Sanuwave Health - Earnings Call - Q3 2022

Transcript

Speaker 0

and welcome to Shinywave Business Update Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Kevin Richardson, CEO. Thank you. You may begin.

Speaker 1

Thank you, Zico. Welcome to SANUWAVE's third quarter earnings call. Ten Q was filed with the SEC last night. Our earnings release was issued last night as well. And our quarterly update presentation, which we will be using as a guide for this call, is made available on our website in the Investors section.

Joining me on the call for their first times are Morgan Frank, our Chairman and Tony Reno, our CFO. After the presentation, we will open the call to Q and A. With regards to the forward looking statement, I would ask that you look to the presentation on the website to cover the forward looking statements. The third quarter was an important one for SANUWAVE on many levels in terms of execution on our plan to achieve profitable growth at the company. Despite running at 120 percent of production capacity, the company was able to increase revenues 12% versus a year ago, while also reducing corporate operating expenses.

We continued our cost cutting programs and while one time expenses of $500,000 related to consulting and severance occurred in the quarter, Q3 will be the last such quarter of such expenses and operating expense savings will be visible in Q4 and going forward as we consolidate our manufacturing and shift from using outside consultants to our staff in Eden Prairie. The move to Eden Prairie and getting the MD SAP certification for manufacturing has also allowed us to ship product internationally for the first time this year. We also completed an equity offering in August that has allowed the significant investment in additional manufacturing capacity needed to support current demand levels. These accomplishments have been a part of a long work in progress to create the kinds of capacity and capability of SANUWAVE to address the opportunities currently emerging in the wound care market. It has taken a lot of work, a lot of consultants, and a fair bit of cash to accomplish this, but as of now, we're extremely pleased to be able to say that the work is behind us and we can now focus on achieving the growth and profitability that we see in front of us.

Through a combination of revenue growth and cost reduction, the company turned the corner and became EBITDA positive for the first time in history during the month of October and we anticipate remaining so going forward. We will elaborate more on this when we update guidance later in the call. Let me turn the call over to Toni Reno to walk through the numbers. She will pass it back to me to review more of the update slides. Then Morgan, our Chairman, will speak, and I will conclude with our near term outlook.

Toni?

Speaker 2

Thank you, Kevin. Q3 revenues ending 09/30/2022, amount to $4,200,000 an increase of 12% over the same period last year. For the nine months ending 09/30/2022, total revenues amounted to $11,200,000 an increase of 28.5% year over year. Gross margins improved year over year, reaching 85% in Q3 versus 58% a year ago. These gross margins were higher than normal during the quarter due to an inventory adjustment, and we expect them to converge on our 75% guidance going forward.

For the nine month period ending September 30, gross margin amounted to 77% versus the same period last year at 58%, so an improvement of 19 percentage points. Q3 was the end of the transition quarters of SANUREZ additional expenses from systems implementations and catching up on financials and audits. Despite this, the $5,400,000 in operating expense for Q3 was down 2% from the prior year and operating expense for the first nine months of 2022 was down 18% versus prior year. SANURAZ continues to execute on its financial strategy to improve profitability and manage operating expenses, which will be significantly lower in Q4 than in Q3. The progress on the strategic execution to reach profitability is also shown through improvements in EBITDA performance.

EBITDA in the three month period ending September 30, to minus $1,650,000 an improvement of 48% over the same period last year. This is in furtherance of our strategy to reach profitability, starting with expectations of reaching breakeven next quarter. Total current assets amounted $6,900,000 as of September 30, an improvement of 56% over 12/31/2021. Cash was $1,100,000 For the recently announced financing, liquidity continues to improve. We thank you for your continued support of SANUWAVE, and I'm transferring back to Kevin.

Kevin?

Speaker 1

Thanks, Tony. For those following along in the slide deck, we are now on Page six. We spent much of the third quarter addressing the capacity issues with our suppliers. We are fortunate to have great partners, but it still takes time to prime supply chains, set up and qualify lines and begin making product. This is a key corporate priority and we expect to see the first new product from these expansions in the next couple of weeks.

We currently have demand for over 98 systems representing over $3,000,000 in revenue and that would generate on the order of $3,000,000 in recurring revenue from consumable sales that's still in the backlog. And while it's nice to have that visibility of that backlog, it would be nicer to have the revenue and it is our corporate goal to both expand sales and drive backlog down as we begin to get enough product to do so. If we go to Page seven, the consumables business performed well in the quarter as well as initiatives to target higher use rate customers and encourage existing customers to increase their usage rates started to show impact and effect. The company went from five twenty seven active accounts in Q2 to five ninety in Q3 through the placement of 50 new systems and reengagement of 13 old ones. Applicator use per active customer, a sort of same store sales number for the company rose 4.1% from 25.3% to 26.3% from Q2 to Q3 with the majority of gains coming from the top 100 accounts as our most active customers grow.

Helping our customers adopt best practices appears to be a fruitful project for us and one we plan to continue to emphasize. Before I get into guidance for Q4 and the year, I would like to turn the call over to Morgan Frank, our Chairman. Morgan?

Speaker 3

Thanks, Kevin. It's good to be here. So, for those who don't know me, I'm Morgan Frank. I joined the company as chairman back in August. This is a very exciting time in the wound care space and for SANUWAVE in particular.

There are major shifts underway in orientation as payers and providers are making a transition to more evidence based medicine and, you know, looking for improved clinical outcomes. This plays very much to the strengths in SANUWAVE. It was the sort of data that led to Ultramist becoming the standard of care at places like the Mayo Clinic ICU has also led to strong increases in reimbursement rates. Reimbursement for SANUWAVE's products have risen from $80 a procedure a few years ago to between 420 and $500 today. And Ultramist is the only product on the market or that we know of in development that qualifies to use this CPT code.

And so, you know, this this provides an extensive reimbursement mode around the product. You know, at the same time in this market, payers have been really deemphasizing competing treatment modalities like skin substitutes. And reimbursement for these treatments is being dramatically reduced often by as much as 80 to 90%, and this is creating a real surge in demand. And this is what's really starting to drive a lot of backlog as are some new use cases for Ultramist, particularly mobile wound care for both home treatment and, you know, especially for treatment on-site in nursing homes and in assisted living facilities. And this is providing to be a large opportunity and a huge source of demand for the company.

The purpose of the round of capital that we raised in August was to increase our manufacturing capacity to meet this. You know, we've been running well over a % of capacity, and as anybody who's ever tried to do that can tell you, it's not especially fun. So, you know, the company is currently increasing console manufacturing capacity from 240 to 600 a year and its applicator manufacturing capacity from 5,400 a week to 24,000. This increased capacity should begin to become available late November, early December and then ramp up thereafter. You were expecting Q1 to be the first quarter in at least a year in which the company was not highly capacity constrained in terms of ability to meet sales demand.

And we're really looking forward to being able to engage with a number of larger customers whose potential order sizes have previously really kept them outside our reach. Like, when the scariest thing a customer can do is say yes because you can't fill the order, then there's not a whole lot you can do with them. As more product becomes available to the company, we plan to expand our sales force, and we've been having great success in attracting sales talent out of the skin substitute space. You know, the salespeople there are responding to changes in market demand and the reimbursement predominantly by asking if they can come work for us. And so, you know, a lot of the top wound care people who took the skin substitutes category from a hundred million to 4,000,000,000 in five years are looking to make a change.

And, you know, they know this space. They know the call points. They know the doctors. You know, they're also concentrated in the geographies where skin substitute reimbursement is declining most rapidly. And, of course, you know, these are the markets that we are most interested in addressing first.

So this turns out to be a pretty fortuitous alignment for SANUWAVE. To take full advantage of this opportunity to hire and to hire people and also to fund more product build and carry more inventory, the company just completed a small round of financing in November at terms consistent with the August raise. This added approximately $2,000,000 to the balance sheet predominantly from existing investors. And, you know, we're just trying to avoid our ability to you know, we're we're trying to avoid constraining our ability to produce and to sell product. You know, the path for the next twelve months is gonna be finding the balance between production, sales, and financial performance with an emphasis on rapid but profitable growth.

And so to walk you through that guidance into more specificity, I'd like to give a call back to Kevin.

Speaker 1

Great. Thank you, Morgan. For those following along, Slide eight is where we're at now. We have the demand to exceed our current guidance. That is not the issue.

The issue is when will we have the supply. Our team is working closely with the suppliers to ensure we can get access to as much product as we can as quickly as possible. Revenue in the quarter will be determined by product availability and exactly how that plays out is still somewhat difficult to definitively establish. If all goes well, the company believes that it can achieve $18,000,000 for the year. But as initial supply ramps are difficult to predict, we are adjusting annual guidance to a range of 17,000,000 to 18 which implies Q4 of 5,700,000.0 to $6,700,000 growth of 35% to 55% from Q4 a year ago.

It is then our hope that Q1 and Q2 next year will provide sufficient supply to both meet new demand and work down backlog. Our cost cutting and margin improvement programs that have been underway throughout 2022 have occluded but occluded by onetime expenses will become plainly visible in Q4. And as can be seen from the slides, we are updating our guidance on breakeven revenues to 1,800,000.0 versus $2,100,000 previously to reflect our improved operating structure. One of the happiest events occurred for SANUWAVE November two, when the new team in our finance department informed us that October hit EBITDA positive. We have further cost savings hitting in November, more in December and even more in January.

So we'll continue with our cost savings plan and expect to be EBITDA and operating profitable for Q4. Profitable growth, that is the theme you will hear repeated throughout Q4 in 2023. We will begin adding to our sales team in Q1 next year and expect to see a 50% growth there as we had new market presence in places like New York City, Long Island, DC, Atlanta, Florida and parts of Texas among others. With the new finance department in place and new manufacturing coming online currently, this will be the final piece to position SANUWAVE for rapid profitable growth in 2023 as the company expands and becomes able to serve the rapidly rising demand in the space. Lastly, some housekeeping.

You will all or have all received the proxy to increase authorized share count to allow registration of the capital raises. Please send in your vote and consent. It is needed to complete the transaction. In that same proxy, you will need to vote on a reverse split. This will allow us to list on NASDAQ in 2023.

Finally, I want to thank our employees for getting us to EBITDA positive and driving that success. The shareholders who have invested more, which will allow us to ramp the product and most importantly meet our mission, which is about saving limbs, saving lives through healing wounds. With that, I will open it up to questions. Ziko?

Speaker 0

Our first question is from the line of Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.

Speaker 4

Thank you very much and welcome to Minnesota, Kevin. I'm looking out the window seeing a pretty good snowstorm, so get ready for the reality of life here.

Speaker 1

Brooks, I I I guess we probably should have considered moving south for the manufacturing.

Speaker 4

Exactly. But it's actually a pretty good place to live and a pretty good place to work. I know you're not gonna live here in the short term, but I'm excited to have the company here. I have a couple questions. These are more big picture questions, I guess, and I would love it if you would just talk a little bit about how Ultramist compares to what I think is still the industry standard of care, the negative pressure wound therapy treatment from the market leaders.

Can you talk a little bit about how you stand with regard to what some call a complete product line, which is some kind of a device supplemented by some ancillary products, whether you feel that's important and or how are you positioned there? And then thirdly, will you just talk a little bit about what's going on in the marketplace in terms of inpatient care and treatment of wounds versus outpatient? Either you or Morgan mentioned the nursing home opportunity, the in home opportunity. Can you just talk about whether you see that and how you plan to go after it in the future?

Speaker 1

Sure. Thank you, Brooks. I'll start with the ultra risk for standard of care and negative pressure. Negative pressure came on the market around February, a little before that, 1998, with Kinetic Concepts, KCI, and it grew from zero in revenue to, you know, 4,000,000,000, 5 billion as a category. It's used, and and it took a while.

It didn't happen overnight. I know because I was very involved there when that ramp occurred. The, it it took a while because people were asking what is this? What am I doing? Why am I putting a vacuum cleaner on a wound?

And it became the standard of care. Unfortunately, for negative pressure, what typically happens in wound care is as it gets to a certain level of claims, CMS then tries to push down pricing. And so the pricing reimbursement for negative pressure has been impacted pretty dramatically. And in some cases, it's not even profitable anymore for for wound wound care centers to operate them. It it becomes a a a negative burden.

It's still a wonderful product clinically, but to be successful, we always talk about the the three p's. You need to have, the payers are happy because they're not overpaying for a product. The physicians are happy because it's clinically efficient, and they're making money from it. And then third Mhmm. The patients are happy because their wounds are getting better.

And I think what's happened here with negative pressure is it's harder for the physicians to make money, and the payers have kinda squeezed them. It's still a good product, and they still use it mostly in surgical. Post surgical is where the the dollars are. For Ultramist, we have the three p's. It's clinically great, so the patients are happy.

The the the reimbursement, as Morgan alluded to, at 04:50 to five hundred twenty dollars per treatment is fantastic. It's probably the highest gross margin product that they're using in their wound care practices. And then the payers are happy because we still come under the price umbrella of some of the other modalities, like skin subs and hyperbaric. So in general, we're we have a a winning combination with the three p's there. And then head to head, we do have a study that will come out later, probably early in q one, that compares Ultramist specifically to negative pressure and the savings that are generated when you kind shift from negative pressure to Ultramist.

And we'll use that really to drive some of the commercial payers that are that haven't come along with with Ultramist yet. Your second question was around the marketplace. Let me go marketplace of inpatient versus outpatient, and I'll come back to product line. Right. During COVID, the one benefit that happened that that benefits the wound care industry is patients from nursing homes were not allowed to go be transported to the hospital, the outpatient, to be treated for their wounds.

They pushed it to the edge. They allowed for wound care treatment in the facilities, which really hadn't happened before. And Mhmm. And they realized that pushing treatment to the edge, meaning nursing homes, in the home, and there are some home care providers now that are are ramping up their their wound care business and division so that you don't have to worry about getting to the wound center. You're having a someone mobile show up at your house or show up at the nursing home.

The the largest growth we've seen this year is from our providers that are in the nursing home market, assisted the skilled nursing market, where they're having their their staff drive to the nursing home and they're treating, you know, 15 patients at a time and then move into the next nursing home, it's beneficial to the nursing home because they're preventing bed sores from occurring, is the most expensive aspect for a nursing home is when if you get a wound in a nursing home, it gets infected, your quality scores go down, that means how much you're getting reimbursement goes down. It's it's a really bad situation, so that's helping a lot. And if you think about it, moving and I always say granny. Moving granny from the nursing home to the wound center, you need a staff person transport. They go there.

They spend a few hours, whereas if you can treat them at the nursing home, it's much more efficient. And it and it again, it's profitable for for the providers, and the nursing homes like it because they have better quality scores. So that's a a trend that we see continuing. It's really maybe two years old, and it it I I think you'll see that continue both home care and nursing home care for the next for a long time. And lastly, you asked about the product line.

Right now, we're very happy with our products. We have dermaPACE and Ultramist. We also have a product called BroomShield that's in development that would be a ultrasound patch we wear for in between visits. We view it as partnering with people right now if we need to have a complete product line, and I think that's where you'll see us move. We're we have very good relationships with a lot of the different players in the industry because they know our products work well together with them.

So you'll hear a term combination therapy, and you're going to see that become more and more relevant as we go into '23 and '24. And and and, again, we plan on partnering with a lot of lot of folks. We're we're already seeing some doctors do that already, where they'll use Ultramort to treat the wound, and then they'll put on the fish skin, or they'll put on some other type of amniotic tissue to heal the wound, and the same thing with some of the hydrogels. So we're we're getting we're seeing it happen, and it's just our job to to to make sure we keep good partnerships with folks, including the diagnostic guys, because ultimately, they'll be the ones helping them on how protocols are developed.

Speaker 2

Mhmm.

Speaker 1

So at this point in time, I think the complete product line is not as important. In the future, it may be. But right now, our focus is just on getting product from our suppliers and meeting our demand.

Speaker 4

Okay. That's great. Let me just ask you two more. Morgan talked a little bit about the sales force, but how would you characterize your kind of staffing and your ability to sell and take advantage of the demand that's out there? And then lastly, just can you refresh my memory?

Are you completely current with all your filings? And do you expect to kind of remain there going forward?

Speaker 1

I'll do the filing ones first, and then, I'll I'll shoot over to Morgan on Salesforce. And, but on the filings, we're current. We're we actually had the queue done really on time and early this, and I think the team they they filed the yesterday, and they're starting on the k today. So our we have a great finance and accounting team. You know, our goal when we brought on our CFO, Tony, was to have her staff up and get rid of the consultants.

The people and talent that she brought on are fantastic. As you know, Brooks, Minnesota has a especially for Eden Prairie, they have a lot of good talent in the medical device world. And so we're we're we're finding, you know, a good team to come on board. And then, on the sales team, Morgan, if you wanna talk to it, that, that would be great. And if not, you can punch it back to me.

Speaker 3

Sure. I'll, I I could jump in on that. So, I mean, obviously, if you're gonna sell it first, you gotta build it. And so, you know, once once we've got more products flowing from the manufacturing increases in q one, you know, this is the time when you wanna be putting, you know, more more sales feet on the street. And I think, you know, the balance of the next year is really going to be having the sales capacity to sell what we can make and having the and having the manufacturing capacity to make what we can sell.

And, you know, these are sort of two pistons that you have to get going in synchrony with one another. You know, if you're doing too much of one and not enough of the other, somebody winds up angry. And, you know, obviously, that's not what you want. And so, you know, on the other hand, there are a lot of really top notch salespeople who are looking for jobs right now. And, you know, the skin substitute guys are seeing, you know, the number of treatments per patient dropped from 10 to or from 10 to two.

You know, they're seeing price caps. They're seeing eligibility limits. And the markets in which these are happening first, you know, salespeople notice this very rapidly, you know, because the doctors are saying, you know, wow. I can't make any money with this anymore. And so, you know, they start looking around for, well, what can what can we replace it with?

And so it's working out very fortuitously for us in that many of the markets that we're most interested in entering aggressively are the markets where, you know, salespeople are sending out the most resumes right now. And so to the extent that we can grab some people who really know how to hit the ground running here, you know, this is sort of this is an unusual opportunity, and I think, you know, we're we're looking to take advantage of it.

Speaker 4

Great, Morgan. Thanks a lot, and congratulations on all the progress.

Speaker 1

Great. Thanks, Brooks.

Speaker 0

Thank you. Our next question is from the line of Satyen Shah, who is a Private Investor. Please go ahead. State your question.

Speaker 5

Hey, Kevin. How are you guys?

Speaker 1

Great. Thank you, Sachin, for calling

Speaker 5

Yeah. Beautiful and great to hear that you guys are EBITDA positive in October. It's, I'm sure welcome news for you and the whole company. One question I had for you, I mean, this has been a great discussion. But if you had to look sort of a year out of next year at this time, in your view, what would be a success in terms of where the company should at that point.

And the next part of my question is more about Ultramist versus DermaPace and reimbursement rates. You know, what is the biggest hurdle for you guys to start really generating revenue on DermaPace? Is it the fact that it's 80% reimbursable to try to get to a %, or is it something else? And in terms of the revenue mix next year, should we expect basically 90% plus to come from Ultramist? And thirdly, you haven't really talked about international growth.

Is there an emphasis right now on just on domestic, you know, growth and then sort of thinking about that later?

Speaker 1

Sure. I'll I'll try to address all of those, and and I'll conclude with kinda where that leads to us at the end at this time next year. Yep. We we were you know, with Ultramist, it's a it's a wonderful product that has fantastic reimbursement right now. Clinically, it's it's a great product.

It's lightweight. It's mobile. And so we're that's the the lead dog right now because that's where we can have the easiest success with our sales team. When you as I said before, if you have clinically the patients are happy, if, money in their pocket, the physicians are happy, and if payers are happy because they're saving money relative to other therapies, that's the winning combination. And right now, Ultramist is that winning combination.

And especially because it it weighs eight pounds. You can throw it in a back I mean, we don't want them to throw it in a backpack, but the nurses can, you know, bring it into nursing homes very easily. And so you're gonna continue to see us ramp that out and and have that as a as the driving force. And then with dermaPACE, you will see it grow next year. There are initiatives underway.

We got our first kind of product ramp in, I believe it was October. When you move manufacturing facilities, you have to go through recertification. So dermaPACE took a little bit of a stall, this year, and it now is back, you know, on track. We'll have more supply hitting us at the end of the year and then a very consistent supply moving forward in, starting in January. And so, again, that reramp and recertification, as I mentioned in the earlier in the call, we we couldn't even ship internationally because we needed to get that the the the move complete.

And, again, the move was cost saving, but it was also getting all the talent under one roof so we can all share and and work together. So that that was the purpose of it. International mix, I think, you know, we're we're seeing large opportunities out there new markets and then existing markets. Our South Korean partners just got reimbursement for the product, so I expect a pretty sizable ramp there. The Brazilian partnership, is having tremendous success.

They'll, they'll probably contribute over a million dollars next year, if not more. They they're having really good good results. Italy, and Europe are doing well. The Middle East doing well. So it's just a matter of now that we can ship again, it's ramping that up again.

Okay. It's it's it's it's good. So I I I think we're good. Let me turn it over to Morgan, and he can kinda talk a little about it too.

Speaker 3

Yeah. I mean, you one of the things we're we're making a really concerted effort to do as we put product in the field is to focus on accounts that have high attach rates, Right? Who's using a lot of consumables? Right? We, you know, we have a we've we've an average of a little over 26 per month being used, but we have, you know, accounts that are using well over a hundred.

And, you know, it's a combination of both figuring out, you know, how to serve more accounts like that. Particularly, I think a lot of the mobile wound care guys are going through very high numbers of applicators. You know? And also sort of moving best practices out to existing guys and saying, okay. You know, here's here's how to get more use out of the devices you have.

I mean, in terms of, you know, the question of what would we deem a success, you know, this time next year. I think, you know, it's a little premature for us to be giving, you know, that sort of guidance. And, you know, while I Yeah. I appreciate the sneaky way you're sidling up to that question, I think we're gonna we're gonna defer on that a bit, though I think, you know, we can say, you know, we're taking our console production from two forty to 600. We're taking our applicator production from 5,400 a week to 24,000, and I think, you know, that may give you some indication of sort of what we're looking to address.

Speaker 5

Okay. That sounds fair. Great. Thank you.

Speaker 1

Thanks, Sachin.

Speaker 0

Thank you. Our next question is from the line of James Turwiliger, Private Investor. Please proceed with your question.

Speaker 6

Hey, Kevin. Can you hear me?

Speaker 1

I can hear you, James.

Speaker 6

Okay. Well, good morning to everyone. First of all, this is a very good call, very good tone and and a very nice quarter, especially with the EBITDA positive for the month. I'd also like to say hello and welcome the new CFO and the new Chairman of the Board to SANUWAVE. Look forward to working with them.

Three quick questions, and a lot of this has already been discussed. The first question, Kevin, I'm going to take all my questions to you because I know you the best. The first one, Kevin, is can you expand on the your comments on the operating expenses? When I look at that, they seem to be trending down. You had a very nice decrease, I believe, nine months over nine months of 17%.

But it looks like Q3 was even better than that number. So how do you can you expand on the expense reduction trend as we move into q four and into 2023? Is there anything else you can expand on the expense reductions? If

Speaker 1

you look at where the expenses came from and and kind of approach it that way and then what was eliminated, that's how we get there. So when we were late on our filings, you incur a lot of costs using consultants to get caught up. And so we had consultants who were not employees working with us on getting caught up on our filings. That ended I think we have one one of the employees still, consultants working with us. And so that was a big part of it.

Are they're not cheap. They're very expensive. You also run up higher audit costs with the mark them. You run up higher legal costs. Everything is higher.

And so getting caught up was our first goal was finance and accounting, get it get our internal staff, and then getting them in the right spot. I mean, it's a million 4 a month of excess expenses. The other piece was the manufacturing move. So consolidating from Georgia up to Minnesota, that saves us a good chunk of change. You can then start leveraging employees who can work on Ultramist and on DermaPace instead of having a dedicated DermaPace and a dedicated Ultramist in two locations.

The others are just sales efficiency. Our sales team, the ones that are here have done a heroic job to get us to where we are. You know, we were 15 or 16 a year ago. We're down at nine now. And and so if you look at sales productivity, they've done a a very good job driven largely by consumables and the the larger, faster growing customers.

So we've eliminated headcount. And then one of the initiatives we have operationally is just looking to how do we getting ready for a ramp, which we're seeing for '23, how do we move from manual activities to automation? And a lot of that is little implementation projects we're working on, too numerous to mention here, but just lots of little things, James, that are gonna lead to more cost savings as we go into November, December, and January. So it's a it's a series of hard looks, and the question we always ask ourselves is, will this have a negative impact on sales? And if it is, then, you know, you don't cut.

But on ones where it's not gonna impact our sales, those are activities that we look to drive cost savings from. And, you know, that that I don't think I I don't think they'll be as dramatic in q one as they'll they'll be in q four when you look at the numbers, but that you'll really see the impact in Q4.

Speaker 6

Okay. That's great. It's clearly going in the right direction. My second question is really around gross margins and supply chain. It's really a two part question.

The first part is it seems like are you having any supply chain issues? And it seems like yours might be more internal just of of moving the manufacturing from one facility to another or one state to another. And then on the gross margins, when I looked at the release, the 85%, extremely strong. You know, it it really grabbed my attention. But I believe the CFO gave a a gross margin range that we should be looking for for 2023.

So are you having any supply chain issues? Is it external or internal for you guys? And then could you remind me again of what that gross margin range is for 2023? Great.

Speaker 1

I'll have Tony talk to gross margin in a moment. I'll talk supply chain first. On supply chain, last year, it was driven partially due to labor shortages at some of our suppliers and then issues with certain types of plastics. So there was a shortage of Tyvek, and there's really only one supplier of Tyvek, and and so we we were on allocation for our applicator pouches. There was also within the medical community, saline was in short supply, and so some of the smaller practices that we support couldn't get saline which needed to use our device.

So those are the impacts that I would say were external. The internal ones were us not were were were resolved when we did the raise in August and restarted some of the manufacturing engines with the consoles and wands and dermaPACE products. So that's just a matter of them putting together the statement of work, the purchase order is kind of restarting the engine, and it takes longer to restart engines. They we haven't seen any material issues with our supply chain at this point in time, James, so we're in pretty good shape. It it's just things are more expensive.

I mean, inflation is having an impact across the board, So we are seeing some of that in the supply chain. I hope that answers supply chain. Why don't I turn over to Tony for gross margin, and she can go into a little more detail? Sure.

Speaker 2

So yes, gross margin for Q3 were reported at 85%, however which is an uptick to the 58% a year ago. However, the Q3 was really higher than normal due to an inventory adjustment that we made in Q3. So we truly expect gross margin to converge to our 75% guidance going forward. For the nine months, gross margins were 77%, so around our guidance that we're giving forward. And that

Speaker 1

was

Speaker 2

still an uptick of 19% from last year, which was around 58%. So going forward, we believe that gross margins will converge to around 75%. Back to you, Kevin.

Speaker 6

Okay. Thank you, Tony. And Kevin, my last question is, you know, I speak to a lot of public and actually almost more private healthcare providers. Has when you look at the market, has the procedure volumes returned to what you would believe would be a normalized level? I when I'm talking to these individuals and they're running their companies, I know sometimes they're just complaining and in a bad mood, but they seem to say they don't have they're having a labor shortage.

And without the right resources, that they they can't really schedule the procedures. Again, that would have nothing to do with, quote, SANUWAVE. But if they can't schedule the procedures, it's hard for you to capture that procedure. Are you what what are you seeing on procedural volumes returning to normal levels?

Speaker 1

There's a few pieces to that, James. One is, unfortunately, wounds, wounds don't have supply chain issues. They happen. Diabetes is, is growing at I mean, it's National Diabetes Month, we're seeing the trends aren't getting better. They're actually getting worse.

COVID and people staying at home have seen an uptick in diabetes cases, and the statistics on diabetic foot ulcers, venous leg ulcers all are trending higher in The US, globally even higher than that. And so first, the underlying demand for our product isn't going away. The issue that you're talking about are nursing shortages basically, And, at certain wound centers, they are seeing, difficulty on staffing. We're very fortunate that we've had new growth though as as they're now treating at the edge, the skilled nursing facilities, the home treatment. So ours has been largely offset by new verticals, so to speak, and where the nurses are going.

They have more freedom and flexibility working independently and going into their skilled nursing facilities. But I I I would say that we've heard that volumes in wound care centers are back to where they were pre COVID, but they did drop forty percent, you know, in that May of whenever COVID started. So they've had a recovery, but people are complaining about shortages of staff. But like I said, the underlying you can defer a knee replacement. You can defer a hip replacement.

You can't defer taking care of the wound because then if it gets infected, then the risk of amputation increases dramatically. So I think we're very we're a little bit of an anomaly relative to other practice verticals, James. I mean, again, if you need to get a replacement, you can wait. But if you got a a diabetic foot ulcer and it's infected, you gotta get it treated or else bad things happen.

Speaker 6

Well, great, Kevin. Thank you for taking my questions. I thought this was a good call, and and congratulations on being EBITDA positive in October. Keep it up. Thanks.

Speaker 1

Thanks, Sam.

Speaker 6

Back in queue. Goodbye.

Speaker 1

Thank you.

Speaker 0

Our next question is from the line of Christopher Davis with Founding Asset Management. Please state your question.

Speaker 1

Yes, Kevin. Thank you. I wanted to have you comment on the strength of the company's IP and also talk about your strategy for possible infringements of that IP. Thank you. Sure, so the company's very lucky that we have a strong patent portfolio.

Our science team and the predecessor company, the Ultramist science team, did a very good job making sure that we our use cases are are covered and with over a 50 patents currently issued or pending. The we have certain pockets where patents are now potentially being and I have to be careful with phraseology. The the legal guys have told me I I there's certain things I can say and certain things I can't say. You know, it's there are certain verticals where we believe there are, companies that may be infringing on patents that are either published and not issued yet or patents that have been issued. We we were kinda first on, you know, the technology.

So it's foundational technology that now others are are, again, potentially in violation of. The way we operate, we've communicated effectively with those parties and we always look for a peaceful resolution. I don't have anything to report today on monetization, but that's the path that we we go down as we know that there are potential opportunities. We'd prefer to do it friendly, but are prepared to do it aggressively if need be to. Thank you.

Speaker 0

Thank you.

Speaker 1

All right. Siko, any others? If not, we can call it a day.

Speaker 0

There are no further questions at this time. I would like to turn the floor back over to Mr. Kevin Richardson, CEO, for closing comments.

Speaker 1

Great. I'd like to thank everyone on the call. If anyone has questions, as always, you can go to the website, you can reach out to us. We're an open book, and feel free to reach out. And then, you know, you'll hear this again and again, the repeated theme of profitable growth q four twenty twenty three.

With that, I will, look forward to talking with you when we do q four results for the end of the year. Thank you, and have a great day.

Speaker 0

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.