Sanuwave Health - Earnings Call - Q3 2023

Transcript

Speaker 0

Greetings. Welcome to Sandy Wave Announces Third Quarter Results. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

At this time, I'll turn the conference over to Morgan Frank, Chairman and CEO of SANUWAVE. Morgan, you may begin.

Speaker 1

Thank you. Good morning and welcome to SANUWAVE's third quarter twenty twenty three earnings call. Our 10 Q was filed with the SEC Thursday night and our earnings release was issued this morning along with our updated presentation, which is available on our website in the Investors section. Please refer to those during the presentation. Joining me on this call are Tony Reno, our CFO and Tim Hendrix, our EVP and Head of Sales.

After this presentation, we will open the call up to Q and A. Before we begin, let me start with the customary forward looking statements disclaimer. This call may contain forward looking statements such as statements relating 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. A description of these risks and uncertainties and other factors that could affect our financial results is included in our filings.

Actual results may differ materially from those projected in the forward looking statements. The company undertakes no obligation to update any forward looking statement. As a reminder, our discussion today will include non GAAP measures. Reconciliations between our GAAP and non GAAP results can be found in our recently filed third quarter Form 10 Q. Okay, with that behind us, Q3 was a busy quarter for SANUWAVE on the number of factors.

Internally, our move to a flatter management and informational structure has allowed us to move a great deal faster and to collaborate more effectively and this is really starting to pay dividends both in terms of planning and in terms of expense management. In conjunction with some key hires, this has led to significant operational progress in cash management, in business model development and in management of our manufacturing. I'm sure that many of you have gotten a bit sick of hearing about the production constraints that have been impeding growth and believe me no one's been more sick of this than we have. And so I'm really pleased to be able to tell you that Q3 saw major steps toward the elimination of these limitations and that the 55 Ultra Mist units sold in the quarter were achieved despite having had only five to sell in the entire month of July. Our current manufacturing cadence has reached and stabilized at a double digit rate per week.

This is a figure that we were struggling to hit in many full months in the first half of the year. As inventory to sell falls away as our primary revenue constraint, we've been exploring some new business model ideas that we think can increase our market penetration and produce predictable revenue streams that better serve our customers. Our goal is really to sort of sit down next to the customers and ask them what they needed. And what

Speaker 2

they told us is that they

Speaker 1

would like to be able to get Ultramist out of their capital budget and into their operating budgets. And so this has led us to develop extended trial model, the name, but twelve month period in which the company would allow the customer to bundle the payment of the and the applicators into one easy monthly payment. This allows the customer to avoid the large initial capital outlay and to view Ultimist as an operating cost rather than a capital cost. From the SANUWAVE side, this generates predictable recurring revenue and cash flow that amounts to something akin to a captive financing arm, but that does not consume significant operating funds and thus can support rapid growth of increased number of systems in the field without placing undue stress on our balance sheet. At the end of this period, the customer will own the device outright and will just shift to shipping them applicators as though they were any other customer.

We're pleased to say that we placed the first thirteen systems into this program literally just last week. So this one feels like a big win for both sides and while it may reduce near term revenues a little bit as the whole of the sale will not in most cases be recognized upfront, but rather ratably as cash is collected. The medium term effects here are likely a growth acceleration is getting more units in the field means more users, more patients and more applicator consumption which is of course January's primary business goal. As we discussed on the last call like

Speaker 0

renewables business and the recurring revenue associated with ongoing use represents the core of our business model. We continue to pursue our key goals of rapid profitable growth and Q3 showed

Speaker 1

some significant progress here despite some extra costs associated with manufacturing ramp up and our M and A deal with Swet Equity Partners. It feels increasingly like we're getting everything aligned and like we're starting to really move in the right direction. I'm now going to turn the call over to Toni to walk you through our Q3 numbers.

Speaker 3

Thank you, Morgan. Revenue for the three months ended 09/30/2023 totaled 5,000,000 an increase of 19% as compared to the $4,200,000 for the same period of 2022. This growth falls within the guidance range of 15% to 25% provided last quarter and slightly above the range from our October preannouncement. Revenue for the month ended September 30 totaled $13,400,000 an increase of 19% as compared to $11,200,000 for the same period of 2018. Gross margin as a percentage of revenue amounted to 71% for the three months ended September 30 versus 72% for the same period last year.

For the nine months ended 09/30/2023, gross margin amounted to 71% versus 72% for the same period last year, which is typical and reasonable volatility around our product cost timing variability and some expense lumpiness. Operating expenses for the three months ended September 30, operating loss totaled €500,000 which is an improvement of €2,000,000 compared to the same period last year, which aligns with our initiative to drive profitable growth and manage spend through 2023. Operating expenses for the three months ended September 30 amounted to 4,100,000.0 compared to $5,500,000 a decrease of $1,400,000 which we believe shows the effectiveness of our cost and expense management initiatives. SANUREZ continues to execute its financial strategy to improve profitability and manage operating expenses. Net loss for the three months ended 09/30/2023 was 23,700,000 compared to a net loss of $1,100,000 for the same period in 2022.

The increase in net loss for the three months ended September 30 was primarily due to continued noncash losses on the change in fair value of our derivative liabilities, which totaled €19,300,000 of expense for the period, which contributes to volatility in net loss. Adjusted EBITDA for the three months ended 09/30/2023 was negative €300,000 versus negative $2,200,000 for the same period last year, an improvement of $1,900,000 indicating improved operational profitability. Total current assets amount to $7,400,000 as of September 30 versus $6,600,000 as of 12/31/2022. Cash totaled $1,100,000 as of 09/30/2023. In July 2023, the company closed an additional financing with gross proceeds receiving totaling approximately 3,000,000 which is intended to support operations geared towards continuous growth.

We thank you for continued support of SANUWAVE and I'm now transferring back to Morgan. Morgan? I'm transferring back to Morgan.

Speaker 1

Thanks, Tony. So next up will be Tim Hendrix, is going to provide an overview of current market development and sales opportunities.

Speaker 2

Great. Good morning. Everyone,

Speaker 0

as

Speaker 2

we come up close to the holiday season, it's my pleasure to share with you the progress we continue to make as an organization and our sales efforts. It's our unwavering commitment to help clinicians treat more patients suffering from chronic wounds that drive these efforts. For the third quarter in twenty twenty three, I would like to share four notable items related to these efforts. First development is that our results in Q3 of 55 Ultramist systems sold is amplified by the fact that greater than 40% of those systems were to new customers and

Speaker 4

to our and our

Speaker 2

The obvious effect of so many new offices, mobile wound practices, hospitals and long term care facilities now utilizing UltraMist show benefit to scores of patients and to our business results. Growth with new customers and in key markets will be a key performance indicator that my team focuses on consistently through 2024 and beyond. Second item I'd like to reference is the pricing discipline that we have instituted throughout this year. The market has responded and shown us what reasonable and acceptable pricing levels are for both

Speaker 1

capital equipment and the single use disposal.

Speaker 2

Significant progress has been made and this trend should continue over the next several quarters. Number three is that I'd to echo Morgan's comments about key hires that have been made. This has already begun with the sale of the commercial field team and a significant number more will be made throughout the first half of next year. My fourth and final item for today is to springboard from the improved inventory levels you heard about, which will continue to allow us to place evaluation strategically. The goal is to place individual units into trials with practices who, if the trial goes well, would be looking to purchase multiple units.

Overall, we're looking to engage with new customers with a focus on those busy practices of high utilization rates and to generate a good mix of smaller, midsize and increasingly larger customers to create a robust and flexible sales funnel that can support our growth without undue dependence on any one customer or channel. So with that, I'll turn it back over to Morgan.

Speaker 1

Thanks, Tim. So I like to hit on a few key metrics for the quarter. I guess as we previously mentioned, system sales in the quarter got off to a slow start with only five sold in July due to supply constraints, but this number rose to 23 in August and then 27 in September, which is what got us to 55 for the quarter. Overall, Ultramist revenues grew in excess of 25% year on year in the quarter. We ended the quarter with five eighty one active systems in the field up from five twenty six at the end of Q2.

That increase sequentially. Our Ultramist consumables revenue similarly grew 11% from Q2 and 24% versus the third quarter last year. Consumables for Ultramist constituted 62% of overall revenues in the quarter. This is a figure we're pleased with and while we may see some choppiness in the ratios over the next couple of quarters as we have a lot more systems available for sale. This

Speaker 4

is

Speaker 1

a number we aim to see trend higher over the medium and long term as either the appeal of the sort of classic razor razor blade model is immense. We're extremely excited about the prospect of the merger with Sweat Equity Partners and both the capital and enhanced capability that they will bring to the table. We're also excited to move up to NASDAQ and place the company on a sound financial footing such that we can with any luck begin to be valued for our business and not for our capital structure. We remain committed to the pull rapid profitable growth, what will allow us control of our own destiny and really focusing on our own internal principles here which at the risk of ripping off a bunch of sports aphorisms are we play offense, we skate not to the puck, but to where the puck is going to be and nobody's job is done until the job is done. And this is how we make progress and this is how we're going to become the company that can create real change in wound care.

Moving to Q4 guidance, the company anticipates revenue growth in the 15% to 25% range versus the December in 2022. We are not anticipating any meaningful production capacity constraints in the quarter, but the ramp up of new salespeople and partners and the addition of a new sales model with the potential for spread out revenue recognition, it's a little difficult to predict. So this seems like a prudent range for us to use here. So look there's a lot of road ahead here, but we're really starting to chew up some ground and I think the sense of change and the sense of progress at the company is just it's becoming palpable and I just want to take this opportunity to thank the whole SANUWAVE team for their faith and for their efforts to make all this happen. It's really an exciting time to be here and I am both pleased and proud to be part of it.

With that, I'm going open up the floor for questions. Operator, if you could queue that up.

Speaker 0

Thank you. Thank you. Our first question comes from the line of Albert Hanser with Kestrel. Congratulations

Speaker 4

on the progress. Exciting to see and appreciate the communication. You talk a lot about the success and growth in placement of Ultramist. Can you just touch on dermaPACE and kind of what is the state of dermaPACE and kind of what will that look like going forward? Thank you.

Speaker 1

Sure. Thanks, Albert. Appreciate the question. So DermaPace was a bit slow in Q3. We are making some assessments there in terms of the directions in which we want to take that product.

In particular, I think we are rationally we're looking at our various international channels and figuring out which ones are likely to bear fruit and which are not. We're looking at some of our U. S. Channels as well, particularly in some cash pay applications that don't require as much that don't require the sort of studies and reimbursement work. And I think we're also looking to get involved with a couple of longer term studies on dermaPACE that would generate sort of data that could support you really attractive long term reimbursement in a number of applications.

It's in general, it's just it's always a little harder with products that don't have the kind of nationwide codes. And so we're having a bit of a rethink on UltraMist or not sorry, not UltraMist on dermaPACE and getting a sense of what the immediate term opportunities are there and what the longer term opportunities are there. So I realize that's probably a little bit unsatisfyingly vague, but give us a quarter or so on that and I think we'll be able to come back with some more concrete plans. Thank you.

Speaker 0

Thank you. And our next question is from Andrew Davis with Overall Capital. Please proceed with your Mr. Davis, your line is live for questions. Could

Speaker 3

you give

Speaker 5

us a a quick update on the specifics of

Speaker 1

the merger

Speaker 5

approval, when exactly the vote is and if we're seeing any significant hurdles on the other side?

Speaker 1

Sure. I'm happy to. So as many of you likely saw, we filed our amended S-four last Friday. So that was in response to the SEC's comments on our first draft of S-four. So at this point, the ball is back in their court.

We are expecting probably another round of comments and which is pretty typical. And hopefully based on hopefully those comments are fairly straightforward and presuming they are and we can again get a response back to them in a reasonable timeframe. We have a pretty good shot at trying to get the deal closed this year. But obviously, some of these matters are out of your control, there's always some limits on predictability. In terms of reaching the rest of the closing conditions, we're pretty good on our side.

Remaining issues become the votes, exchange of the public warrants on the SPAC side and then finishing the financing. We're targeting $13,000,000 of capital in the deal. We're sitting at approximately $9,000,000 committed having not started to actually raise the rest of pipe yet. I think we're in reasonable striking distance on that. And so I mean we're going to

Speaker 2

steal this year.

Speaker 5

Great. But yes, I mean, sounds like you've locked up most of their shareholder base, so you're not worried about the vote per se on their end?

Speaker 1

I don't think so. I mean, they're basically their holders seem very supportive. Our holders seem very supportive. I don't have any reason to suspect that either side doesn't want to do this.

Speaker 5

Great. Thanks, guys.

Speaker 0

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

Speaker 1

Yes. Morgan and team, congratulations for the progress. My question was going to be around the capacity going forward, for the devices and the applicators. Sure. Hi, Christopher.

Good morning. I guess, good afternoon for you. Our plan I think as we mentioned earlier in the call, reached a point where we're up into a double digit cadence weekly on making systems. And I think that should take that should put us in pretty good shape for the next quarter or so. I think as we look forward to 2024, we're aiming to have the production capacity on systems rise to something on the order of two to three times what it was in 2023.

On the applicator side, we're paying a great deal of attention to that. And is obviously these are sort of the lifeblood of the company like we will next year start to need to expand capacity meaningfully to keep up with what we are projecting to be demand. And we have plans underway there including some work we're doing on a minor redesign on the applicator that will make it a great deal more manufacturable. And so that could free up a great deal of capacity simply by taking some of the complicated steps out of putting the units together. So we're having hired Andrew Walco during the quarter and had him really just jump right in with both feet and get to work on this.

It feels like we've made a ton of progress on both systems and on applicators. And so I actually feel really good about our ability to bring capacity up really meaningfully there next year. Would you bring either side in house at some point? It's something that we always look at and consider and say, would we bring this in house. We don't have any plans to do that at this time.

It's a lot of work, it's a lot of stand up and honestly like I think we have great partners who may well just be able to do this more cheaply than we ever could and who have better supply lines and better access to supply chain than we would. I mean obviously look if we were doing 200,000,000

Speaker 5

or $400,000,000

Speaker 1

of revenue or something that might be a different equation, but I don't really see that happening in the next year or two. Okay. Thank you.

Speaker 0

Thank you. At this time, we've reached the end of our question and answer session. I'll turn it over to management for closing remarks.

Speaker 1

Thank you very much. And I appreciate everyone making the time this morning and we look forward to speaking to you again next quarter. Thanks.

Speaker 0

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.