Sanuwave Health - Q2 2024

Transcript

Operator (participant)

Please stand by, your program is about to begin. Good day, everyone, and welcome to SANUWAVE Announces Highest Quarterly Revenues in Company History, Q2 2024 Results. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask questions by pressing the star and one on your telephone keypad. You may withdraw your question by pressing star two. Please note this call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Morgan Frank, CEO.

Morgan Frank (CEO)

Hi. Thank you, and good morning. Welcome to SANUWAVE's second quarter 2024 earnings call. As many of you probably noticed, our Form 10-Q was filed with the SEC Monday night. Our earnings release was issued this morning, and our updated presentation was made available on the website in our investor section. Please refer to that during this presentation. Joining me on the call is Peter Sorensen, our CFO, and after the call, we will open up for Q&A. Before we get going, let me go through the obligatory forward-looking statements disclaimer. This call may contain forward-looking statements such as statements regarding to future financial results, production expectations and constraints, plans for future business development activities.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the company's ability to control. Description of these risks and uncertainties and other factors that could affect our financial results is included in our SEC filings. Actual results may differ materially from those projected in the forward-looking statements, and the company undertakes no obligation to update any forward-looking statements. As a reminder, our discussion today will include non-GAAP numbers. Reconciliations between our GAAP and non-GAAP results can be found in our recently filed 10-Q for the quarter ended June 30, 2024.

Okay, that said, so last conference call, you know, we spoke about the higher growth rates in Q1 being sustainable going forward, and that we believe that we can get our gross margins to stabilize in the mid-70s in the near term. We are obviously very pleased to have hit both of these targets once more, putting up revenue growth figures north of 50%, 53, to be precise, for Q2, 2024, and margins of seventy, gross margins of 73%, despite some costs associated with standing up our new, contract manufacturers.

So hitting record quarterly level revenue levels for the company, despite the first half generally being seasonally softer than the second half, was a really strong performance by the company, and doing this while also achieving operating and Adjusted EBITDA positivity, despite some additional costs in the quarter around the merger, which we terminated, and the manufacturing costs that, I just mentioned, I think really starts to drive home the potential for our business and for this business model. We are gonna continue our mantra of rapid, profitable growth as our guiding principle, and we're extremely excited about the traction and the success that we're seeing in our markets. And this has led us to increase our quarterly revenue growth guidance from 45%-55% in each of Q1 and Q2, and raise that up to 65%-75% versus prior year for Q3 2024.

We've been adding to our sales force and to our commercial operations team. We've been stepping up our manufacturing capacity as well, as we prepare for what we aim to make a breakout second half for SANUWAVE. UltraMIST systems sold in the quarter were up 47% from Q2 2023, and we ended the quarter with 788 active systems in the field. Revenue from the UltraMIST product line in Q2 2024 increased 62% year-on-year, and consumable applicators revenue, the razor blade to our razor, increased 67% in Q2 2024 versus Q2 2023, and 15% sequentially from our prior record quarter of Q1 2024. Both categories showed revenue growth in excess of unit growth due to strong pricing and applicators continuing to benefit from the larger user base that we have in the field.

We're particularly pleased with the linearity we've been seeing in applicator sales, which can be seen on page 6 of the Q2 business update deck on our website. Applicator revenues are roughly 65% of total revenues in Q2, which is, I mean, honestly, still a little bit higher than we've been aiming for. Our aim is to get this number down into the 55% area. Obviously not because we expect applicator sales to wane, but because we are looking to sell more systems and to grow our end-user base, setting the stage for even more future growth. We believe this process is well underway, and as of the time of this call, we've already sold more systems in Q3 2024 than we sold in all of Q3 last year.

So we continue to focus on building a robust pipeline of large and mid-sized customers to serve the significant unmet needs in the wound care space. And our initiatives to more deeply engage, particularly with skilled nursing, long-term care, and the mobile wound systems that are focused on these markets, are starting to bear some real fruit, and to lead not just to more customers and customer uptake, but are really starting to help restructure and redefine how providers think about patients, complex wounds, or even pressure injuries and bedsores. And we really believe this more holistic engagement is going to lead to a better business for us and for improved outcomes for our patients as we continue to facilitate these care-to-the-edge philosophies of treating patients where they are, and to do so early, often, and effectively.

I'm now going to turn the call over to Peter Sorensen, our CFO, to walk you through the financial results.

Peter Sorensen (CFO)

Thank you, Morgan. Indeed, it was an exciting quarter for SANUWAVE as we achieved all-time record high quarterly revenues. We added over $8 million to our stockholders' equity through increasing our bottom line and paying off long-standing debt liabilities, and we continue to execute on our goal of rapid, profitable growth. Revenue for the three months ended June 30, 2024, totaled $7.2 million, an increase of 53% as compared to $4.7 million for the same period of 2023. This growth is within our previous guidance range of 45%-55%, as previously discussed by Morgan. Gross margin as a percentage of revenue amounted to 73% for the three months ended June 30, 2024, versus 74% for the same period last year.

For the three months ended June 30, 2024, operating income totaled $2 million, which is an improvement of $1.1 million compared to the same period last year, which aligns with our continued initiative to drive towards profitable growth and manage spend effectively. Operating expenses for the three months ended June 30, 2024, amounted to $3.2 million, compared to $2.5 million for the three months ended June 30, 2023, an increase of $706,000. However, operating expenses as a percentage of revenue dropped to 62% in Q2 2024 versus 73% in Q2 2023, as well as there is a one-time adjustment in Q2 2023 to release historical accruals for $1.3 million.

Net income for the three months ended June 30, 2024, was $6.6 million, compared to a net loss of $7.3 million for the same period in 2023. The increase in net income was primarily due to a change in the fair value of derivative liabilities, a gain on extinguishment of debt, and an increase in operating income. Adjusted EBITDA for the three months ended June 30, 2024, was $1.5 million versus $171,000 for the same period last year, an improvement of $1.3 million. SANUWAVE continues to execute its financial strategy to improve operational profitability and manage operating expenses. Total current assets amounted to $8.7 million as of June 30, 2024, versus $9.8 million as of December 31, 2023.

Cash and cash equivalents totaled $2.5 million as of June 30, 2024. We thank you for the continuous support of SANUWAVE, and I'll now transfer the call back to Morgan.

Morgan Frank (CEO)

Okay. Thanks, Peter. So on to other matters. The company terminated its merger with SEPA during the quarter. We did this because there appeared to be no path to acquiring a national securities exchange listing for the post-merger entity. So the company deemed that it was no longer deal in the best interest of shareholders. The good news is that, you know, our economics and business model have improved a great deal over the last 12 months, and we now find ourselves in a position of having sufficient capital to run the business and move forward without the dilution or the complexity of de-SPAC merger. Since this termination, we've been taking steps to simplify and improve our capital structure. So we paid off a piece of non-compliant debt at a significant discount.

We're also seeking to execute a reverse stock split to revert, you know, to reduce our share count, and we're going to use this reverse split as a trigger for a note and warrant exchange similar to the one, or really identical to the one we were using, or that we had proposed under the SEPA merger, and that will really simplify our cap stack and improve our shareholders' equity. At this time, we have received shareholder approval for the reverse split, and we have agreed. We've received agreement on the exchange from 100% of outstanding note and warrant holders within the future promissory note classes issued between August of 2022 and present.

So we're currently assessing the split ratios and the best timing on this plan, but I think it's reasonable to assume this will occur in the near future. I know that reverse splits have something of a bad history, but this is generally because they tend to occur at companies whose fundamentals are poor and deteriorating, and that's just simply not the case here. We have spoken in the past about 2024 being the breakout year for SANUWAVE and having all the pieces in place that we need to execute. We are more convinced than ever that this can be so, and that simplifying our cap structure, reducing our share count, and getting our stock price up to a respectable integer is the next step in getting this company to a point where we can be valued for our business and not our cap structure.

So, I mean, we're building for the long term here, and our growth is accelerating. This team is keen, hungry for more, and really looking to go make it happen. So I just want to thank everyone at SANUWAVE for all of their hard work and just the blood, sweat, and tears of getting us here and taking us forward. None of this happens by itself, and it's been an amazing thing to be a part of, and by all indications, the best is yet to come. So, you know, with that, I think that's the end of our prepared comments. So why don't I turn this back over to the operator, and we can field questions.

Operator (participant)

And at this time, if you would like to ask a question, please press star and one on your telephone keypad. You may withdraw your question by pressing star two. Once again, to ask a question, please press star and one on your telephone keypad. One moment while we queue. I will take our first question from Adam Gazzola, private investor. Please go ahead.

Speaker 3

Hi, good morning. Thank you for all your hard work.

Morgan Frank (CEO)

Good morning.

Speaker 3

I have a number of questions. My first, if I can politely ask, as we chat percentages, that's all quite interesting. Can we talk actual number and acquisition units or new customers and what each unit per se, say, is the UltraMIST or the separation of SANUWAVE, and how each of those units directly impact the bottom line, cost to acquisition, cost to implement, and then perhaps chat how these mechanisms are now returning back to the company? That's my first question. Please, and thank you.

Morgan Frank (CEO)

I mean, in terms of the, so I guess to start off with, you know, as we sell a system, you know, we have not been releasing the exact ASPs we're getting on a quarterly basis. The, you know, the list price on an UltraMIST system is about $35,000. So, you know, then we're not capturing full list price, but we're capturing a great deal more of it than we once did. You know, we ultimately view this as sort of a razor, razor blade model, where, you know, the goal is to get the system out in the hands of the customer and, you know, generate revenue from individual applicator sales associated with each procedure that's performed.

You know, we track this internally and refer to it as patch rate, which is, you know, how many 12, you know, how many cases of 12 applicators does a system use per week in the field? In terms of systems, so, you know, that's a number that obviously we manage to very closely, but also haven't shared with the street. I mean, what we can, you know, obviously, what we can share is that the amount of consumables revenue has been going up very significantly across quarters and has been sort of leading the... You know, it's the leading source of the company's revenue and has been leading a lot of the company's growth.

So in terms of what does it cost to get a system out into the field, you know, we have two different sales channels, right? We use... Well, I guess really three. We have direct sales force, right? And I mean, we began this year at only about 2 reps. We've ramped that up to more like 9, right about now. You know, we also use a series of distributors on a 1099 basis. These distributors are not compensated unless they place units, and if so, are paid, you know, commissions on the systems that they sell.

And, you know, the last channel being our internal sort of, you know, non-commissioned commercial sales operation that works both like sort of a business development and an internal sales force. And so, when you break it all down, I don't know that I have a percentage for you on what we're spending on that customer cost of acquisition across everything. Peter, do you have a thought on that?

Peter Sorensen (CFO)

Yeah, I think it really varies across channels. So, I don't have an exact estimate per channel.

Morgan Frank (CEO)

I think, you know, something in the 10%-15% range is probably, you know, of overall sales, a pretty reasonable range to consider.

Peter Sorensen (CFO)

Yes, for sure.

Speaker 3

Okay. Thank you.

Morgan Frank (CEO)

I'm sorry, you had several questions. Was there anything I didn't get to?

Speaker 3

Yeah. So, so that you, you began to touch on, on one of the points, and I, and I won't be intrusive or, or hold you accountable to unit numbers if that's something you haven't shared with the street yet. So you, you mentioned sales and, and Salesforce, and, one of the things that I happen to notice traffic on your website myself, is that I believe your website is not fully optimized. Where if someone is going to your website and clicking about us, you can track and monitor data, and I'm not talking through Google, I'm talking through your own website. You can find out who, and pretty much right down to a location, an IP address, and even potentially a business address, and generate a sales lead. That's something that is very prevalent in today's society, and I, I notice...

I don't know how you're obtaining your customers. I do know it's a captive audience. There are only so many people involved in wound care. I know that you guys market and go to all the events. I've tried to make a few when Mr. Richardson was hosting them. I wasn't able to make them. I believe in the company. How is it that you're generating more sales in this environment? I notice that a publicist sometimes in the right direction can help generate the needed attention, and given its venue where the stock trades. There is very little attention given to the story. If there was even an ounce of attention paid to the story, we wouldn't be trading at a penny and a half. Can you comment on that?

Morgan Frank (CEO)

Well, I think this is part of the reason why we're interested in cleaning up the cap structure, right? I think that, you know, we've been seeking first to get the company's fundamentals together. Now that we have them together and have a story, the fundamentals will ultimately out, so long as you can get yourself into a position where the company's being valued for its business rather than its cap structure. You know, with the current note warrant structure, it becomes difficult to even assess what the company's share count is and to realize what it... realize how low its market cap actually is.

There are also far fewer investors, I think, that will look at a stock valued in this range, and it's part of why we want to get our stock price up to something that looks like a respectable integer. I mean, you know, as you probably know, I have 25 years of, or I guess really now 30 years of cap markets experience. So, I have thoughts on this matter. And I think you're gonna be seeing a lot more outreach toward the street once we have a, you know, once we have a stock that more people would be comfortable looking at.

Speaker 3

Right, about $5, because the longs are restricted, a number of accounts, retail, so many—there are so many restrictions to access a Pink Sheet bulletin board, or now QQQ. So yeah, agreed. Okay. Thank you for your time, gentlemen.

Morgan Frank (CEO)

Thank you.

Operator (participant)

And once again, that is star and one, if you would like to join the queue. We'll pause a moment to allow any further questions to queue. And once again, that is star and one. With no further questions at this time. I will turn the call back to management for closing or additional remarks.

Morgan Frank (CEO)

Great. Thank you very much, and thank you everyone for joining us, and we will speak to you next quarter.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may disconnect at any time.