SANUWAVE Health Inc(SNWV) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the company's unaudited consolidated financial statements as of June 30, 2023, detailing financial position, performance, cash flows, and related notes, highlighting ongoing losses and going concern uncertainties Condensed Consolidated Balance Sheets As of June 30, 2023, total assets slightly decreased, while total liabilities significantly increased due to growth in senior secured debt, convertible notes, and warrant liabilities, further expanding the stockholders' deficit | Metric | June 30, 2023 (USD thousands) | December 31, 2022 (USD thousands) | Change (USD thousands) | Change (%) | | :--------------------------------- | :----------------------- | :------------------------ | :------------ | :---------- | | Assets | | | | | | Cash | 332 | 1,153 | (821) | -71.2% | | Restricted cash | 850 | - | 850 | N/A | | Accounts receivable, net | 2,818 | 4,029 | (1,211) | -30.1% | | Inventory | 900 | 868 | 32 | 3.7% | | Prepaid expenses and other current assets | 1,201 | 570 | 631 | 110.7% | | Total current assets | 6,101 | 6,620 | (519) | -7.8% | | Property, equipment and other, net | 1,050 | 856 | 194 | 22.7% | | Intangible assets, net | 4,786 | 5,137 | (351) | -6.8% | | Goodwill | 7,260 | 7,260 | - | 0.0% | | Total non-current assets | 13,096 | 13,253 | (157) | -1.2% | | Total assets | 19,197 | 19,873 | (676) | -3.4% | | Liabilities | | | | | | Senior secured debt (in default) | 16,123 | 14,416 | 1,707 | 11.8% | | Convertible promissory notes | 17,712 | 16,713 | 999 | 6.0% | | Convertible promissory notes (related party) | 8,346 | 7,409 | 937 | 12.6% | | Bridge notes advance | 1,476 | - | 1,476 | N/A | | Accounts payable | 4,859 | 4,400 | 459 | 10.4% | | Accrued expenses | 6,351 | 8,512 | (2,161) | -25.4% | | Factoring liabilities | 1,213 | 2,130 | (917) | -43.1% | | Warrant liabilities | 14,410 | 1,416 | 12,994 | 917.7% | | Accrued interest | 6,174 | 4,052 | 2,122 | 52.4% | | Accrued interest (related party) | 1,438 | 788 | 650 | 82.5% | | Current contract liabilities | 67 | 60 | 7 | 11.7% | | Other | 1,108 | 291 | 817 | 280.7% | | Total current liabilities | 79,277 | 60,187 | 19,080 | 31.7% | | Total liabilities | 80,035 | 60,883 | 19,152 | 31.5% | | Stockholders' Deficit | | | | | | Accumulated deficit | (214,584) | (194,242) | (20,342) | 10.5% | | Total stockholders' deficit | (60,838) | (41,010) | (19,828) | 48.4% | Condensed Consolidated Statements of Comprehensive Loss/Income The company achieved significant revenue growth and improved operating profit in Q2 and H1 2023, but a substantial net loss increase was driven by fair value changes in derivative liabilities | Metric (USD thousands) | Q2 2023 | Q2 2022 | Change (USD thousands) | Change (%) | H1 2023 | H1 2022 | Change (USD thousands) | Change (%) | | :--------------------------------- | :------------- | :------------- | :------------ | :---------- | :----------- | :----------- | :------------ | :---------- | | Revenue | 4,675 | 3,882 | 793 | 20.4% | 8,450 | 7,077 | 1,373 | 19.4% | | Cost of sales | 1,202 | 1,096 | 106 | 9.7% | 2,464 | 1,986 | 478 | 24.1% | | Gross profit | 3,473 | 2,786 | 687 | 24.7% | 5,986 | 5,091 | 895 | 17.6% | | Total operating expenses | 2,542 | 5,834 | (3,292) | -56.4% | 7,033 | 10,096 | (3,063) | -30.3% | | Operating (loss)/income | 931 | (3,048) | 3,979 | -130.6% | (1,047) | (5,005) | 3,958 | -79.1% | | Total other (expense)/income | (8,193) | 4,692 | (12,885) | -274.6% | (19,295) | 1,548 | (20,843) | -1346.5% | | Net (loss)/income | (7,262) | 1,644 | (8,906) | -541.7% | (20,342) | (3,457) | (16,885) | 488.4% | | Basic (loss)/income per share | (0.01) | 0.00 | (0.01) | N/A | (0.04) | (0.01) | (0.03) | 300.0% | | Diluted (loss)/income per share | (0.01) | 0.00 | (0.01) | N/A | (0.04) | (0.01) | (0.03) | 300.0% | - The significant increase in net loss was primarily due to fair value changes in derivative liabilities, which resulted in a $3.8 million expense in Q2 2023 and a $10.6 million expense in H1 2023, compared to income in the prior year periods[78][79] Condensed Consolidated Statements of Stockholders' Deficit As of June 30, 2023, the company's stockholders' deficit increased to $60.838 million from $41.010 million on December 31, 2022, primarily due to a net loss of $20.342 million and shares issued for services | Metric (USD thousands) | June 30, 2023 | December 31, 2022 | Change (USD thousands) | | :--------------------------------- | :------------- | :------------- | :------------ | | Common stock | 562 | 549 | 13 | | Additional paid-in capital | 153,264 | 152,750 | 514 | | Accumulated deficit | (214,584) | (194,242) | (20,342) | | Accumulated other comprehensive loss | (80) | (67) | (13) | | Total stockholders' deficit | (60,838) | (41,010) | (19,828) | - In H1 2023, the company issued 12.9 million shares of common stock for services, increasing common stock par value by $13 thousand and additional paid-in capital by $514 thousand[23] Condensed Consolidated Statements of Cash Flows In H1 2023, operating cash outflows significantly decreased, but investing activities shifted to outflows, and financing cash inflows reduced, leading to a substantial decline in net cash and restricted cash at period-end | Cash Flow (USD thousands) | H1 2023 | H1 2022 | Change (USD thousands) | | :--------------------------------- | :------------- | :------------- | :------------ | | Net cash used in operating activities | (1,215) | (5,201) | 3,986 | | Net cash (used in)/provided by investing activities | (169) | 948 | (1,117) | | Net cash provided by financing activities | 1,426 | 5,104 | (3,678) | | Effect of exchange rate on cash | (13) | 14 | (27) | | Net change in cash and restricted cash during period | 29 | 865 | (836) | | Cash and restricted cash at beginning of period | 1,153 | 619 | 534 | | Cash and restricted cash at end of period | 1,182 | 1,484 | (302) | - The reduction in cash used in operating activities is primarily due to the company's efforts in profitability growth and cost management[95] - Cash provided by financing activities mainly stemmed from new convertible loan activities to support company growth[96] Notes to Unaudited Condensed Consolidated Financial Statements Financial statement notes provide detailed information on the company's business, going concern, accounting policies, debt, derivatives, revenue, supplier concentration, contingencies, and subsequent events, revealing financial challenges and future financing plans 1. Nature of the Business and Basis of Presentation SANUWAVE Health, Inc. and its subsidiaries focus on commercializing patented non-invasive bio-responsive activation medical systems for skin, musculoskeletal tissue, and vascular structure repair and regeneration, with financial statements prepared under U.S. GAAP - The company focuses on commercializing patented non-invasive bio-responsive activation medical systems, such as UltraMIST and PACE® systems, for the repair and regeneration of skin, musculoskeletal tissue, and vascular structures[26] 2. Going Concern Ongoing operating losses, note defaults, and reliance on future financing raise significant doubt about the company's ability to continue as a going concern for the next twelve months - The company faces significant doubt about its ability to continue as a going concern due to continuous operating losses, note defaults, and reliance on future financing[31] - Management plans to obtain additional capital in 2023 through the conversion of unexercised warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt[32] - Failure to secure financing may require the company to substantially curtail or cease operations, or obtain funds on unfavorable terms[32] 3. Summary of Significant Accounting Policies This section outlines key accounting policies for condensed consolidated financial statements, including estimates, revenue recognition (system sales, parts, licensing), and recent accounting standard adoption - Company revenue primarily derives from system sales, accessories and parts sales, licensing fees, and other income (including warranty, repair, and freight)[38][39][40] - The company adopted ASU 2016-13 (Financial Instruments – Credit Losses) in January 2023, with no material impact on the condensed consolidated financial statements[41] 4. Loss/Income per Share This section details the calculation of loss/income per share and lists equity securities, such as options, warrants, and convertible notes, excluded from diluted EPS due to their anti-dilutive nature | Metric (shares in thousands) | June 30, 2023 (Six Months) | June 30, 2022 (Six Months) | | :--------------------------------- | :----------------------- | :----------------------- | | Common stock options | 19,136 | 22,046 | | Common stock purchase warrants | 1,247,911 | 189,157 | | Convertible notes | 677,050 | 122,271 | | Total anti-dilutive equity securities | 1,944,097 | 333,474 | - Due to net losses in Q2 and H1 2023, and H1 2022, all potentially dilutive equity securities were considered anti-dilutive and thus excluded from the calculation of diluted loss per share[43] 5. Cash and Restricted Cash As of June 30, 2023, the company held $0.85 million in restricted cash, primarily from bridge note advances, which converted to asset-backed notes in July 2023 | (USD thousands) | June 30, 2023 | | :----------------- | :------------- | | Cash | 332 | | Restricted cash | 850 | | Total cash and restricted cash | 1,182 | - Restricted cash primarily originated from bridge note advances, which converted to asset-backed notes in July 2023[44] 6. Accrued Expenses Total accrued expenses decreased to $6.351 million as of June 30, 2023, from $8.512 million on December 31, 2022, mainly due to reduced employee compensation | (USD thousands) | June 30, 2023 | December 31, 2022 | Change (USD thousands) | | :----------------- | :------------- | :------------- | :------------ | | Registration penalties | 1,583 | 1,583 | 0 | | Licensing fees | 892 | 892 | 0 | | Board and professional fees | 877 | 586 | 291 | | Employee compensation | 2,665 | 4,585 | (1,920) | | Other | 334 | 866 | (532) | | Total | 6,351 | 8,512 | (2,161) | 7. Senior Secured Debt, In Default As of June 30, 2023, the company's senior secured debt was in default due to unmet minimum liquidity covenants, accruing interest at a default rate, with an extension granted until December 31, 2023 | (USD thousands) | June 30, 2023 | December 31, 2022 | | :----------------- | :------------- | :------------- | | Senior secured debt carrying value | 16,123 | 14,416 | | Accrued interest | 2,676 | 1,890 | - The company's senior secured debt is in default due to failure to meet minimum liquidity covenants, accruing interest at an additional 5% default rate[49] - In June 2023, the company received a Fourth Amendment to the Note and Warrant Purchase and Security Agreement, extending the exercise of default remedies to December 31, 2023, and requiring completion of at least $2.5 million in equity financing by July 15, 2023, which was successfully completed[50] | Interest Expense (USD thousands) | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :----------------- | :------------- | :------------- | :----------- | :----------- | | Senior secured debt interest expense | 1,700 | 700 | 3,300 | 1,400 | 8. Convertible Promissory Notes Payable As of June 30, 2023, total convertible promissory notes amounted to $26.058 million, largely from 2022 notes with a $0.04 conversion price and 15% annual interest, subject to adjustment but not below $0.01 | (USD thousands) | June 30, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Acquisition convertible notes (in default) | 4,000 | 4,000 | | Convertible notes (related party, in default) | 1,373 | 1,373 | | 2022 Convertible Notes | 13,712 | 12,713 | | 2022 Convertible Notes (related party) | 6,973 | 6,036 | | Total convertible promissory notes carrying value | 26,058 | 24,122 | - The 2022 Convertible Notes have a conversion price of $0.04 and an annual interest rate of 15%, with the conversion price adjustable but not below $0.01[54] | Interest Expense (USD thousands) | Q2 2023 | H1 2023 | | :----------------- | :------------- | :----------- | | Convertible notes interest expense | 2,400 | 4,600 | 9. Bridge Notes Advance As of June 30, 2023, the company received $1.5 million in bridge note advances, with $0.9 million held as restricted cash, which converted to asset-backed notes in July 2023 after a $2.5 million financing - As of June 30, 2023, the company received $1.5 million in bridge note advances, with $0.9 million from an unrelated party held as restricted cash[56] - Following the completion of $2.5 million in financing in July 2023, the $1.5 million bridge note advances converted into asset-backed notes with a total principal of $2.2 million[57] 10. Fair Value Measurements The company measures warrant liabilities and certain embedded conversion features at fair value, classified as Level 3, with significant changes in value during H1 2023 influenced by underlying stock value and volatility | (USD thousands) | June 30, 2023 | December 31, 2022 | | :----------------- | :------------- | :------------- | | Warrant liabilities | 14,410 | 1,416 | | Embedded conversion options | 693 | 2,340 | | Total fair value | 15,103 | 3,756 | - Warrant liabilities and embedded conversion options are classified as Level 3 fair value, with valuations relying on significant unobservable inputs such as underlying stock value and volatility[59][61][64] | Warrant Liabilities Activity (USD thousands) | H1 2023 | | :--------------------------------- | :------------- | | Balance at December 31, 2022 | 1,416 | | Issuances | 570 | | Remeasurement loss on warrant liabilities | 12,424 | | Balance at June 30, 2023 | 14,410 | | Conversion Option Liabilities Activity (USD thousands) | H1 2023 | | :--------------------------------- | :------------- | | Balance at December 31, 2022 | 2,340 | | Initial value of new issuances | 157 | | Change in fair value | (1,804) | | Balance at June 30, 2023 | 693 | 11. Revenue The company achieved significant revenue growth in Q2 and H1 2023, primarily driven by increased consumables, parts, and system sales in the U.S. market | Revenue Type (USD thousands) | Q2 2023 | Q2 2022 | Change (USD thousands) | Change (%) | | :--------------------------------- | :------------- | :------------- | :------------ | :---------- | | Consumables and parts revenue | 2,931 | 2,663 | 268 | 10.1% | | System revenue | 1,402 | 862 | 540 | 62.6% | | Licensing fees and other | 80 | 13 | 67 | 515.4% | | Product revenue | 4,413 | 3,538 | 875 | 24.7% | | Lease revenue | 262 | 344 | (82) | -23.8% | | Total revenue | 4,675 | 3,882 | 793 | 20.4% | | Revenue Type (USD thousands) | H1 2023 | H1 2022 | Change (USD thousands) | Change (%) | | :--------------------------------- | :------------- | :------------- | :------------ | :---------- | | Consumables and parts revenue | 5,537 | 4,854 | 683 | 14.1% | | System revenue | 2,272 | 1,507 | 765 | 50.8% | | Licensing fees and other | 96 | 28 | 68 | 242.9% | | Product revenue | 7,905 | 6,389 | 1,516 | 23.7% | | Lease revenue | 545 | 688 | (143) | -20.8% | | Total revenue | 8,450 | 7,077 | 1,373 | 19.4% | 12. Concentration of Credit Risk and Limited Suppliers The company relies on single suppliers for most product components, posing production disruption risks, with two major suppliers accounting for over 10% of total purchases in H1 2023 - The company relies on single suppliers for most product component materials, and the loss of any single supplier could lead to production disruptions[69] | Supplier | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :------- | :------------- | :------------- | :----------- | :----------- | | Supplier A | 13% | 17% | 17% | 18% | | Supplier B | 16% | N/A | 11% | N/A | 13. Commitments and Contingencies The company is involved in various legal proceedings, including a dispute with Celularity, but does not anticipate any material adverse impact on its business, despite inherent uncertainties in legal outcomes - The company is involved in a dispute with Celularity regarding a licensing agreement, with Celularity alleging non-compliance and the company asserting breach of contract[71] - The company does not believe any currently pending legal proceedings will have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows, but legal matters are inherently unpredictable[70] 14. Subsequent Events In July 2023, the company issued $4.6 million in asset-backed notes, and in August 2023, converted $16.2 million principal and $2.4 million interest of 2022 convertible notes into 464.4 million common shares - In July 2023, the company issued asset-backed notes with a total principal of $4.6 million, generating approximately $3.0 million in gross proceeds at an original issue discount of 33.33%[72] - In August 2023, the company converted $16.2 million in principal and $2.4 million in interest from the 2022 convertible notes into 464,440,813 shares of common stock[75] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and operating results as of June 30, 2023, highlighting revenue growth, improved operating profit, and the primary reasons for increased net loss, along with non-GAAP metrics, liquidity, capital resources, and critical accounting policies Executive Summary The company achieved significant revenue growth and improved operating profit in Q2 and H1 2023, but net loss substantially increased due to expenses from derivative fair value changes | Metric (USD thousands) | Q2 2023 | Q2 2022 | Change (%) | H1 2023 | H1 2022 | Change (%) | | :--------------------------------- | :------------- | :------------- | :---------- | :----------- | :----------- | :---------- | | Revenue | 4,675 | 3,882 | 20% | 8,450 | 7,077 | 19% | | Net (loss)/income | (7,262) | 1,644 | -542% | (20,342) | (3,457) | 488% | | Operating (loss)/income | 931 | (3,048) | -131% | (1,047) | (5,005) | -79% | - The increase in net loss is primarily attributable to ongoing losses from fair value changes in derivatives, resulting in a $3.8 million expense in Q2 2023 and a $10.6 million expense in H1 2023[78][79] Non-GAAP Financial Measures The company uses EBITDA and Adjusted EBITDA as non-GAAP financial measures for performance assessment and strategic planning, with Adjusted EBITDA showing significant improvement in Q2 and H1 2023 after excluding non-cash or one-time expenses - The company uses EBITDA and Adjusted EBITDA to assess operating performance and for strategic planning, noting these metrics should not be considered substitutes for GAAP financial measures[81] | Non-GAAP Metric (USD thousands) | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--------------------------------- | :------------- | :------------- | :----------- | :----------- | | Net (loss)/income | (7,262) | 1,644 | (20,342) | (3,457) | | EBITDA | (2,624) | 4,858 | (11,168) | 3,141 | | Adjusted EBITDA | 171 | (1,904) | (1,576) | (3,669) | - The improvement in Adjusted EBITDA indicates an enhanced operating performance after excluding non-cash or one-time expenses such as derivative fair value changes[84] Results of Operations This section analyzes the company's Q2 and H1 2023 revenue, gross margin, and operating expenses, noting revenue growth from UltraMIST system sales, fluctuating gross margins, and reduced operating expenses due to restructuring and cost management Revenues and Gross Margin Revenue grew by 20% in Q2 and 19% in H1 2023, driven by UltraMIST® system sales, with Q2 gross margin increasing to 74% and H1 slightly decreasing to 71% due to higher third-party manufacturing costs | Metric (USD thousands) | Q2 2023 | Q2 2022 | Change (%) | H1 2023 | H1 2022 | Change (%) | | :----------------- | :------------- | :------------- | :---------- | :----------- | :----------- | :---------- | | Total revenue | 4,675 | 3,882 | 20% | 8,450 | 7,077 | 19% | | Gross margin (%) | 74% | 72% | 2% | 71% | 72% | -1% | - Revenue growth was primarily driven by the continued increase in UltraMIST® system sales[86] - The increase in Q2 gross margin was due to stronger pricing strategies, while the decrease in H1 gross margin was mainly due to higher production costs from third-party manufacturers[86][87] General and Administrative Expenses General and administrative expenses decreased by 67% in Q2 and 33% in H1 2023, primarily due to restructuring activities and ongoing cost management initiatives | Metric (USD thousands) | Q2 2023 | Q2 2022 | Change (%) | H1 2023 | H1 2022 | Change (%) | | :----------------- | :------------- | :------------- | :---------- | :----------- | :----------- | :---------- | | General and administrative expenses | 1,238 | 3,781 | -67% | 3,997 | 5,986 | -33% | - The decrease in expenses was primarily due to restructuring activities and ongoing cost management initiatives[88] Selling and Marketing Expenses Selling and marketing expenses decreased by 42% in Q2 and 29% in H1 2023, mainly due to reduced sales personnel and other cost management efforts in 2023 | Metric (USD thousands) | Q2 2023 | Q2 2022 | Change (%) | H1 2023 | H1 2022 | Change (%) | | :----------------- | :------------- | :------------- | :---------- | :----------- | :----------- | :---------- | | Selling and marketing expenses | 978 | 1,672 | -42% | 2,390 | 3,387 | -29% | - The decrease in expenses was primarily due to reduced sales personnel and other cost management activities in 2023[89] Research and Development Expenses Research and development expenses decreased by 19% in Q2 and 20% in H1 2023, attributed to improved cost management, with R&D as a percentage of revenue falling from 4-5% in 2022 to 3% in 2023 | Metric (USD thousands) | Q2 2023 | Q2 2022 | Change (%) | H1 2023 | H1 2022 | Change (%) | | :----------------- | :------------- | :------------- | :---------- | :----------- | :----------- | :---------- | | Research and development expenses | 139 | 171 | -19% | 270 | 337 | -20% | | R&D expenses as % of revenue | 3% | 4% | -1% | 3% | 5% | -2% | - The decrease in expenses was primarily due to improved cost management in 2023[90][91] Other Income (Expense), net Other income (expense), net, significantly increased in Q2 and H1 2023, primarily due to higher convertible notes and increased expenses from fair value changes in warrants and embedded conversion liabilities | Metric (USD thousands) | Q2 2023 | Q2 2022 | Change (USD thousands) | Change (%) | H1 2023 | H1 2022 | Change (USD thousands) | Change (%) | | :--------------------------------- | :------------- | :------------- | :------------ | :---------- | :----------- | :----------- | :------------ | :---------- | | Interest expense | (4,381) | (2,959) | (1,422) | 48% | (8,659) | (6,152) | (2,507) | 41% | | Change in fair value of derivatives | (3,821) | 7,861 | (11,682) | -149% | (10,618) | 11,343 | (21,961) | -194% | | Other income (expense), net | (8,193) | 4,692 | (12,885) | -275% | (19,295) | 1,548 | (20,843) | -1346% | - The increase in net other expenses was primarily due to higher convertible notes and increased expenses from fair value changes in warrants and embedded conversion liabilities[92] Liquidity and Capital Resources The company has incurred continuous losses since inception and faces going concern uncertainties, with management planning various financing methods to secure additional capital for UltraMIST and PACE system commercialization - The company faces significant doubt about its ability to continue as a going concern due to continuous operating losses, note defaults, and reliance on future financing[93] - Management plans to obtain additional capital through the conversion of unexercised warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt[94] | Cash Flow (USD thousands) | H1 2023 | H1 2022 | | :--------------------------------- | :------------- | :------------- | | Cash used in operating activities | (1,215) | (5,201) | | Cash (used in)/provided by investing activities | (169) | 948 | | Cash provided by financing activities | 1,426 | 5,104 | - The reduction in cash used in operating activities indicates the company's progress in profitability growth and cost management[95] Critical Accounting Policies and Estimates The company's financial statements rely on critical judgments and estimates for litigation contingencies, derivative liabilities (including embedded conversion options and warrants), and intangible assets and goodwill valuations, which are subject to future events and market changes - Critical accounting policies and estimates include litigation contingencies, derivative liabilities (embedded conversion options and warrants), and the valuation of intangible assets and goodwill[99][100][101] - Fair value estimates for derivative liabilities involve subjective input assumptions that can significantly impact the valuation[100] - Impairment tests for intangible assets and goodwill depend on significant estimates of future cash flows, discount rates, and asset useful lives, which are susceptible to legal, technological, regulatory, economic, and competitive risks[101] Segment and Geographic Information The company operates as a single segment, with revenue primarily from the U.S. market and international sales across various regions, while all significant expenses and assets are located in the U.S - The company is identified as a single operating segment[103] - Revenue is primarily generated in the United States, with international sales covering Europe, Canada, the Middle East, Central America, South America, Asia, and the Asia Pacific region[103] Effects of Inflation The company's liquid assets are minimally affected by inflation, but rising inflation impacts expenses like employee compensation, office leases, and R&D, which may be difficult to recover quickly during product commercialization - Rising inflation rates impact expenses such as employee compensation, office space lease costs, and research and development expenses, which may be difficult to recover quickly during product commercialization[104] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," the company is not required to provide quantitative and qualitative disclosures about market risk - As a "smaller reporting company," the company is not required to provide quantitative and qualitative disclosures about market risk[105] Item 4. Controls and Procedures As of June 30, 2023, management deemed disclosure controls and internal financial reporting controls ineffective due to three material weaknesses, including lack of GAAP expertise for complex transactions, insufficient financial instrument accounting resources, and inadequate control design and implementation for accounting and IT processes Evaluation of Disclosure Controls and Procedures As of June 30, 2023, the CEO and CFO assessed the company's disclosure controls and procedures as ineffective due to material weaknesses - As of June 30, 2023, the company's disclosure controls and procedures were not operating effectively[107] - The company's internal control over financial reporting was deemed ineffective as of June 30, 2023[108] Remediation Plan The company is collaborating with external vendors to document internal control policies and procedures, enhance automated and manual controls in its ERP system, and has hired internal resources with relevant expertise to address identified material weaknesses - The company is collaborating with external vendors to document internal control policies and procedures and to enhance automated and manual controls within its ERP system to mitigate risks related to customer creation, pricing, and billing accuracy[109] - Identified material weaknesses include: lack of expertise and resources to analyze and correctly apply U.S. GAAP for complex financial instruments and derivative transactions; insufficient internal resources to analyze and correctly apply U.S. GAAP for financial instruments in specific vendor service agreements; and failure to design and implement controls for all accounting and IT processes and procedures[110] - The company hired internal resources with appropriate expertise and experience in applying U.S. GAAP in 2022[112] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, other than those disclosed in the "Remediation Plan" - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, other than the measures disclosed in the "Remediation Plan"[115] PART II – OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings as of June 30, 2023, is detailed in Note 13 to the condensed consolidated financial statements - Legal proceedings information can be found in Note 13 to the condensed consolidated financial statements[117] Item 1A. Risk Factors No material changes to the risk factors disclosed in the company's 2022 Annual Report have occurred during this reporting period - There have been no material changes to the risk factors disclosed in the company's 2022 Annual Report[118] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended June 30, 2023, the company issued 6 million shares to consultants as consideration for services rendered - During the three months ended June 30, 2023, the company issued 6 million shares to consultants as consideration for services provided[119] Item 3. Defaults Upon Senior Securities Not applicable - Not applicable[120] Item 4. Mine Safety Disclosures Not applicable - Not applicable[121] Item 5. Other Information During the three months ended June 30, 2023, no directors or officers adopted or terminated any Rule 10b5-1(c) trading arrangements - During the three months ended June 30, 2023, no directors or officers adopted or terminated any securities trading contracts, instructions, or written plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)[122] Item 6. Exhibits This section lists all exhibits filed with this quarterly report, including corporate charters, certificates, agreements, certifications, and XBRL data files - Exhibits include corporate charters, certificates, various agreements (such as Note and Warrant Purchase and Security Agreement, Securities Purchase Agreement, Guaranty Agreement, Subordination Agreement), executive employment agreements, and certifications from the Chief Executive Officer and Chief Financial Officer[123][125] SIGNATURES This quarterly report was formally signed by SANUWAVE Health, Inc.'s CEO Morgan Frank and CFO Toni Rinow on August 10, 2023 - This report was signed by Morgan Frank, Chief Executive Officer, and Toni Rinow, Chief Financial Officer, of SANUWAVE Health, Inc. on August 10, 2023[129]