenses:
Revenue
Revenues for the year ended December 31, 2024 were $32.6 million, compared to $20.4 million for 2023, an increase of $12.2 million or 60%. The increase in net sales was primarily driven by the growth in quantity of UltraMIST® disposables
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and systems sold. The quantity of UltraMIST® disposables sold increased by 37% in 2024 as compared to 2023. The quantity of UltraMIST® systems sold increased by 77% in 2024 as compared to 2023. Pricing of the UltraMIST® system and disposables also showed growth in 2024 as compared to 2023; disposables average selling price increased 21% in 2024, and systems average selling price increased 10% in 2024. Revenue from UltraMIST® totaled over 98% of total revenue in 2024 and 90% in 2023.
Cost of Revenue
Cost of revenues for the year ended December 31, 2024 was $8.1 million, compared to $6.0 million for 2023. Gross profit as a percentage of revenues was 75% for the year ended December 31, 2024, compared to 70% for the same period in 2023. This increase in gross margin was largely driven by increased pricing on our UltraMIST systems and applicators.
General and Administrative
General and administrative expenses for the year ended December 31, 2024 were $11.3 million as compared to $8.7 million for 2023, an increase of $2.7 million, or 31%. The increase in 2024 as compared to 2023 was primarily due to increased headcount, severance and legal settlement expenses, and non-cash charges for stock-based compensation expense.
Selling and Marketing
Selling and marketing expenses for the year ended December 31, 2024 were $6.3 million as compared to $4.9 million for 2023, an increase of $1.4 million, or 29%. The year-over-year increase in sales and marketing expenses in 2024 was largely driven by increased commission expenses due to increased sales.
Research and Development
Research and development expenses for the year ended December 31, 2024 were $0.7 million, compared to $0.6 million for 2023. The research and development costs in 2024 remained approximately consistent with the costs in 2023.
Other Income (Expense), net
Other expense, net consists of the following:
For the years ended December 31, Change
Gain on extinguishment of debt 6,326 - 6,326 nm
nm - not meaningful
Other expenses totaled $36.8 million for the year ended December 31, 2024, as compared $25.3 million for 2023, an increase of $11.5 million. The increase was primarily driven by an increased loss from the change in the fair value of derivative liability of $21.8 million, partially offset by a gain on the extinguishment of debt of $6.3 million and other income of $2.5 million from a license and option agreement. The change in fair value of the derivative liability mainly relates to warrants issued during 2024, 2023, and 2022 with the convertible debt. That convertible debt and associated warrants were converted to common stock in October 2024, as further discussed in Note 16 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data”. The gain on extinguishment of debt was mainly due to the settlement of outstanding notes to Celularity and HealthTronics, as further discussed in Note 10 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data”.
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Liquidity and Capital Resources
Since inception, we have incurred losses from operations each year. As of December 31, 2024, we had an accumulated deficit of $251 million. Historically, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities.
See Notes 1, 10, 11, 15, and 16, to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information regarding the Convertible Promissory Notes, Senior Secured Note, Reverse Stock Split, and the October 2024 transaction.
The following table presents summarized cash flow information:
For the period ended December 31,
Cash flows provided by (used in) operating activities $ 2,455 $ (4,538)
Cash flows (used in) provided by investing activities $ (490) $ 21
Cash flows provided by financing activities $ 6,354 $ 5,211
Cash Flows from Operating Activities
We have improved our cash flow from operations in 2024 as compared to 2023, which was driven by increased emphasis on improved cash management and operating expense management. Additional volatility in adjustments of cash flows from operations is the change in fair value of derivative liabilities connected to our convertible debt and warrants issued. The Company recognized a loss on these liabilities of $31.4 million for the year ended December 31, 2024, as compared to a loss of $9.6 million for the year ended December 31, 2023.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities increased while also paying off outstanding debt. For the year ended December 31, 2024, we received proceeds of $12.1 million from the issuance of the convertible promissory notes, sales of common stock, and proceeds from promissory note payable as compared to $6.0 million for the year ended December 31, 2023. In 2024, we paid off outstanding debt owed to Celularity, HealthTronics, and our factoring line of credit for a total of $5.0 million.
Going Concern
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-K.
During the current 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 will 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.
See Note 2 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information on our ability to continue as a going concern.
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Critical Accounting Estimates
We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our consolidated financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our consolidated financial statements.
We have used various accounting policies to prepare the 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 this Annual Report on Form 10-K.
The preparation of the 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 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. The Company has reserved approximately $150 thousand for unasserted claims. Our significant legal proceedings are discussed in Note 21 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
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 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 13 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Recently Issued Accounting Standards
Information regarding new accounting pronouncements is included in Note 3 to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
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Item 7A. 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.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID: 688) F-1
Consolidated Balance Sheets as of December 31, 2024 and 2023 F-3
Notes to Consolidated Financial Statements F-7
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
SANUWAVE Health, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SANUWAVE Health, Inc. (the “Company”) and Subsidiaries as of December 31, 2024 and 2023, the related consolidated statements of comprehensive loss, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2024, and the related notes(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring losses, has negative working capital, and needs to refinance its debt to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
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taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Financial Instruments (Warrant Liability)
Critical Audit Matter Description
As described in Note 13 to the consolidated financial statements, the Company has entered into warrant agreements accounted for as a liability and recorded at fair value. The fair value of the warrant liability was valued using valuation techniques and key inputs as described in the footnotes.
The principal considerations for our determination that the valuation of the warrant liability is a critical audit matter were the significant judgments made by management in determining the fair value of the warrant liability. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions. The audit also involved the use of professionals with specialized skill and knowledge.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the valuation of the financial instruments included the following, among others:
▪We obtained an understanding of the design of the Company's controls over valuation of financial instruments, including controls over management's review of the valuation models, and the significant assumptions used in determining the fair value of the financial instruments.
▪With assistance of our valuation specialists, we audited the fair value of the warrant liability, valuation methodology, and key assumptions used in determining the fair value of the warrant liability by:
a.Evaluating the appropriateness of the valuation models and techniques used in determining the fair value;
b.Assessing the reasonableness of the significant valuation inputs, including the probability weighted expected value considering the merger agreement with SEPA Acquisition Corp. (“SEPA”), the risk adjusted expected exchange ratio, the value of SEPA’s Class A common stock, the expected timing of the closing of the merger, and the probability of the merger closing;
c.Assessing the reasonableness of the significant valuation inputs, including the probability weighted expected value considering the reverse stock split of the Company’s common stock (the “Reverse Stock Split”), the expected exchange ratio, the value of the Company’s common stock, the expected timing of the effectuating of the Reverse Stock Split, and the probability of the Reverse Stock Split occurring;
d.Assessing that the significant valuation assumption inputs in the Black Scholes valuation model of the implied volatility are consistent with those that would be used by market participants through the testing of source information; and
e.Checking the mathematical accuracy of the calculation, developing independent estimates, and comparing to those selected by management, where applicable, and recalculating management’s fair value, verifying it was reasonable.
▪We audited the completeness and accuracy of the underlying data supporting the significant valuation assumption inputs.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2018.
New York, NY
March 20, 2025
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2024 and 2023
(In thousands, except share data) 2024 2023
ASSETS
Current Assets:
Prepaid expenses and other current assets 682 1,722
Non-Current Assets:
Property, equipment and right of use assets, net 732 938
LIABILITIES
Current Liabilities:
Convertible promissory notes payable - 5,404
Convertible promissory notes payable, related parties - 1,705
Asset-backed secured promissory notes payable - 3,117
Asset-backed secured promissory notes payable, related parties - 1,458
Factoring liabilities - 1,490
Accrued interest - 5,444
Accrued interest, related parties - 669
Current portion of contract liabilities 193 92
Non-Current Liabilities:
Lease liabilities, less current portion 191 492
Contract liabilities, less current portion 300 347
Total Non-Current Liabilities 491 839
Commitments and Contingencies (Footnote 21)
STOCKHOLDERS’ DEFICIT
Accumulated other comprehensive loss 10 (111)
Total Liabilities and Stockholders’ Deficit $ 30,119 $ 22,416
* Reflects a one-for-three hundred seventy-five (1:375) reverse stock split of the outstanding shares of the Company's common stock effected on October 18, 2024.
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended December 31, 2024 and 2023
(In thousands, except share and per share data) 2024 2023
Operating Expenses:
Research and development 673 579
Depreciation and amortization 789 752
Other Income (Expense)
Interest expense, related party (1,214) (2,677)
Change in fair value of derivative liabilities (31,413) (9,621)
Gain on extinguishment of debt 6,326 -
Income tax expense 27 4
Other Comprehensive Loss
Foreign currency translation adjustments 121 (44)
Net Loss per share:
Basic and Diluted * $ (7.03) $ (12.19)
Weighted average shares outstanding:
* Reflects a one-for-three hundred seventy-five (1:375) reverse stock split of the outstanding shares of the Company's common stock effected on October 18, 2024.
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands, except share data)
Common Stock
Foreign currency translation adjustment - - - - (44) (44)
Foreign currency translation adjustment - - - - 121 121
* Reflects a one-for-three hundred seventy-five (1:375) reverse stock split of the outstanding shares of the Company's common stock effected on October 18, 2024.
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2024 and 2023
Cash Flows - Operating Activities:
Adjustments to reconcile net loss to net cash used by operating activities
Stock-based compensation 1,514 -
Depreciation and amortization 1,145 1,028
Reserve for credit losses 77 781
Shares issued for services - 224
Gain on extinguishment of debt (6,326) -
Income tax expense - 4
Change in fair value of derivative liabilities 31,413 9,621
Amortization of debt issuance and debt discounts 5,520 6,911
Accrued interest and accrued interest, related parties 3,387 6,306
Changes in operating assets and liabilities
Accounts receivable (486) (53)
Prepaid expenses and other assets (79) (206)
Accrued expenses and contract liabilities 282 (2,093)
Net Cash Provided by (Used in) Operating Activities 2,455 (4,538)
Cash Flows - Investing Activities
Proceeds from sale of property and equipment - 21
Purchases of property and equipment (490) -
Net Cash Flows (Used in) Provided by Investing Activities (490) 21
Cash Flows - Financing Activities
Proceeds from convertible promissory notes 1,300 3,026
Payment of note payable (3,548) -
Proceeds from asset-backed secured promissory notes payable - 2,994
Proceeds from secured promissory notes payable, related party 500 -
Payments to secured promissory notes payable, related party (500) -
Proceeds from sale of common stock 10,300 -
Principal payments on finance leases (208) (170)
Net Cash Flows Provided by Financing Activities 6,354 5,211
Effect of Exchange Rates on Cash 121 (50)
Net Change in Cash During Period 8,440 644
Supplemental Information:
Non-Cash Investing and Financing Activities:
Shares issued for settlement of debt $ 8,513 $ -
Write off deferred merger costs 1,225 -
Conversion of warrants to common stock 41,380 -
Embedded conversion feature on convertible debt - 835
Common shares issued for advisory shares - 302
Capitalize default interest into senior secured debt 3,850 -
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
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SANUWAVE HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024 and 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 regenerative medicine utilizing noninvasive ultrasound or shockwaves to produce a biological response promoting the repair and regeneration of tissue, musculoskeletal, and vascular structures.
Basis of Presentation - The accompanying 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”) and with the instructions to for 10-K and Regulation S-X. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The functional currencies of the Company’s foreign operations are their local currencies. The financial statements of the Company’s foreign subsidiary have been translated into United States dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. Translation adjustments are reported in other comprehensive loss in the consolidated statements of comprehensive loss and as cumulative translation adjustments in accumulated other comprehensive loss in the consolidated balance sheets.
Reverse Stock Split - All share numbers, including the number of shares underlying warrants, options and convertible debt, and per share amounts presented in these consolidated financial statements, including these footnotes, reflect a one-for-three hundred seventy five (1:375) reverse stock split of the outstanding shares 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 were issued as a result of the reverse stock split. Any fractional shares that would have resulted from the reverse stock split were settled in cash. The reverse stock split affected all common stockholders uniformly and did not alter any stockholder's percentage interest in the Company's common stock, except to the extent that the reverse stock split resulted in some stockholders experiencing an adjustment of a fractional share as described above.
Reclassification - Certain accounts in the prior period consolidated statement of cash flows have been reclassified to conform to the presentation of the current year consolidated financial statements. These reclassifications had no effect on the previously reported operating results.
2. Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses in prior years, has negative working capital, and its Senior Secured Note becomes due in September 2025, which raises substantial doubt as to its ability to continue as a going concern for a period of 12 months from the filing of the Form 10-K.
During the current fiscal year, the Company has achieved operating income for the year ended 2024, reflecting a significant improvement in its financial performance. This turnaround is attributable to several strategic initiatives, primarily revenue growth initiatives and a capital raise from the Private Placement, which have positively impacted the Company's operations.
Despite the positive operating income in the current year, the Company continues to monitor its financial position closely.
In addition to the operational improvements, 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 will extend the maturity of the debt and provide additional liquidity to support ongoing operations and strategic initiatives.
Management acknowledges that it must continue to execute its strategic initiatives effectively to ensure long-term financial stability.
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The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our 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 we be unable to continue as a going concern.
3. Summary of Significant Accounting Policies
The significant accounting policies followed by the Company are summarized below:
Estimates - These 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 consolidated financial statements for any period necessarily involves the use of estimates and assumptions. Actual amounts may differ from these estimates. These consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized herein.
Significant estimates include the recording of allowances for credit losses, the net realizable value of inventory, fair value of goodwill and other intangible assets, the determination of the valuation allowances for deferred taxes, litigation contingencies, estimated fair value of stock-based compensation, and the estimated fair value of embedded financial instruments, including warrants and embedded conversion options.
Cash and cash equivalents - Cash and cash equivalents consist of cash on hand and demand deposits. These investments are highly liquid and readily convertible to known amounts of cash with insignificant risk of changes in value. The Company classifies all such highly liquid instruments that are not restricted as cash equivalents. Cash equivalents are stated at cost, which approximates fair value due to their short-term nature. For purposes of the statement of cash flows, the Company considers cash and cash equivalents to include cash on hand and demand deposits.
Accounts receivable - Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that will not be fully collected. The allowance is based on the assessment of the following factors: customer creditworthiness; historical payment experience; age of outstanding receivables. Management routinely assesses the financial strength of its customers and, consequently, believes accounts receivable are stated at the net realizable value and credit risk exposure is limited.
Allowance for credit losses roll forward - The roll-forward of the allowance for credit losses is as follows:
Allowance for credit losses, January 1 $ 1.2 $ 1.0
Provision for credit losses 0.3 0.8
Write-offs (0.4) (0.6)
Allowance for credit losses, December 31 $ 1.1 $ 1.2
Property, plant, and equipment (PPE) - PPE is initially recorded at cost, which includes all expenditures directly attributable to bringing the asset into working condition for its intended use. Subsequent to initial recognition, PPE is carried at cost less accumulated depreciation and any impairment losses. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, with no residual value for most assets. The estimated useful lives and residual values of assets are reviewed periodically and adjusted if necessary. Major improvements and enhancements that extend the useful life of PPE are capitalized, while routine repairs and maintenance are expensed as incurred.
Inventory - Inventory consists of purchased medical equipment and parts and is stated at the lower of average cost, which is valued using the first in, first out (“FIFO”) method, or net realizable value less allowance for selling and distribution expenses. The Company analyzes its inventory levels and writes down inventory that has, or is expected to, become obsolete.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under Accounting Standards Codification (ASC) Topic 350, Intangibles-
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Goodwill and Other. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter. The Company performed a qualitative evaluation at the reporting unit level and determined there was no goodwill impairment as of December 31, 2024, and 2023.
Intangible assets - Intangible assets arising from the Company’s acquisition are amortized on a straight‐line basis over the estimated useful life of each asset. Customer relationships have a useful life of seven years. Patents and tradenames have a useful life of nineteen years.
Impairment of long-lived assets - The Company annually reviews long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the asset’s carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. The Company determines fair value by using a combination of comparable market values and discounted cash flows, as appropriate. There were no impairments in 2024 and 2023.
Leases - The Company determines whether an arrangement is a lease at inception. When lease arrangements include lease and non-lease components, the Company accounts for lease and non-lease components (e.g. common area maintenance) separately based on their relative standalone prices.
For leases where the Company is the lessee, Right of Use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases did not provide an implicit interest rate, the Company used the equivalent borrowing rate for a secured financing with the term of equal to the remaining life of the lease at inception.
Any lease arrangements with an initial term of 12 months or less are not recorded on our consolidated balance sheets, and the Company recognizes lease costs for these lease arrangements on a straight-line basis over the lease term. In the event a lease arrangement would provide us with options to exercise one or more renewal terms or to terminate the lease arrangement, we would include these options when we are reasonably certain to exercise them in the lease term used to establish ROU assets and lease liabilities. None of our lease agreements include an option to purchase the leased asset, residual value guarantees, or material restrictive covenants.
The Company has other lease arrangements that are adjusted periodically based on an inflation index or rate. The future variability of these payments and adjustments are unknown, and therefore they are not included as minimum lease payments used to determine ROU assets and lease liabilities. Variable rental payments are recognized in the period in which the obligation is incurred.
Fair value of financial instruments - The carrying values of accounts payable, and other short-term obligations approximate their fair values, because of the short-term maturities of these instruments.
The Company utilizes the guidance of ASC Topic 820-10, Fair Value Measurements (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The framework that is set forth in this standard is applicable to the fair value measurements where it is permitted or required under other accounting pronouncements.
The ASC 820-10 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets and liabilities:
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly: and
Level 3 – Unobservable inputs that are not corroborated by market data, therefore requiring the Company to develop its own assumptions.
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Convertible promissory notes – The Company evaluates its convertible instruments to determine if those contracts, or embedded components of those contracts, qualify as derivative financial instruments to be separately accounted for in accordance with ASC Topic 815 “Derivatives and Hedging” (“ASC 815”). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. Conversion options are recorded as a discount to the host instrument and are amortized as amortization of debt discount on the consolidated statements of comprehensive loss over the life of the underlying instrument. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes because of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
Debt discount – The Company records a debt discount related to warrants issued with debt at fair value and recognizes the cost using the straight-line method, which approximates the effective interest method, over the term of the related debt as interest expense, which is reported in the Other Income (Expense) section in our consolidated statements of comprehensive loss. This debt discount is reported as a reduction of the related debt liability.
Contract liabilities – Device product sales are bundled with an initial one-year warranty and the Company offers a separately priced multi-year warranty. Because the warranty represents an obligation, revenue is deferred as a contract liability and recognized over the time that the Company satisfies its performance obligations, which is generally the warranty term.
Segment reporting - The Company operates as a single reporting entity and has determined that it has one reportable segment. This conclusion is based on the fact that the Company's chief operating decision maker (“CODM”), who is the Chief Executive Officer (“CEO”), reviews the financial information and makes decisions about resource allocation and performance assessment on a consolidated basis. The Company's operations are managed and evaluated as a single business unit, and the nature of the products and services, production processes, and customer base are similar across the entire organization.
The Company is engaged in the business of designing and selling medical devices. The products and services offered by the Company are integrated and interrelated, and the Company does not have discrete financial information for different business lines that would qualify as separate operating segments.
All significant accounting policies, including those related to revenue recognition, inventory valuation, property, plant, and equipment, and other key areas, are applied consistently across the entire organization.
Revenue recognition - The core principle of ASC Topic 606 “Revenue from Contracts with Customers” (“ASC 606”) requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company allocates the transaction price to all contractual performance obligations included in the contract. If a contract has more than one performance obligation, we allocate the transaction price to each performance obligation based on standalone selling price, which depicts the amount of consideration we expect to be entitled in exchange for satisfying each performance obligation. The Company recognizes revenue primarily from the following types of contracts:
System Sales, Consumables and Part Sales -System sales, 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.
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Shipping and handling costs - Shipping charges billed to customers are included in revenues. Shipping and handling costs incurred have been recorded in cost of goods sold totaling $482 thousand and $484 thousand for the years ended December 31, 2024, and 2023, respectively.
Research and development - Research and development costs are expensed as incurred. Research and development costs include costs of research, engineering, and technical activities to develop a new product, researching an expanded product use or making significant improvements to existing products, including the costs of clinical development.
Stock-based compensation - The Company uses the fair value method of accounting for its employee stock option program. Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the award measured on the grant date. The Company recognizes the estimated fair value of the award as compensation cost on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The Company generally issues new shares of common stock to satisfy option and warrant exercises.
The expected life of options granted represents the period of time that options granted are expected to be outstanding and are derived from the contractual terms of the options granted calculated under the simplified method. The risk-free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of the grant. The expected volatility is based on the average volatility of the common stock of the Company’s peer group. The expected dividend yield is based on our historical dividend experience, however, since our inception, we have not declared dividends. Forfeitures are recognized as they occur.
Comprehensive income (loss) - Comprehensive income (loss) results from the translation of the Company’s foreign entity’s financial statements from their functional currency to U.S. dollars for consolidation in the accompanying consolidated financial statements.
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 are deferred and charged against the gross proceeds of the offering. In the event of a significant delay or cancellation of a planned offering of securities, all the costs would be expensed. In June 2024, the Company terminated the Merger Agreement and the deferred offering costs of $0.5 million were expensed.
New accounting pronouncements
ASU 2024-03, Disaggregation of Income Statement Expenses
In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-03, Income Statement - Reporting Comprehensive Income (Topic 220): Expense Disaggregation Disclosures to improve the disclosures about a public entity’s expenses and provide more detailed information about the types of expenses in commonly presented expense captions such as inventory purchases, employee compensation, depreciation and intangible asset amortization. The disclosure requirements must be applied retrospectively to all prior periods presented in the financial statements. The effective date for the standard is for fiscal years beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the effects adoption of this guidance will have on the consolidated financial statements.
ASU 2023-09, Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASC Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Update No. 2023-09 aims to enhance the transparency and decision usefulness of income tax disclosures. Update No. 2023-09 modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state, and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. Update No. 2023-09 is effective for fiscal years beginning after December 15, 2024. We expect to adopt Update No. 2023-09 prospectively. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
Recently adopted accounting pronouncements
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In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, requiring public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis. The Company adopted ASU 2023-07 during the year ended December 31, 2024 and was retroactively applied to December 31, 2023. See Note 22 for further detail.
4. Merger Agreement
On August 23, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SEP Acquisition Corp., a Delaware corporation (“SEPA”), and SEP Acquisition Holdings Inc., a Nevada corporation and a wholly owned subsidiary of SEPA. Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA was to be effected.
On June 25, 2024, the Company delivered a notice to SEPA terminating the Merger Agreement.
5. Loss per Share
Basic 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 years ended December 31, 2024, and 2023. The weighted average of number of shares outstanding includes outstanding common stock and shares issuable for nominal consideration as follows:
Weighted Average Shares Outstanding 4,463 2,117
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 dilutive 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 years ended December 31, 2024, and 2023, all potentially dilutive shares in such periods were anti-dilutive and therefore excluded from the computation of diluted net loss per share. Anti-dilutive equity securities consist of the following:
Restricted stock units- unvested 5 -
Common stock purchase warrants 53 3,200
Convertible notes payable, including interest - 431
6. Inventory
Inventory consisted of the following:
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7. Intangible Assets
Carrying value of intangible assets consisted of the following:
December 31, 2024 December 31, 2023 Weighted-Average UsefulLife (in years)
(in thousands) Gross AccumulatedAmortization Gross AccumulatedAmortization
Definite-lived Intangibles
Amortization expense for each of the years ended December 31, 2024, and 2023 totaled $704 thousand. Future amortization expense is expected to be the following (dollars in thousands):
Year ended December 31, Amortization
8. Accrued Expenses
Accrued expenses consisted of the following:
License fees - 892
Board of directors fees 249 942
9. Factoring Liabilities
In June 2021, the Company entered into a factoring agreement with an unrelated third party, pursuant to which the Company may sell certain of its accounts receivables for 86.25% of the value of the receivable. Advances available under the facility are capped at the lesser of $3.0 million or a formula amount, as defined in the agreement. Interest on advances is assessed at a fixed amount upon funding, which is equivalent to an annualized rate of 15.0% for the first 30 days, and daily thereafter at an annualized rate of 14.4%. The agreement’s term is one month and automatically renews for additional one-month periods, unless either party provides 30 days’ notice of termination. The accounts receivable is sold with recourse back to the Company, therefore, the Company accounts for the arrangement as traditional financing. The factoring asset is shown within Accounts receivable on the Company's consolidated balance sheets.
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Receivables transferred $ 16 $ (1,794)
Factoring asset (liability) $ 236 $ (1,490)
10. Senior Secured Debt
The following table summarizes outstanding senior secured debt:
Senior secured promissory note payable (“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 into 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 43,200 shares of common stock with an exercise price of $67.50 and 54,933 shares of common stock.
Interest is charged at the greater of the prime rate or 3% plus 9%, paid quarterly. The principal increases at a rate of 3% of the outstanding principal balance (PIK interest) on each quarterly interest payment date. The original maturity date of the Senior Secured Note is September 20, 2025, and it can be prepaid.
In June 2022, the Company entered into the Third Amendment to the Note and Warrant Purchase and Security Agreement (the “Third NWPSA”). The Third NWPSA provides for (i) the extension of the agent’s and holder’s forbearance of exercising its remedies arising from Existing Defaults (as defined in the NWPSA) to the earlier of (x) the occurrence of an Event of Default (as defined in the NWPSA) or (y) August 30, 2022, and (ii) the extension to file a registration statement with the Securities and Exchange Commission to register the resale of the Advisor Shares (as defined in the NWPSA) no later than August 30, 2022.
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, 2024. The amendment also added a consent fee of 2% of the original principal amount of the NWPSA, payable in cash at maturity, accounted for as additional debt issuance costs. The amendment also 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.
In March 2024, the Company entered into a Consent, Limited Waiver and Fifth Amendment to Note and Warrant Purchase Agreement (the “Fifth Amendment”). The Fifth Amendment provides (i) consent to enter into a License and Option Agreement and consummation of the License and Option Transaction (ii) a waiver of any event of default that may occur under the NWPSA, because of the License and Option Agreement or License and Option Transaction and (iii) amended the NWPSA to release certain patents from the collateral. The Fifth Amendment also provides for a forbearance of exercising remedies in connection with certain existing events of default under the NWPSA until the earlier of (x) the occurrence of another event of default under the NWPSA and (y) April 30, 2024. During the forbearance period, the outstanding obligations under the NWPSA continue to accrue interest at the default rate.
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On July 15, 2024, the Company entered into the Sixth Amendment to Note and Warrant Purchase and Security Agreement (the “Sixth Amendment”), which was a modification of debt. The Sixth Amendment added, as of June 30, 2024, a consent fee of $0.7 million to the principal amount of the Senior Secured Note issued pursuant to the NWPSA. On and after April 1, 2024, for each fiscal quarter during which any interest is payable in cash, deferred interest and default interest shall be calculated based on the principal amount of the Senior Secured Note as of the beginning of the quarter and shall include any default interest accrued to date. The Sixth Amendment also provides for a forbearance of exercising remedies in connection with certain existing events of default under the NWPSA until the earlier of (x) the occurrence of another event of default under the NWPSA or (y) December 31, 2024. During the forbearance period, the outstanding obligations under the NWPSA accrued interest at the default rate.
On October 17, 2024, the Company entered into a Consent and Limited Waiver to Note and Warrant Purchase and Security Agreement (the “Consent and Limited Waiver”) with the noteholders party thereto (the “Holders”) and NH Expansion Credit Fund Holdings LP, as agent (the “Agent”). The Agent and the Holders agreed to continue to forbear upon exercising remedies in connection with certain existing events of default under the NWPSA until the earlier of (x) the occurrence of an event of default and (y) December 31, 2024. The Consent and Limited Waiver also consents to the repayment in full of amounts owed to HealthTronics, Inc. (“HealthTronics”) pursuant to the Convertible Promissory Note, dated as of August 6, 2020, by and between the Company and HealthTronics, in the original principal amount of approximately $1.4 million; gross proceeds from the sale of common stock of at least $9.0 million in a private placement (for further details on this private placement transaction, see Note 16) and the Reverse Stock Split if the Company has at least $5.0 million of liquidity following such transactions, which is required pursuant to the minimum liquidity covenant in the NWPSA. The Agent and the Holders have also agreed that any existing event of default that exists due to the Company’s failure to meet the minimum liquidity covenant will be waived if the conditions set forth in the Consent and Limited Waiver, including at least $5.0 million of liquidity following such transactions, are met. As a condition to the effectiveness of the Consent and Limited Waiver, the Agent exercised, on a cashless basis, all warrants issued by the Company to the Agent in exchange for the issuance of 146,302 shares of the Company’s common stock following the Reverse Stock Split.
As of December 31, 2024, the Company is no longer in default and is in compliance with all covenants in the Senior Secured Note.
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.
Twelve Months Ended
Interest expense $ 8.1 $ 6.9
Accrued interest related to the Senior Secured Note was $0.0 million and $3.2 million on December 31, 2024, and December 31, 2023, respectively. Interest expense on the Senior Secured Note totaled $8.1 million and $6.9 million for the years ended December 31, 2024, and 2023, respectively.
11. Promissory Notes Payable
Acquisition convertible promissory note, in default $ 37.50 $ 4,000 - - $ 4,000
Total Convertible Promissory Notes $ 8,462 $ (1,353) $ - $ 7,109
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Convertible Notes Payable and Convertible Notes Payable, Related Parties - In August 2022, November 2022, May 2023, December 2023, January 2024, and June 2024, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) for the sale in a private placement of (i) Future Advance Convertible Promissory Notes (the “Notes”) in an aggregate principal amount of $16.2 million in August 2022, $4.0 million in November 2022, $1.2 million in May 2023, $1.9 million in December 2023, $4.6 million in January 2024 related to the conversion of the Asset-Backed Secured Promissory Notes (described in Note 12), and $1.3 million in June 2024 (ii) Common Stock Purchase Warrants to purchase an additional 1.9 million shares of common stock with an exercise price of $25.13 per share and (iii) Common Stock Purchase Warrants to purchase an additional 1.9 million shares of common stock with an exercise price of $15.00 per share. Interest expense for the years ended December 31, 2024 and 2023, totaled $5.0 million and $6.4 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 $15 (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 $15 per share; provided, however, that the Conversion Price shall never by less than $3.75. The Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens. The Notes have a term of 12 months from the date of issue.
In August 2023 and November 2023, the Company utilized its election to convert the August and November issued Notes into shares of common stock upon the Notes’ maturity. The August Notes totaling $16.2 million in principal and $2.4 million in interest were converted to 1,238,508 shares of common stock. The November Notes totaling $4.0 million in principal and $0.6 million in interest were converted to 305,282 shares of common stock.
In May 2024, the Company utilized its election to convert the May Notes into shares of common stock upon the Notes' maturity. The May Notes totaling $1.2 million in principal and $0.2 million interest were converted to 0.1 million shares of common stock.
All remaining outstanding convertible notes payable and convertible notes payable related party converted on October 18, 2024 to 591,802 shares of common stock. The outstanding principal and interest converted totaled $8.9 million. The Company recognized a $0.3 million gain on conversion of the Notes.
Promissory note payable, related parties - In June 2024 the Company entered into a $0.5 million promissory note with a related party. Interest was accrued at 12% with an original maturity date of December 3, 2024. The Note was paid in full with accrued interest in October 2024.
Acquisition Convertible promissory notes payable - In August 2020, the Company entered into an asset purchase agreement with Celularity to acquire Celularity’s UltraMIST assets. A portion of the aggregate consideration of $24 million paid for the assets included the issuance of a promissory note to Celularity in the principal amount of $4 million (the “Seller Note”). The Seller Note matured on August 6, 2021, and was not repaid. The Company’s failure to pay the outstanding principal balance when due constituted an event of default under the terms of the Seller Note and, accordingly, it began accruing additional interest of 5.0% in addition to the 12.0% initial rate, as of the date of the default. As of December 31, 2024, and 2023, the Seller Note had outstanding accrued interest of $0 and $1.5 million, respectively. This Seller Note was settled in 2024 for a cash payment of $2.2 million. See Note 21 for additional disclosures regarding the settlement of the Seller Note.
The Company evaluated embedded conversion features within the convertible promissory note and determined that the conversion feature does not require to be bifurcated. Upon adoption of ASU 2020-06 effective January 1, 2021, the convertible promissory note is accounted for as a single liability due to the elimination of the beneficial conversion feature accounting model.
Convertible promissory notes payable, related party - In August 2020, the Company issued a convertible promissory note payable in the amount of $1.4 million. The note matured on August 6, 2021, and was not repaid was in default. As of December 31, 2024, and 2023, the note had outstanding accrued interest of $0 and $444 thousand, respectively.
The convertible promissory note was settled in 2024 for a cash payment of $1.4 million, which resulted in a gain on the extinguishment of debt of $0.8 million and a reduction in accrued interest of $0.8 million.
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12. 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 10. Interest expense for the year ended December 31, 2024, totaled $0.1 million.
The Company and the Purchasers also entered into a side letter pursuant to which the parties agreed that upon the Maturity Date, or upon a fundamental transaction as defined by the ABS Promissory Notes, the Company will issue each Purchaser a Future Advance Convertible Promissory Note with the same principal amount as the principal amount of such Purchasers’ ABS Promissory Notes, plus any accrued and unpaid interest and two Common Stock Purchase Warrants, substantially in the forms of the Notes and Common Stock Purchase Warrants disclosed in Note 11.
On January 21, 2024, pursuant to the side letter, the Company issued each Purchaser a Convertible Note Payable with the same principal amount as the principal amount of such Purchasers’ ABS Promissory Notes. Pursuance to this side letter the ABS Promissory Notes converted to convertible promissory notes, as described in Note 11. The Company recorded a net loss on extinguishment of debt totaling $0.1 million for the twelve months ended December 31, 2024.
(In thousands) Principal DebtDiscount Embedded Derivative CarryingValue
13. Fair Value Measurements
The Company uses various inputs to measure the outstanding warrants and certain embedded conversion features associated with convertible debt on a recurring basis to determine the fair value of the liabilities. The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy:
Fair value measurement at December 31, 2024
Fair value measurement at December 31, 2023
Conversion option 93 - - 93
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There were no transfers between Level 1, 2, or 3, during the years ended December 31, 2024, and 2023. Both observable and unobservable inputs were used to determine fair value of the positions that the Company classified within the Level 3 category. Unrealized gains and losses associated with the liabilities within the Level 3 category include changes in fair value that were attributable to both observable and unobservable inputs.
Warrant Liability
The Company's liability classified warrants as of December 31, 2024 were valued using the Black Scholes valuation model.
The Company’s initial valuation of warrant liability from the June 2024 financing, were valued using a probability weighted expected value considering the proposed reverse stock split of the Company's common stock (the "Reverse Stock Split") that would effectuate the exchange of Notes and Common Stock Purchase Warrants for shares of the Company's common stock (the "Note and Warrant Exchange"), and the previous Black Scholes valuation model, with significant value stemming from the Note and Warrant Exchange. Significant inputs under the Note and Warrant Exchange included the expected exchange ratio of 0.90 for $15.00 warrants and 0.85 for $25.13 warrants, the value of the Company’s common stock, the expected timing of the Reverse Stock Split effectuating, and the probability of the Note and Warrant Exchange occurring (90% probability).
The Company’s liability classified warrants as of December 31, 2023 and the value of initial warrant liability from the conversion of the ABS Promissory Notes, were valued using a probability weighted expected value considering the Merger Agreement and the previous Black Scholes valuation model, with significant value stemming from the Merger Agreement. Significant inputs under the Merger Agreement valuation included the expected exchange ratio 0.003, the value of SEPA’s Class A Common Stock, the expected timing of the closing of the Merger, and the then-current probability of the Merger closing.
Significant Black Scholes valuation model inputs related to the Company’s warrants are listed below:
Weighted average expected life in years 0.85
Weighted average volatility 91%
Value of underlying shares $2.05
Weighted average risk free interest rate 4.10%
Expected dividend yield 0%
A summary of the Level 3 warrant activity is as follows:
Issuance of warrants classified as liabilities 412 4.02 1,655
Change in fair value - - 11,376
Issuance of warrants classified as liabilities 781 4.55 3,557
Change in fair value - - 31,488
Embedded Conversion Option
Certain convertible notes include a conversion option that meets the definition of a derivative liability and, accordingly, is required to be bifurcated. The fair value for the conversion option liability of the June 2024 transaction was valued using a
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probability weighted expected value considering the proposed Reverse Stock Split of the Company's common stock that would effectuate the Note and Warrant Exchange, and the previous Black Scholes valuation model, with significant value stemming from the Note and Warrant Exchange. Significant inputs under the Note and Warrant Exchange included the value of the Company’s common stock, the expected timing of the Reverse Stock Split effectuating, and the probability of the Note and Warrant Exchange occurring (90% probability).
The Company’s liability classified warrants as of December 31, 2023 and the value of initial warrant liability from the conversion of the ABS Promissory Notes, were valued using a probability weighted expected value considering the Merger Agreement and the previous Black Scholes valuation model, with significant value stemming from the Merger Agreement. Significant inputs under the Merger Agreement valuation included the expected exchange ratio 0.003, the value of SEPA’s Class A Common Stock, the expected timing of the closing of the Merger (estimated by February 29, 2024), and the probability of the then-current Merger closing (90% probability).
In October 2024, the Company exchanged all outstanding convertible notes for Common Stock as part of the Note and Warrant Exchange, see Note 11.
A summary of the conversion option liability activity is as follows:
(in thousands) Conversion Liability
Issuance of Convertible Notes (519)
Change in fair value (1,728)
Issuance of Convertible Notes 8
Settlement of convertible notes (26)
Change in fair value (75)
14. Contract Liabilities
During the years ended December 31, 2024, and 2023, the Company recognized revenue related to these contract liabilities of $95 thousand and $60 thousand, respectively, that were included in the beginning contract liability balances for each of those periods.
The following table summarizes the changes in contract liabilities:
Year Ended December 31,
Revenue recognized (95) (60)
Total Contract Liabilities $ 493 $ 439
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15. Common Stock Purchase Warrants
A summary of the warrant activity is as follows:
Forfeited or expired (376) -
Forfeited or expired 5 -
16. Common Stock
In December 2022, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 800,000,000 to 2,500,000,000. In January 2023, the Company filed the amendment to the Articles of Incorporation with the state of Nevada to affect the increase in authorized shares.
Private Investment in Public Equity (PIPE) Transaction
On October 16, 2024, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with the purchasers (the “Purchasers”), for the private placement (the “Private Placement”) of approximately 1.3 million shares (the “Shares”) of common stock at a purchase price of $8.25 per share, in each case, after adjustment to reflect the Reverse Stock Split. The Private Placement closed on October 18, 2024, and aggregate gross proceeds were approximately $10.3 million, before deducting $0.1 million offering expenses.
The Company used the net proceeds from the Private Placement to pay all amounts owed pursuant to the Consent and Limited Waiver and that certain letter agreement, dated as of August 8, 2024, between the Company and HealthTronics with respect to the HealthTronics Note, and intends to use the remaining net proceeds for working capital and general corporate purposes, which may include the repayment of other indebtedness.
In addition, on October 16, 2024, the Company and the Purchasers entered into a registration rights agreement (the “Registration Rights Agreement”), pursuant to which the Company agreed to file the registration statement with the SEC on or before December 17, 2024 (subject to certain exceptions) for purposes of registering the resale of the Shares, to use its commercially reasonable efforts to have such registration statement declared effective within the time period set forth in the Registration Rights Agreement, and to keep the registration statement effective until the date that all Placement Shares have been sold, thereunder or pursuant to Rule 144.
17. Concentration of Credit Risk and Limited Suppliers
Major customers are defined as customers whose accounts receivable, or sales individually consist of more than ten percent of total trade receivable or total sales, respectively. There were no accounts receivable concentrations on December 31, 2024, or 2023.
Cash equivalents are financial instruments that potentially subject the Company to concentration of credit risk. As of December 31, 2024, the Company's cash equivalent securities were largely comprised of money market funds. The
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Company’s cash accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per financial institution in the United States.
The Company currently purchases most of its product component materials from single suppliers and the loss of any of these suppliers could result in a disruption in our production. The percentage of purchases from major vendors of the Company that exceeded ten percent of total purchases were as follows:
Year ended December 31,
Purchases:
Vendor B 0 % 19 %
18. Revenue
The disaggregation of revenue is based on type and geographical region. The following table presents revenue from contracts with customers:
United States International Total United States International Total
19. Stock-Based Compensation
On October 22, 2024, the Company granted stock options under the Company’s 2024 Equity Incentive Plan (the “2024 Plan”). The 2024 Plan authorizes the issuance of 1,376,556 shares. Stock options issued under the 2024 Plan generally vest over a three-year period, expire 10 years after the grant date, and are forfeited upon separation from the Company. Shares vest over a 3 year period.
On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Stock Incentive Plan”). Upon the approval of the 2024 Plan by the Company's stockholders, no further awards will be made under the Stock Incentive Plan.
The Stock Incentive Plan permitted grants of awards to selected employees, directors, and advisors of the Company in the form of restricted stock or options to purchase shares of common stock. Options granted may include non-statutory options as well as qualified incentive stock options. The Stock Incentive Plan is administered by the board of directors of the Company. The Stock Incentive Plan gives broad powers to the board of directors of the Company to administer and interpret the form and conditions of each option.
The following table presents stock compensation expense recognized by the Company for the year ended December 31, 2024. Total unrecognized compensation cost related to equity awards as of December 31, 2024 was $8.3 million and is expected to be recognized over the next 3 years. The Company recognizes compensation expense on a straight-line basis over the requisite service period, net of actual forfeitures.
Year ended December 31,
General and administrative $ 1,514
Total expense $ 1,514
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The following table presents a summary of stock options award activity during the year ended December 31, 2024:
Exercised -
Forfeited (25)
Valuation Information for Stock-Based Compensation
The fair value of each stock option award during the year ended December 31, 2024 was based on the closing price of the Company's common stock on the date of the grant. Expected volatility was based on 100% of the historical realized volatilities of peer companies. The risk-free interest rate was based on the implied yield for U.S. Treasury zero-coupon issue with the remaining term equal to the expected term. The expected holding period was calculated using the simplified method. No dividend was assumed as the Company does not pay regular dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. The Company's policy is to recognize forfeitures as they occur.
The weighted average assumptions used in the Black-Scholes option pricing model in valuing stock options granted in the year ended December 31, 2024 are summarized in the table below:
Fair value at grant date $14.54
Expected volatility 63%
Risk-free interest rate 4%
Expected holding period, in years 6.05
Dividend yield 0%
The following table presents a summary of restricted stock unit activity during the year ended December 31, 2024:
Number of Options (in thousands) Weighted Average Grant Date Fair Price
Forfeited -
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20. Income Taxes
The Company files income tax returns in the United States Federal jurisdiction and various state and foreign jurisdictions. The Company is subject to United States Federal and state income tax examinations by tax authorities for any years that have net operating losses open until the net operating losses are used.
The components of the net loss before income taxes are as follows:
Year ended December 31,
In accordance with ASC Topic 740, Income Taxes (“ASC 740”), the Company accounts for income taxes utilizing the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the deferred tax assets, including loss carryforwards, when it is more likely than not that some portion or all a deferred tax asset will not be realized.
The income tax provision (benefit) from continuing operations consists of the following:
Current:
Federal $ - $ -
Foreign - -
Current Tax Provision $ 27 $ 4
Deferred:
Foreign (10) (3)
Change in valuation allowance 1,495 4,026
Deferred Tax Provision $ - $ -
As of December 31, 2024, and 2023, the Company did not have any undistributed earnings of our foreign subsidiaries. As a result, no additional income or withholding taxes have been provided for. The Company does not anticipate any impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) and as such, the Company has not recorded any impact associated with either GILTI or BEAT.
The income tax provision (benefit) amounts differ from the amounts computed by applying the United States Federal statutory income tax rate of 21% for the years ended December 31, 2024, and 2023. Adjustments to determine income tax expense are as follow:
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(In thousands) Years ended December 31,
Tax benefit at statutory rate $ (6,582) $ (5,485)
Increase (reduction) in income taxes resulting from:
State income tax benefits, net of federal benefit 28 (307)
Non-deductible gain on warrant adjustment valuation 6,597 2,102
Change in valuation allowance (1,495) 4,026
Registration penalties - -
Accrual to Return 1,264 -
Income Tax Expense $ 27 $ 4
The tax effects of temporary differences that give rise to the deferred tax assets are as follows:
Deferred Tax Assets
Net operating loss carryforwards - foreign 19 27
Excess of tax basis over book value of property and equipment 53 70
Excess of tax basis over book value of intangible assets 961 1,162
Accrued employee compensation 212 338
Capitalized equity costs - 235
Capitalized research and development 340 1,273
Net change in reserve accounts 819 -
Deferred Tax Liabilities
Right-of-use asset (95) (180)
Reserve for credit losses (20) -
Gross deferred tax liability (115) (180)
TOTAL $ - $ -
The Tax Cuts and Jobs Act (“TCJA”) requires taxpayers to capitalize and amortize research and development (“R&D”) expenditures under section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during 2022 and resulted in capitalized R&D costs of $2.2 million as of December 31, 2024. The Company will amortize these costs for tax purposes over five years for R&D performed in the U.S. and over 15 years for R&D performed outside the U.S. In 2024, all R&D was performed in the U.S.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realization of deferred tax assets, management considers, whether it is “more likely than not”, that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.
ASC 740 requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered,
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including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of December 31, 2024, and 2023.
The Company’s ability to use its net operating loss carryforwards could be limited and subject to annual limitations. Since a full analysis under Section 382 of the Internal Revenue Code has not been performed, the Company may realize a “more than 50% change in ownership” which could limit its ability to use its net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take advantage of all or portions of its net operating loss carryforwards for Federal income tax purposes.
The Federal net operating loss carryforwards of approximately $77.9 million from years ended December 31, 2005, through December 31, 2017, will begin to expire in 2025. The Federal net operating loss carryforward for the years ended December 31, 2018, through 2024 of approximately $95.9 million will not expire. The state net operating loss carryforwards of approximately $73.9 million from years ending December 31, 2005, through December 31, 2024, will expire at various dates through 2044.
A provision of ASC 740 specifies that companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. ASC 740 requires the evaluation of tax positions taken or expected to be taken while preparing the Company’s tax returns to determine whether the tax positions would “more-likely-than-not” be sustained if challenged by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements as of December 31, 2024, and 2023. The Company does not expect any significant changes in the unrecognized tax benefits within twelve months of the reporting date.
The Company will recognize in income tax expense, interest and penalties related to income tax matters. For the years ended December 31, 2024, and 2023, the Company did not have any amounts recorded for interest and penalties.
The Company is subject to taxation in the United States, various state jurisdictions and Switzerland. The Company is subject to income tax examination by U.S. and state tax authorities for the year ended December 31, 2021 and forward and foreign tax authorities for the year ended December 31, 2020 and forward. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating losses utilized in open tax years.
21. Commitments and Contingencies
Litigation
In the ordinary course of business, the Company from time to time becomes involved in various legal proceedings involving a variety of matters. The Company does not believe there are any pending legal proceedings that will have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. The Companies expenses legal fees in the period in which they are occurred.
In February 2024, the Company entered into a termination agreement with an advisor to agree on termination fees owed with respect to a previous engagement agreement. The Company agreed to a contingent payment of $0.7 million upon the closure of the Merger as disclosed in Note 4. Upon the Company's termination of the Merger Agreement in June 2024, the related contingent consideration liability was derecognized.
Acquisition Dispute
In May 2022, the Company received notification alleging that it is not in compliance with the license agreement with Celularity entered in connection with the acquisition of the UltraMIST assets. The Company has settled this dispute in June 2024 for a cash payment of $2.2 million, which resulted in the removal of $4.0 million in convertible promissory note
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payable, $2.4 million in accrued interest, $0.9 million of accrued expenses, $0.5 million of other liabilities, and $0.4 million in accounts receivable, which resulted in the recognition of a gain on extinguishment of debt of $5.3 million.
Lease Commitments
As of December 31, 2024, the maturities of the Company’s operating and financing leases, which have initial or remaining lease terms more than one year, consist of the following:
(In thousands) Operating Leases FinanceLeases
Year ended December 31,
Total Lease Payments $ 248 $ 223
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22. Segment Information
The Company operates in one reportable segment engaged in the design and sale of medical devices.
The accounting policies of the one reportable segment are the same as those described in the summary of significant accounting policies. The CODM assesses performance for the reportable segment and decides how to allocate resources primarily based on gross profit that is also reported on the consolidated statements of comprehensive loss. The measure of segment assets is reported on the consolidated balance sheets as total consolidated assets.
The CODM uses gross profit to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits or to apply them to other parts of the entity.
Net (loss) income is used to monitor budget versus actual results. The CODM also uses net (loss) income in competitive analysis by benchmarking to competitors. The competitive analysis along with the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation.
Management has determined that Morgan Frank, CEO, is the CODM.
The following table sets forth our consolidated statement of operations used by the CODM:
For the Years Ended December 31,
Operating expenses:
Research and development 673 579
Depreciation and amortization 789 752
Income tax expense 27 4
23. License and Option Agreement
In March 2024, the Company entered into an exclusive license and option agreement (the "Patent License") with a third party licensee in connection with a portfolio of patents related to the field of intravascular shockwave applications. The Company received a one-time payment of $2.5 million related to this Patent License, which was recorded in other income during the nine months ended September 30, 2024. The Company granted the Licensee an exclusive license to the patents and an option to acquire the patents for an additional one-time payment in the mid single-digit millions of dollars for a period of 3 years following the effective date of the Agreement. Upon acquisition of the patents, the Licensee will distribute any resulting proceeds to the Company, including but not limited to any royalties, license fees, settlement payments, or other proceeds generated from the licensing or assertion of the patents, in accordance with a revenue sharing agreement. If the Licensee does not exercise its option to acquire the Patents during a specified option period of 3 years from the effective date of the Agreement, the license terminates, a supplement license fee is owed, and all rights revert back to the Company.
Contingent Consideration - The Company considers such royalties, license fees, settlement payments, or other proceeds as variable or contingent consideration. The Company determined that the amount of variable consideration would be constrained until the period the uncertainty related to the consideration is relieved.
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24. Subsequent Event
On March 3, 2025, the Company received a letter from the Listing Qualifications Staff of the Nasdaq Stock Market LLC ('Nasdaq") approving the uplisting of the Company's common stock. Trading of the Company's common stock on Nasdaq commenced on March 7, 2025 under the ticker symbol "SNWV".
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2024. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not operating effectively as of December 31, 2024.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management, with the participation of the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013).
As of December 31, 2024, the Company identified the following material weaknesses:
1.The Company lacked expertise and resources to analyze and properly apply U.S. GAAP to complex and non-routine transactions such as complex financial instruments and derivatives and complex sales distributing agreements with select vendors.
2.The Company lacked of internal resources to analyze and properly apply U.S. GAAP to account for financial instruments included in service agreements with select vendors.
3.The Company has failed to implement controls around the following accounting processes: Equity, Financial Reporting, Accounts Payable, Expenses, Revenue, Accounts Receivable, Tax, Cash, Debt, Fixed Assets, Inventory, Commissions, Entity-Level, Human Resources/Payroll, and IT processes: change management, operations, access security. As such, we believe that accounting and IT processes and procedures need to be tested for operating effectiveness.
As a result, management concluded that its internal control over financial reporting was not effective as of December 31, 2024.
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Remediation Plan
Management is fully committed to addressing the material weaknesses in our internal controls and has implemented several key initiatives to strengthen them. To that end, the Company has continued to implement and enhance appropriate internal controls and contracted with CliftonLarsonAllen LLP starting in the third quarter 2023 to conduct a valuation engagement. This engagement aims to provide an estimated conclusion of value and a summary, restricted appraisal report to assist management in determining the fair value of warrants to purchase the Company’s stock, embedded derivatives, and other interests.
We plan to remediate and implement these controls for high-risk processes throughout 2025. We hired a highly experienced Director of Internal Audit to review, adjust, as needed, and test our internal controls and ensure they function as intended. We recently deployed Governance, Risk, and Compliance software from Workiva to support these efforts. Furthermore, we plan to hire additional personnel and segregate certain duties to enhance our control activities and effectively mitigate risks. Until we fully remediate the material weaknesses, we will perform additional analyses and procedures to ensure our consolidated financial statements comply with U.S. GAAP. We remain vigilant in identifying any additional material weaknesses that may arise and are prepared to adjust our remediation strategies as needed.
We are collaborating with an external vendor to enhance our IT general controls over our enterprise resource planning system. This initiative aims to establish a robust framework for executing IT general controls, addressing weaknesses in our internal controls, and providing a solid framework for future testing.
The existence of any material weakness or significant deficiency requires management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies, and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations, and cause shareholders to lose confidence in our reported financial information, all of which could materially and adversely affect our business and stock price.
Changes in Internal Control over Financial Reporting