| Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial
statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as of
and for the year ended December 31, 2022 included in our Annual Report on Form 10-K, filed with the SEC on March 31, 2023 (the “2022 Annual Report”).
Executive Summary
We continued to realize significant revenue growth during the three and nine months ended September 30, 2023, as compared to the same periods in 2022. Revenue for the three months ended
September 30, 2023, totaled $5.0 million, an increase of 19%, as compared to $4.2 million for the same period of 2022. Revenue for the nine months ended September 30, 2023, totaled $13.4 million, an increase of 19%, as compared to $11.2
million for the same period of 2022.
Net loss for the three months ended September 30, 2023, was $23.7 million, or $0.03 per basic and diluted share, compared to a net loss of $1.1 million, or $0.00 per basic and diluted share,
for the same period in 2022. The increase in our net loss for the three months ended September 30, 2023, was primarily due to continued losses on the fair value of our derivatives, which totaled $19.3 million of expense in the period. For the
three months ended September 30, 2023, our operating loss totaled $0.5 million, which is an improvement of $2.0 million compared to 2022.
Net loss for the nine months ended September 30, 2023, was $44.0 million, or $0.06 per basic and diluted share, compared to a net loss of $4.6 million, or $0.01 per basic and diluted share,
for the same period in 2022. The increase in our net loss for the nine months ended September 30, 2023, was primarily due to continued losses on the fair value of our derivatives, which totaled $29.9 million of expense in the period. For the
nine months ended September 30, 2023, our operating loss totaled $1.6 million, which is an improvement of $5.9 million compared to the same period in 2022, which aligns with our initiative to drive profitable growth and manage spend through
2023.
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”):
|
• |
Merger Sub will merge with and into the Company, with the Company being the surviving company following the merger.
|
|
• |
Each issued and outstanding share of the Company 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
|
|
• |
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) options to purchase Company common stock, (iii) 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.
The Merger Agreement contains certain conditions to Closing, including the following:
|
• |
holders of 80% or more of the Company’s convertible notes with a maturity date occurring after the date of the Closing (the “Closing Date”), measured by number of shares of our common stock into
which such convertible notes may be converted, agreeing to convert their convertible notes into shares of common stock immediately prior to the Effective Time.
|
|
• |
holders of 80% or more of the Company’s warrants that would be outstanding on the Closing Date, measured by number of shares of our common stock subject to all such warrants in the aggregate, agreeing to
convert their warrants into shares of common stock immediately prior to the Effective Time.
|
|
• |
SEPA having, at the Closing, at least $12,000,000 in cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of any redemptions) and
the proceeds of any private placement in SEPA.
|
As of the date of this Quarterly Report on Form 10-Q, the holders of approximately 95% of our outstanding warrants covered by the preceding covenant and 100% of our
outstanding convertible notes covered by the preceding covenant have committed to exchange such warrants and convertible notes for an aggregate of 1,122,677,498 shares and 280,812,105 shares, respectively, of our common stock immediately prior
to the Closing.
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 income 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:
| |
•
|
Do not reflect every expenditure, future requirements for capital expenditures or contractual commitments.
|
| |
•
|
Do not reflect all changes in our working capital needs.
|
| |
•
|
Do not reflect interest expense, or the amount necessary to service our outstanding debt.
|
As presented in the 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).
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
(in thousands)
|
|
2023
|
|
|
2022
|
|
|
2023
|
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)/Income
|
|
$
|
(23,700
|
)
|
|
$
|
(1,139
|
)
|
|
$
|
(44,042
|
)
|
|
$
|
(4,596
|
)
|
|
Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,845
|
|
|
|
3,821
|
|
|
|
12,504
|
|
|
|
9,972
|
|
|
Depreciation and amortization
|
|
|
266
|
|
|
|
235
|
|
|
|
780
|
|
|
|
681
|
|
|
EBITDA
|
|
|
(19,589
|
)
|
|
|
2,917
|
|
|
|
(30,758
|
)
|
|
|
6,057
|
|
|
Non-GAAP Adjustments for Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
19,325
|
|
|
|
(5,252
|
)
|
|
|
29,943
|
|
|
|
(16,597
|
)
|
|
Other non-cash or one-time charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release of historical accrued employee compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,250
|
)
|
|
|
-
|
|
|
Shares for Services
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
|
|
888
|
|
|
Loss on issuance of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,434
|
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
86
|
|
|
|
-
|
|
|
|
297
|
|
|
Adjusted EBITDA
|
|
$
|
(264
|
)
|
|
$
|
(2,249
|
)
|
|
$
|
(1,841
|
)
|
|
$
|
(5,921
|
)
|
Results of Operations
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
(in Thousands)
|
|
2023
|
|
|
2022
|
|
|
$ |
|
|
|
%
|
|
|
|
2023
|
|
|
|
2022
|
|
|
$ |
|
|
|
%
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
4,953
|
|
|
$
|
4,166
|
|
|
$
|
787
|
|
|
|
19
|
%
|
|
$
|
13,404
|
|
|
$
|
11,242
|
|
|
$
|
2,162
|
|
|
|
19
|
%
|
|
Cost of Revenues
|
|
|
1,412
|
|
|
|
1,157
|
|
|
|
255
|
|
|
|
22
|
%
|
|
|
3,876
|
|
|
|
3,141
|
|
|
|
735
|
|
|
|
23
|
%
|
|
Gross Margin
|
|
|
3,541
|
|
|
|
3,009
|
|
|
|
532
|
|
|
|
18
|
%
|
|
|
9,528
|
|
|
|
8,101
|
|
|
|
1,427
|
|
|
|
18
|
%
|
|
Gross Margin Percentage
|
|
|
71
|
%
|
|
|
72
|
%
|
|
|
-1
|
%
|
|
|
|
|
|
|
71
|
%
|
|
|
72
|
%
|
|
|
-1
|
%
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,681
|
|
|
|
3,498
|
|
|
|
(817
|
)
|
|
|
-23
|
%
|
|
|
6,678
|
|
|
|
9,484
|
|
|
|
(2,806
|
)
|
|
|
-30
|
%
|
|
Selling and marketing
|
|
|
1,039
|
|
|
|
1,650
|
|
|
|
(611
|
)
|
|
|
-37
|
%
|
|
|
3,430
|
|
|
|
5,037
|
|
|
|
(1,607
|
)
|
|
|
-32
|
%
|
|
Research and development
|
|
|
165
|
|
|
|
157
|
|
|
|
8
|
|
|
|
5
|
%
|
|
|
436
|
|
|
|
494
|
|
|
|
(58
|
)
|
|
|
-12
|
%
|
|
Depreciation and amortization
|
|
|
187
|
|
|
|
189
|
|
|
|
(2
|
)
|
|
|
-1
|
%
|
|
|
563
|
|
|
|
575
|
|
|
|
(12
|
)
|
|
|
-2
|
%
|
|
Operating Loss
|
|
|
(531
|
)
|
|
|
(2,485
|
)
|
|
|
1,954
|
|
|
|
-79
|
%
|
|
|
(1,579
|
)
|
|
|
(7,489
|
)
|
|
|
5,910
|
|
|
|
-79
|
%
|
|
Other Income (Expense), net
|
|
|
(23,169
|
)
|
|
|
1,346
|
|
|
|
(24,515
|
)
|
|
nm
|
|
|
|
(42,463
|
)
|
|
|
2,893
|
|
|
|
(45,356
|
)
|
|
nm
|
|
|
Net Loss
|
|
$
|
(23,700
|
)
|
|
$
|
(1,139
|
)
|
|
|
(22,561
|
)
|
|
nm
|
|
|
$
|
(44,042
|
)
|
|
$
|
(4,596
|
)
|
|
|
(39,446
|
)
|
|
nm
|
|
Revenues and Gross Margin
Revenues for the three month-period ended September 30, 2023, were $5.0 million compared to $4.2 million for the same period of 2022, an increase of $0.8 million, or 19%. The increase was
primarily driven by the continued increased sales of our UltraMIST® system. The increase in revenues was due to an increase in the average selling price of our consumables and parts revenue of 9% year over year, and the remainder of the growth
in the number of consumables and systems sold year over year. Gross margin as a percentage of revenue decreased to 71% during the three months ended September 30, 2023, from 72% in the same period of 2022.
Revenues for the nine months ended September 30, 2023, were $13.4 million compared to $11.2 million for the same period of 2022, an increase of $2.2 million, or 19%. Gross margin as a
percentage of revenue decreased to 71% for the nine months ended September 30, 2023, from 72% in the same period in 2022.
General and Administrative Expenses
General and administrative expenses decreased $0.8 million or 23% for the three months ended September 30, 2023, compared with the same period of 2022. The decrease for the three months ended
September 30, 2023, was primarily due to cost savings activities. General and administrative expenses decreased $2.8 million or 30% for the nine months ended September 30, 2023, compared to the same period in 2022. This decrease was primarily
due to continued cost management activities and restructuring activities.
Selling and Marketing Expenses
Selling and marketing expenses decreased by $0.6 million or 37% for the three months ended September 30, 2023, as compared with the same period of 2022. Selling and marketing expenses decreased
by $1.6 million or 32% for the nine months ended September 30, 2023, as compared with the same period of 2022. The decreases were primarily due to a reduction in sales headcount during 2023 and other cost management activities.
Research and Development Expenses
Research and development expenses increased slightly or 5% for the three months ended September 30, 2023, as compared with the same period of 2022. Research and development expenses as a
percentage of revenue decreased from 4% during the three months ended September 30, 2022, to 3% for the same period in 2023. The decrease was primarily due to improved cost management in 2023.
Research and development expenses decreased $58 thousand or 12% for the nine months ended September 30, 2023, as compared with the same period of 2022. Research and development expenses as a
percentage of revenue decreased from 4% during the nine months ended September 30, 2022, to 3% for the same period in 2023. The decrease was primarily due to improved cost management in 2023.
Other (Expense)/Income, net
|
|
|
For the three months
ended September 30,
|
|
|
Change
|
|
|
For the nine months
ended September 30,
|
|
|
Change
|
|
|
|
|
2023
|
|
|
2022
|
|
|
$ |
|
|
|
%
|
|
|
|
2023
|
|
|
|
2022
|
|
|
$ |
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(3,845
|
)
|
|
$
|
(3,821
|
)
|
|
$
|
(24
|
)
|
|
|
1
|
%
|
|
$
|
(12,504
|
)
|
|
$
|
(9,972
|
)
|
|
$
|
(2,532
|
)
|
|
|
25
|
%
|
|
Change in fair value of derivatives
|
|
|
(19,325
|
)
|
|
|
5,252
|
|
|
|
(24,577
|
)
|
|
|
-468
|
%
|
|
|
(29,943
|
)
|
|
|
16,597
|
|
|
|
(46,540
|
)
|
|
|
-280
|
%
|
|
Loss on issuance of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
nm
|
|
|
|
-
|
|
|
|
(3,434
|
)
|
|
|
3,434
|
|
|
nm
|
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(86
|
)
|
|
|
86
|
|
|
nm
|
|
|
|
-
|
|
|
|
(297
|
)
|
|
|
297
|
|
|
nm
|
|
|
Other expense
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
nm
|
|
|
|
(16
|
)
|
|
|
(1
|
)
|
|
|
(15
|
)
|
|
nm
|
|
|
Other (expense)/income, net
|
|
$
|
(23,169
|
)
|
|
$
|
1,346
|
|
|
$
|
(24,515
|
)
|
|
|
-1821
|
%
|
|
$
|
(42,463
|
)
|
|
$
|
2,893
|
|
|
$
|
(45,356
|
)
|
|
|
-1568
|
%
|
Other expense, net increased by $24.5 million to $23.2 million for the three months ended September 30, 2023, as compared to the same period for 2022. Other expense, net increased $45.4 million
to $42.5 million for the nine months ended September 30, 2023, as compared to the same period for 2022. These increases were primarily due to increased convertible promissory notes and ABS Promissory Notes outstanding from the transactions
executed during 2022 and 2023 and continued losses recognized for the change in fair value of warrants and their embedded conversion liabilities.
Liquidity and Capital Resources
Since inception, we have incurred losses from operations each year. As of September 30, 2023, we had an accumulated deficit of $238.3 million. Historically, our
operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. The recurring losses from operations, the events of default on our notes payable, and
dependency upon future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q.
We expect to devote substantial resources for the commercialization of UltraMIST and PACE systems which will require additional capital resources to remain a going concern.
Management’s plans are to obtain additional capital in 2023 or early 2024 primarily through the closure of the Merger, which is expected to add approximately $12 million
of additional capital and funding to the Company. We could alternatively obtain 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. In addition, there can be no assurances that our plans to obtain additional capital will be successful on the
terms or timeline we expect, or at all. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms.
| |
|
For the nine months ended September 30,
|
|
|
(in Thousands)
|
|
2023
|
|
|
2022
|
|
|
Cash flows used by operating activities
|
|
$
|
(3,253
|
)
|
|
$
|
(13,176
|
)
|
|
Cash flows (used by) provided by investing activities
|
|
$
|
(156
|
)
|
|
$
|
1,022
|
|
|
Cash flows provided by financing activities
|
|
$
|
3,356
|
|
|
$
|
12,664
|
|
Cash used in operating activities during the nine months ended September 30, 2023, totaled $3.3 million as compared to $13.2 million in the previous period. This improvement in cash used in
operations aligns with our approach to drive profitable growth and manage costs.
Cash provided by financing activities of $3.4 million for the nine months ended September 30, 2023, was primarily due to new bridge notes payable and convertible lending activities to fund
operations. Cash provided by financing activities for the nine months ended September 30, 2022, consisted primarily of $5.0 million received from our senior lender.
Critical Accounting Policies and Estimates
We have used various accounting policies to prepare the condensed consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 4 to
the consolidated financial statements in Part II Item 8. “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 31, 2023.
The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon
relevant information available. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources.
The following accounting policies and 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 condensed 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 11 to the condensed consolidated financial statements.
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 valuations models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on
the condensed 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 material assumptions for the selected subjective inputs
have not changed for the reporting period, except for the expected volatility, which is estimated based on the actual volatility during the most recent historical period equal to the remaining life of the instruments.
Valuation of Intangible Assets and Goodwill
When we acquire a business, the assets acquired, and liabilities assumed are recorded at their respective fair values on the acquisition date. Goodwill is the excess of the purchase price
over the estimated fair value of net assets of acquired businesses. Intangible assets primarily include patents, trademarks, and customer relationships. Determining the fair value of intangible assets acquired as part of a business combination
requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, and the assessment of
the asset’s life cycle. The estimates could be impacted by legal, technical, regulatory, economic, and competitive risks. The test for impairment of goodwill requires us to make several estimates to determine the fair value of the goodwill. Our
estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our condensed consolidated balance sheets and the judgment required in determining fair value. We assess the impairment of
goodwill at the consolidated level annually. We also test definite-lived intangible assets for impairment when an event occurs, or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired. Our
assessment for goodwill and intangible assets impairment is based on future cash flows that require significant judgment with respect to future revenue and expense growth rates and other assumptions and estimates. We use estimates that are
consistent with the highest and best use of the assets based on a market participant’s view of the assets being evaluated. Actual results may differ from our estimates due to several factors including, among others, changes in competitive
conditions, regulatory changes, results of clinical trials, and changes in worldwide economic conditions.
Segment and Geographic Information
We have determined that we have one operating segment. Our revenues are generated from sales primarily in the United States. International sales include sales in Europe, Canada, the Middle
East, Central America, South America, Asia, and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are in the United States.
Effects of Inflation
Our assets are, to an extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation, which has increased, affects expenses such as employee
compensation, office space leasing costs and research and development charges, which may not be readily recoverable. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our
consolidated financial condition and results of operations.
| Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required under this item.
| Item 4. |
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 September 30, 2023. 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 September 30, 2023. Our disclosure controls and procedures were not effective because of the “material weakness” described below.
As of September 30, 2023, the Company has still identified the following material weaknesses:
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1. |
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.
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|
2. |
A lack of internal resources to analyze and properly apply U.S. GAAP to accounting for financial instruments included in service agreements with select vendors.
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|
3. |
The Company has failed to design and implement controls around all accounting and IT processes and procedures and, as such, we believe that all its accounting and IT processes and procedures need to be
re-designed and tested for operating effectiveness.
|
As a result, management concluded that its internal control over reporting was not effective as of September 30, 2023.
Remediation Plan
We are working with an external vendor to properly document our current internal control policies and procedures to provide the framework for increased effectiveness to test internal controls going forward. We are
also adding automated and manual controls into and over the Company’s enterprise resource planning (“ERP”) system to ensure that order to cash controls are implemented to mitigate the risk in customer creation, pricing, and accuracy of billing.
We will continue to work with our external vendor to remediate the weaknesses noted above.
We are also working with an outside vendor to improve our IT general controls over our ERP system and set up a proper framework for IT general controls to be executed with the objective to remediate the weaknesses
regarding internal controls and provide the framework for testing going forward.
In 2022, we hired internal resources with the proper expertise and experience to apply U.S. GAAP. With the passage of time and implementation of additional policies, procedures, and controls, we believe the
framework for a proper internal control environment will begin to remediate our material weaknesses.
While the above actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal control over a sustained
period, we are committed to continuous improvement and will continue to diligently review our internal control over financial reporting. The material weaknesses will not be considered remediated until management completes the design and
implementation of the measures described above, until the controls operate for a sufficient period, and until management has concluded, through testing, that the controls are effective.
There is no assurance that the measures described above will be sufficient to remediate the previously identified material weaknesses and significant deficiencies.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023, that materially affect, or are reasonably likely to
materially affect, our internal control over financial reporting, except as disclosed in “Remediation Plan” above.
PART II — OTHER INFORMATION
| Item 1. |
LEGAL PROCEEDINGS.
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For information regarding legal proceedings at September 30, 2023, see Note 13 to the condensed consolidated financial statements, which information is incorporated herein by reference.
Except as set forth below, there have been no material changes from our risk factors as previously reported in Part I, Item 1A “Risk Factors” in our 2022 Annual Report. The following new risk factors are added:
Risks Related to the Business Combination
The Business Combination is subject to conditions, including certain conditions that may not be satisfied on a timely basis, if at all.
Unless waived by the parties to the Merger Agreement, and subject to applicable law, the consummation of the Business Combination is subject to several conditions set forth in the Merger Agreement. For more
information about conditions for the consummation of the Business Combination, see Item 2 – Management’s discussion and analysis and analysis of financial condition and results of operations.
The Merger Agreement includes a Minimum Cash Condition as a Condition to the consummation of the Merger, which may make it more difficult for SEP Acquisition Corp.(“SEPA”) and the Company to complete the Business Combination as contemplated.
The Merger Agreement provides that the Company’s obligation to consummate the Business Combination is conditioned on, among other things, that as of the Closing, SEPA has at least $12,000,000 (“Minimum Cash
Condition Amount”) resulting from (i) proceeds that have not been redeemed in the Redemption and (ii) proceeds of the PIPE Investment (the “Minimum Cash Condition”).
Assuming SEPA Stockholders redeem the maximum amount (622,747 shares of Class A Common Stock), then SEPA will need to obtain at least $5,184,880 (or 518,488 shares of Class A Common Stock at a price of $10.00 per
share) in the PIPE Investment in order to satisfy the Minimum Cash Condition. Assuming 50% redemptions of Class A Common Stock, then SEPA will need to receive at least $2,071,140 (or 207,114 shares of Class A Common Stock at a price of $10.00 per
share) in the PIPE Investment in order to satisfy the Minimum Cash Condition. Assuming 25% redemptions of Class A Common Stock, then SEPA will need to receive at least $514,280 (or 51,428 shares of Class A Common Stock at a price of $10.00 per
share) in the PIPE Investment in order to satisfy the Minimum Cash Condition. Assuming 10% redemptions of Class A Common Stock or no redemptions of Class A Common Stock, then SEPA will not need to raise any funds in the PIPE Investment in order
to satisfy the Minimum Cash Condition.
SEPA expects to enter into subscription agreements in connection with the PIPE Investment in order to raise additional capital in an amount sufficient to ensure the Minimum Cash Condition is satisfied at Closing.
However, as of the date of this filing, no commitments have been given for the proposed financing from the PIPE Investment, and there is no assurance that SEPA will enter into subscriptions for the PIPE Investment. The actual amount that SEPA
raises in the PIPE Investment will depend on the number of redemptions of Class A Common Stock, market conditions, and other factors.
This condition is for the sole benefit of the Company. If such condition is not met, and such condition is not or cannot be waived under the terms of the Merger Agreement, then the Merger Agreement could terminate,
and the proposed Business Combination may not be consummated.
If such condition is waived and the Business Combination is consummated with less than the Minimum Cash Condition Amount in the Trust Account, the cash held by the Combined Company (including the Company) in the
aggregate, after the Closing may not be sufficient to allow the Combined Company to operate and pay Combined Company bills as they become due. Any such event in the future may negatively impact the analysis regarding the Combined Company’s
ability to continue as a going concern at such time.
The ability of SEPA Stockholders to exercise Redemption Rights with respect to Class A Common Stock may prevent SEPA from completing the Business Combination or maximizing its
capital structure.
SEPA does not know how many SEPA Stockholders will ultimately exercise their Redemption Rights in connection with the Business Combination. As such, the Business Combination is structured based on SEPA’s
expectations (and those of other parties to the Merger Agreement) as to the amount of funds available in the Trust Account after giving effect to any Redemptions of Class A Common Stock.
It is a condition to the Company’s obligation to close the Business Combination, which may be waived by the Company, that, upon the Closing, SEPA have cash and cash equivalents, including funds remaining in the
Trust Account (after giving effect to the completion and payment of the Redemption) and the proceeds of any PIPE Investment, after giving effect to the payment of SEPA’s unpaid transaction expenses and liabilities, of an amount equal to at least
$12,000,000. If too many SEPA Stockholders elect to redeem their shares or the Company does not waive the condition described in the preceding sentence as a condition to the Closing and a sufficient number of PIPE Investors default upon
obligations pursuant to PIPE Subscription Agreements, the proceeds from the PIPE Investment alone may be insufficient to complete the Business Combination and additional third-party financing may not be available to SEPA.
There can be no assurance that the shares of the Combined Company’s Class A Common Stock that will be issued in connection with the Business Combination will be approved for
listing on the Nasdaq following the Closing, or that the Combined Company will be able to comply with the continued listing rules of Nasdaq.
In connection with the Business Combination and as a condition to the Company’s obligations to complete the Business Combination, the Combined Company will be required to demonstrate compliance with Nasdaq’s
initial listing requirements, which generally require, among other criteria, a per share price of at least $4.00 per share and a market value of at least $50,000,000. In addition to the listing requirements for the Combined Company’s Class A
Common Stock, Nasdaq imposes listing standards on warrants. The Company cannot assure you that the Combined Company will be able to meet those initial listing requirements, in which case the Company will not be obligated to complete the Business
Combination.
In order to continue the listing of its securities on the Nasdaq, SEPA prior to the Business Combination, and the Combined Company following the consummation of the Business Combination, must maintain certain
financial, share price, and distribution levels. Generally, a listed company must maintain a minimum market capitalization (generally $50,000,000) and a minimum number of holders of its securities (currently 300 public shareholders). Even if the
Combined Company’s Class A Common Stock is approved for listing on the Nasdaq, the Combined Company may not meet the Nasdaq continued listing requirements following the Business Combination.
The announcement of the proposed Business Combination could disrupt SANUWAVE’s relationships with its customers, suppliers, business partners and others, as well as its
operating results and business generally.
Whether or not the Business Combination and related transactions are ultimately consummated, as a result of uncertainty related to the proposed transactions, risks relating to the impact of the announcement of the
Business Combination on the Company’s business include the following:
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• |
its employees may experience uncertainty about their future roles, which might adversely affect the Combined Company’s ability to retain and hire key personnel and other employees;
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|
• |
customers, suppliers, business partners and other parties with which the Company maintains business relationships may experience uncertainty about its future and seek alternative relationships with third parties, seek to alter their
business relationships with the Company or fail to extend an existing relationship with the Company; and
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|
• |
the Company continues to expand and will continue to expend significant costs, fees and expenses for professional services and transaction costs in connection with the proposed Business Combination.
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If any of the aforementioned risks were to materialize, they could lead to significant costs which may impact the Company and, in the future, the Combined Company’s results of operations and cash available to fund
its business.
The Company will be subject to contractual restrictions while the Business Combination is pending.
The Merger Agreement restricts the Company from making certain expenditures and taking other specified actions without the consent of SEPA until the Business Combination occurs. These restrictions may prevent the
Company from pursuing attractive business opportunities that may arise prior to the completion of the Business Combination.
SEPA and the Company will incur significant transaction and transition costs in connection with the Business Combination.
SEPA and the Company have both incurred and expect to incur significant, non-recurring costs in connection with consummating the Business Combination and operating as a public company following the consummation of
the Business Combination. SEPA and the Company may also incur additional costs to retain key employees. Certain transaction costs incurred in connection with the Merger Agreement (including the Business Combination), including all legal,
accounting, consulting, investment banking and other fees, expenses, and costs, will be paid by the Combined Company following the Closing.
| Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
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None.
| Item 3. |
DEFAULTS UPON SENIOR SECURITIES.
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Not applicable.
| Item 4. |
MINE SAFETY DISCLOSURES.
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Not applicable.
| Item 5. |
OTHER INFORMATION.
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During the three months ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated any contract, instruction or written
plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1 trading arrangement (as defined in the SEC’s rules).
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Exhibit No.
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Description
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Agreement and Plan of Merger, dated as of August 23, 2023, by and among SEP Acquisition Corp., SEP Acquisition Holdings Inc., and SANUWAVE Health, Inc. (Incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on
August 23, 2023).
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Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Form 10-SB filed with the SEC on December 18, 2007).
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Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to Appendix A to the Definitive Schedule 14C filed with the SEC on October 16, 2009).
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Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to Exhibit A to the Definitive Schedule 14C filed with the SEC on April 16, 2012).
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Bylaws (Incorporated by reference to Exhibit 3.02 to the Form 10-SB filed with the SEC on December 18, 2007).
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Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of the Company dated March 14, 2014 (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on March 18,
2014).
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Certificate of Amendment to the Articles of Incorporation, dated September 8, 2015 (Incorporated by reference to Exhibit 3.6 to the Form 10-K filed with the SEC on March 30, 2016).
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Preferred Stock of the Company dated January 12, 2016 (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on January 19, 2016).
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Preferred Stock of the Company dated January 31, 2020 (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on February 6, 2020).
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Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock of the Company dated January 31, 2020 (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on February 6,
2020).
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Certificate of Designation of Series D Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on May 20, 2020).
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Certificate of Amendment of the Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on January 5, 2021).
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Certificate of Amendment of the Articles of Incorporation, dated January 31, 2023 (Incorporated by reference to Exhibit 3.12 to the Form S-1/A filed with the SEC on January 31, 2023).
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Form of Asset-Backed Secured Promissory Note issued to certain purchasers, dated July 21, 2023 (Incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on July 26, 2023).
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Security Agreement, dated July 21, 2023, by and among the Company and certain lenders (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on July 26, 2023).
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Subordination Agreement, dated July 21, 2023, by and among the Company, NH Expansion Credit Fund Holdings LP and certain creditors (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on July 26, 2023).
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Side Letter, dated July 21, 2023, by and among the Company and certain purchasers (Incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the SEC on July 26, 2023).
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Offer Letter, dated July 20, 2023, by and between the Company and Andrew Walko (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on July 31, 2023).
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Non-Compete and Confidentiality Agreement, dated July 31, 2023, by and between the Company and Andrew Walko (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on July 31, 2023).
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Form of Voting Agreement, dated as of August 23, 2023, by and among SEP Acquisition Corp., SANUWAVE Health, Inc., and the stockholder of SANUWAVE Health, Inc. party thereto (Incorporated by reference to Exhibit 10.1 to the Form 8-K
filed with the SEC on August 23, 2023).
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Sponsor Voting Agreement, dated as of August 23, 2023, by and among Mercury Sponsor Group I LLC, SEP Acquisition Corp., and SANUWAVE Health, Inc. (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on August
23, 2023).
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Form of Lock-Up Agreement, dated as of August 23, 2023, by and between SEP Acquisition Corp. and the stockholder of SANUWAVE Health, Inc. party
thereto (Incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the SEC on August 23, 2023). |
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Section 1350 Certification of the Principal Executive Officer.
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Section 1350 Certification of the Chief Financial Officer.
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101.INS*
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XBRL Instance.
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101.SCH*
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XBRL Taxonomy Extension Schema.
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101.CAL*
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XBRL Taxonomy Extension Calculation.
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101.DEF*
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XBRL Taxonomy Extension Definition.
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101.LAB*
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XBRL Taxonomy Extension Labels.
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101.PRE*
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XBRL Taxonomy Extension Presentation.
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104
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SANUWAVE HEALTH, INC.
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Dated: November 9, 2023
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By:
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/s/ Morgan Frank
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Morgan Frank
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Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
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Dated: November 9, 2023
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By:
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/s/ Toni Rinow
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Toni Rinow
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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28