SANUWAVE Health, Inc. (SNWV) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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, 2023, and 2022. You should read this discussion and analysis in conjunction with our consolidated financial statements and
related notes thereto on December 31, 2023, and 2022, and for years 2023, and 2022, 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 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.
32
Table of Contents
Executive Summary
We realized significant revenue growth during the year ended December 31, 2023, with a 22% growth in revenue to $20.4 million for the year ended December 31, 2023, as compared to $16.7 million in 2022. Gross margins
also decreased to 70% from 74% in 2022. As the Company continues to focus on profitable growth, we have also reduced our operating loss by 94% to $0.5 million for the year ended December 31, 2023.
Net loss for the year ended December 31, 2023, was $25.8 million, or ($0.03) per basic and diluted share, compared to a net loss of $10.3 million, or ($0.02) per basic and diluted share, for the year ended December 31,
2022, a variance of $15.5 million, which was largely driven by a non-cash change in the fair value of derivatives. Operating loss for the year ended December 31, 2023, was $540 thousand, compared to $9.0 million for the year ended December 31, 2022.
We continue to focus on profitable growth and reduction in operating expenses. We believe these improvements sets the stage for additional growth as we head into 2024.
Merger Agreement with SEPA
On August 23, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among SEP Acquisition Corp., a Delaware corporation (“SEPA”), SEP Acquisition Holdings
Inc., a Nevada corporation, and a wholly owned subsidiary of SEPA (“Merger Sub”). Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA (the “Merger”) will be affected. More specifically, and
as described in greater detail below, at the effective time of the Merger (the “Effective Time”):
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Merger Sub will merge with and into the Company, with the Company being the surviving company following the merger. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Each issued and outstanding share of the Company common stock will automatically be converted into Class A common stock of SEPA, par value $0.0001 per share, at the Conversion Ratio (as defined in the Merger Agreement); and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Outstanding Company convertible securities of the Company will be assumed by SEPA and will be converted into the right to receive Class A Common Stock of SEPA. |
Pursuant to the terms of the Merger Agreement, the holders of (i) Company common stock, (ii) in the money options to purchase Company common stock, (iii) in the money warrants to purchase Company common
stock, and (iv) convertible promissory notes, collectively will be entitled to receive 7,793,000 shares of Class A Common Stock of SEPA. Out-of-the-money options and out-of-the-money warrants will be assumed by SEPA and converted into options or
warrants, respectively, exercisable for shares of Class A Common Stock based on the Conversion Ratio; however, such out-of-the-money options and out-of-the-money warrants shall not be reserved for issuance from the Merger Consideration.
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 one-time 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 GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP financial measures
are presented in a consistent manner for each period, unless otherwise disclosed. The Company uses these measures for the purpose of evaluating its historical and prospective financial performance, as well as its performance relative to competitors.
These measures also help the Company to make operational and strategic decisions. The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results through the eyes of
Management, and to better understand its historical and future financial performance. These 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 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 GAAP. Some of these
limitations are that EBITDA and Adjusted EBITDA:
33
Table of Contents
| Column 1 | Column 2 |
|---|---|
| • | Do not reflect every expenditure, future requirements for capital expenditures or contractual commitments. |
| Column 1 | Column 2 |
|---|---|
| • | Do not reflect all changes in our working capital needs. |
| Column 1 | Column 2 |
|---|---|
| • | Do not reflect interest expense, or the amount necessary to service our outstanding debt. |
As presented in the GAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measure excludes the impact of certain charges that contribute to our net loss (Non-GAAP Adjustments).
| (in thousands) | For the year ended | |||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| Net loss | $ | (25,807 | ) | $ | (10,293 | ) | ||
| Non-GAAP Adjustments: | ||||||||
| Interest expense | 15,623 | 14,132 | ||||||
| Depreciation and amortization | 1,028 | 952 | ||||||
| EBITDA | $ | (9,156 | ) | $ | 4,791 | |||
| Non-GAAP Adjustments for Adjusted EBITDA: | ||||||||
| Change in fair value of derivative liabilities | 9,621 | (16,654 | ) | |||||
| Other non-cash or non-recurring charges: | ||||||||
| Release of historical accrued expenses | (1,866 | ) | - | |||||
| Shares issued for services | 224 | 888 | ||||||
| Loss on issuance of debt | - | 3,434 | ||||||
| Loss on extinguishment of debt | - | 418 | ||||||
| Adjusted EBITDA | $ | (1,177 | ) | $ | (7,123 | ) |
Results of Operations
The following table sets forth our consolidated statement of operations:
| For the Years Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | $ | % | ||||||||||||
| Revenue | 20,398 | $ | 16,742 | $ | 3,656 | 22 | % | |||||||||
| Cost of revenue | 6,035 | 4,331 | 1,704 | 39 | % | |||||||||||
| Gross margin | 14,363 | 12,411 | 1,952 | 16 | % | |||||||||||
| Gross margin % | 70 | % | 74 | % | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 8,674 | 12,556 | (3,882 | ) | -31 | % | ||||||||||
| Selling and marketing | 4,898 | 7,474 | (2,576 | ) | -34 | % | ||||||||||
| Research and development | 579 | 567 | 12 | 2 | % | |||||||||||
| Depreciation and amortization | 752 | 766 | (14 | ) | -2 | % | ||||||||||
| Operating loss | (540 | ) | (8,952 | ) | 8,412 | -94 | % | |||||||||
| Other expense, net | (25,263 | ) | (1,339 | ) | (23,924 | ) | nm | |||||||||
| Income tax expense | 4 | 2 | 2 | 100 | % | |||||||||||
| Net loss | $ | (25,807 | ) | $ | (10,293 | ) | $ | (15,514 | ) | 151 | % |
Revenue
Revenues for the year ended December 31, 2023, were $20.4 million, compared to $16.7 million for the same period in 2022, an increase of $3.7 million or 22%. The increase in net sales was primarily driven by the growth
in quantity of disposables sold, which increased by 9% in 2023 as compared to 2022. Pricing of the UltraMIST® system and disposables also showed growth in 2023 as
compared to 2022, disposables average selling price increased over 10% in 2023, and system revenue increased 28% in 2023. Revenue from UltraMIST totaled 90% of total revenue in 2023 and 2022.
34
Table of Contents
Cost of Revenue
Cost of revenues for the year ended December 31, 2023, was $6.0 million, compared to $4.3 million for the same period in 2022. Gross profit as a percentage of revenues was 70% for the year ended December 31, 2023,
compared to 74% for the same period in 2022. This decrease in gross margin was largely driven by increased one time inventory write offs and costs to support our growth and alleviate our inventory constraint in 2023.
General and Administrative
General and administrative expenses for the year ended December 31, 2023, were $8.7 million as compared to $12.6 million for the same period in 2022, a decrease of $3.9 million, or 31%. The decrease in 2023 as compared
to 2022 was primarily due to the higher legal costs related to patent work and securities work incurred in 2022.
Selling and Marketing
Selling and marketing expenses for the year ended December 31, 2023, were $4.9 million as compared to $7.4 million for the same period in 2022, a decrease of $2.6 million, or 34%. The year-over-year decrease in sales
and marketing expenses in 2023 was a result of cost saving initiatives taken by management.
Research and Development
Research and development expenses for the year ended December 31, 2023, were $0.6 million, compared to $0.6 million for the same period in 2022. The research and development costs in 2023 remained consistent with the
costs in 2022.
Other Income (Expense), net
Other expense, net consists of the following:
| For the years ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||||
| Interest expense | $ | (15,623 | ) | $ | (14,132 | ) | $ | (1,491 | ) | 11 | % | |||||
| Change in fair value of derivatives | (9,621 | ) | 16,654 | (26,275 | ) | nm | ||||||||||
| Loss on issuance of debt | - | (3,434 | ) | 3,434 | -100 | % | ||||||||||
| Gain/(loss) on extinguishment of debt | - | (418 | ) | 418 | nm | |||||||||||
| Other expense | (19 | ) | (9 | ) | (10 | ) | nm | |||||||||
| Other expense, net | $ | (25,263 | ) | $ | (1,339 | ) | $ | (23,924 | ) | nm | ||||||
| nm - not meaningful |
Other expenses totaled $25.2 million for the year ended December 31, 2023, as compared $1.3 million for the same period in 2022, an increase of $23.9 million. The increase was primarily driven by an increased loss from
the change in the fair value of derivative liability of $26.3 million, offset by a decrease in loss on issuance of debt along with the loss on extinguishment of debt. The increased interest expense of $1.5 million was the result of higher levels of
debt outstanding during 2023, due to new issuances of convertible debt, compared with 2022. The change in fair value of the derivative liability relates to warrants issued during 2023 and 2022 with the convertible debt.
Liquidity and Capital Resources
Since inception, we have incurred losses from operations each year. As of December 31, 2023, we had an accumulated deficit of $220.0 million. Historically, our operations have
primarily been funded from the sale of capital stock, notes payable, and convertible debt securities.
In August 2022,November 2022, May 2023 and December 2023, we entered into a 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, and $1.9 million in December 2023 (ii) Common Stock Purchase Warrants to purchase
an additional 581.6 million shares of common stock with an exercise price of $0.067 per share and (iii) Common Stock Purchase Warrants to purchase an additional 581.6million shares of common stock with an exercise price of $0.04 per share.
35
Table of Contents
Pursuant to the Notes, the Company promised to pay in cash and/or in shares of common stock, at a conversion price of $0.04 (the “Conversion Price”), the principal amount and interest at a rate of 15%
per annum on any outstanding principal. The Conversion Price of the Notes is subject to adjustment, including if the Company issues or sells shares of common stock for a price per share less than the Conversion Price of the Notes or if the Company
lists its shares of common stock on The Nasdaq Capital Market and the average volume weighted average price of such common stock for the five trading days preceding such listing is less than $0.04 per share; provided, however, that the Conversion
Price shall never by less than $0.01. The Notes contain customary events of default and covenants, including limitations on incurrences of indebtedness and liens.
In August 2023 and November 2023, the Company utilized its election to convert the August and November issued 2022 Convertible Notes Payable 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 464,440,813 shares of common stock. The November notes totaling $4.0 million in principal and $0.6 million in interest were converted to 114,481,063
shares of common stock.
In July 2023, we issued Asset-Backed Secured Promissory Notes in an aggregate principal amount of $4.6 million to certain accredited investors at an original issue discount of 33.33%. These notes
bear an interest rate of 0% per annum and matured on January 21, 2024. We received total proceeds of approximately $3.0 million. We also entered into a side letter, pursuant to which, we issued Future Advance Convertible Promissory Notes, on
January 21, 2024, with the same principal amount as the principal amount of such 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 the previous paragraphs.
In August 2020, the Company issued a Senior Secured Promissory Note Payable (the “Senior Secured Note”) to NH Expansion Credit Fund Holdings L.P. pursuant to which the Company had outstanding debt of
$21.5 million as of December 31, 2023. Interest is charged at the greater of the prime rate or 3% plus 9%, paid quarterly. As of December 31, 2023, the Company is in default of the minimum liquidity provisions on the Senior Secured Note and, as a
result, is accruing interest at the default interest rate of an incremental 5%. Interest expense on the Senior Secured Note totaled $6.9 million and $5.9 million for the years ended December 31, 2023, and 2022, respectively.
See Notes 10, 11 and 12 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 additional
debt commitments, the convertible notes and accompanying warrants issued in May and December 2023, $4.5 million in asset-backed secured promissory notes, and the Senior Secured Note.
The following table presents summarized cash flow information:
| For the period ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | ||||||
| Cash flows used by operating activities | $ | (4,538 | ) | $ | (17,169 | ) | ||
| Cash flows provided by investing activities | $ | 21 | $ | 332 | ||||
| Cash flows provided by financing activities | $ | 5,211 | $ | 17,384 |
Cash Flows from Operating Activities
We have improved our cash flow from operations in 2023 as compared to 2022, which was driven by increased emphasis on improved cash management and operating expense management. We also invested in
our inventory in 2023, increasing our inventory levels by $2 million for the year ended December 31, 2023. 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 with the August and November 2022, and May and December 2023 financings. The Company recognized a loss on these liabilities of $9.6 million for the year ended December 31, 2023, as compared to a gain of $16.7
million for the year ended December 31, 2022.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities decreased primarily due to the improvement of operating cash flows which reduced our required cash to fund our growth and operations. For the year ended
December 31, 2023, we received proceeds of $6.0 million from the issuance of the convertible promissory notes and asset backed secured promissory notes discussed above in this section, Liquidity and Capital Resources, as compared to $16.2 million
for the year ended December 31, 2022.
36
Table of Contents
Going Concern
The continuation of our business is dependent upon raising additional capital to fund operations. This, as well as the events of default on various notes payable, raise substantial doubt
about our ability to continue as a going concern for a period of at least twelve months. Management plans to obtain additional capital in 2024 through the completion of the Merger Agreement. We could also obtain additional capital through the
conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution
to our existing stockholders. Although no assurances can be given that our plans to obtain additional capital will be successful or on the terms or timeline we expect, or at all, management believes that potential additional issuances of
equity or other potential financing transactions, as discussed above, should provide the necessary funding for us over the next 12 months. 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.
Critical Accounting Policies and Estimates
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. 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 Embedded Conversion Options and Warrants
The Company classified certain convertible instruments as having embedded conversion options which qualified as derivative financial instruments to be separately accounted for. The Company
also determined that certain warrants also qualified as derivative financial instruments. Various valuation models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on the
consolidated balance sheets. The models include subjective input assumptions that can materially affect the fair value estimates and as such are subject to uncertainty. Our significant input assumptions are discussed in Note 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.