Sanuwave Health - Q3 2023

Transcript

Operator (participant)

Greetings. Welcome to SANUWAVE announces third quarter results. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. 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.

Morgan Frank (Chairman and CEO)

Thank you. Good morning, and welcome to SANUWAVE's third quarter 2023 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 investor section. Please refer to those during the presentation. Joining me on this call are Toni Rinow, our CFO, and Tim Hendricks, our EVP and Head of Sales. After this presentation, we will open the call up to Q&A. Before we begin, let me start with the customary forward-looking statement 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 filing. Actual results may differ materially from those projected in the forward-looking statements. Company undertakes no obligation 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 a number of vectors. Internally, our move to a flatter management and informational structure has allowed us to move a great deal faster and to collaborate more effectively.

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 the 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. 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 UltraMIST 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, you know, what they needed. And what they told us is that they 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.

You know, it's a 12-month period in which the company would allow the customer to bundle the payments of the UltraMIST and the applicators into one easy monthly payment. This allows the customer to avoid the large initial capital outlay and to view UltraMIST 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. You know, at the end of this period, the customer will own the device outright, and we'll just shift to shipping them applicators as though they were, you know, any other customer.

We're pleased to say that we placed the first 13 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, you know, 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, as getting more units in the field means more users, more patients, and more applicator consumption, which is, of course, SANUWAVE's primary business goal. You know, as we discussed on the last call, like 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 some significant progress here, despite some extra costs associated with, you know, manufacturing ramp-up and our M&A deal with Sweat 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.

Toni Rinow (CFO)

Thank you, Morgan. Revenue for the three months ended September 30, 2023 totaled $5 million, an increase of 19% as compared to the $4.2 million for the same period of 2022. This growth falls within the guidance range of 15%-25% provided last quarter and slightly above the range from our October pre-announcement. Revenue for the month ended September 30 totaled $13.4 million, an increase of 19% as compared to $11.2 million for the same period of. 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 September 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 $0.5 million, which is an improvement of $2 million 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 amount to $4.1 million, compared to $5.5 million, a decrease of $1.4 million, which we believe shows the effectiveness of our cost and expense management initiatives. SANUWAVE continues to execute its financial strategy to improve profitability and manage operating expenses.

Net loss for the three months ended September 30, 2023, was $23.7 million, compared to a net loss of $1.1 million for the same period in 2022. The increase in net loss for the three months ended September 30 was primarily due to continued non-cash losses on the change in fair value of our derivative liabilities, which totaled $19.3 million of expense for the period, which contributes to volatility in net loss. Adjusted EBITDA for the three months ended September 30, 2023, was -$0.3 million versus -$2.2 million for the same period last year, an improvement of $1.9 million, indicating improved operational profitability. Total current assets amount to $7.4 million as of September 30, versus $6.6 million as of December 31, 2022.

Cash totaled $1.1 million as of September 30, 2023. In July 2023, the company closed an additional financing, with gross proceeds receiving totaling approximately $3 million, 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.

Morgan Frank (Chairman and CEO)

Thanks, Toni. Next up will be Tim Hendricks, who is going to provide an overview of current market development and sales opportunities.

Tim Hendricks (EVP and Head of Sales)

Great. Good morning, everyone. As 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 in our sales efforts. It's our unwavering commitment to help clinicians treat more patients suffering from chronic wounds that drive these efforts. And so for the third quarter in 2023, 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, patients. The obvious effect of so many new offices, mobile wound practices, hospitals and long-term care facilities now utilizing UltraMIST will 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 has been instituted throughout this year. The market has responded and shown us what reasonable and acceptable pricing levels are for both capital equipment and the single-use disposable. Significant progress has been made, and this trend should continue over the next several quarters. Number three, I'd like to echo Morgan's comments about key hires that have been made. This has already begun with the sales and 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 a springboard from the improved inventory levels you heard about, which will continue to allow us to place evaluations 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 with busy practices and high utilization rates, and to generate a good mix of smaller, mid-sized 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.

Morgan Frank (Chairman and CEO)

Thanks, Tim. So I'd 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, you know, due to supply constraints. But, you know, 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. You know, we ended the quarter with 581 active systems in the field, up from 526 at the end of Q2. That percent increased 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, you know, while we may see some choppiness in the ratios over the next couple quarters, as, you know, we have a lot more systems available for sale, you know, this is a number we aim to see trend higher kind of over the medium and long term, as, you know, the appeal of the sort of classic razor, razor blade model is immense. You know, 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. You know, we remain committed to the pursuit of rapid, profitable growth, you know, what will allow us control of our own destiny. And we're really focusing on, you know, our own internal principles here, which, you know, at the risk of ripping off a bunch of sports aphorisms, are, you know, 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 you, 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, you know, the company anticipates revenue growth in the 15%-25% range versus the December quarter 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, you know, 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.

I just want to take this opportunity to thank the whole SANUWAVE team, you know, 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 gonna open up the floor for questions. Operator, if you could queue that up.

Operator (participant)

Thank you. If you'd like to ask a question at this time, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question. Thank you. We'll pause a moment to assemble the queue. Once again, to ask a question at this time, you may press star one. We'll pause a moment to assemble the queue. Thank you. Our first question comes from the line of Albert Hanser with Kestrel. Please proceed with your question.

Albert Hanser (Founder and Managing Partner)

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

Morgan Frank (Chairman and CEO)

Sure. Thanks, Albert. Appreciate the question. So, you know, dermaPACE was a bit slow in Q3. We are, you know, we're making some assessments there in terms of the directions in which we want to take that product. In particular, I think we are rational. You know, we're, we're looking at our various international channels and figuring out, you know, which ones are likely to bear fruit and which are not. We're looking at some of our, some of our U.S. channels as well, particularly in some cash pay applications that don't require as much, you know, that don't require the sort of studies and reimbursement work.

I think, you know, we're also looking to get involved with a couple of long-term studies on dermaPACE that would generate the sort of data that could support, you know, really attractive long-term reimbursement in a number of applications. It's just, in general, it's always a little harder with products that don't have the kind of nationwide codes. So, you know, we're having a bit of a rethink on UltraMIST or not, sorry, not UltraMIST, on dermaPACE, and getting a sense of, you know, what the immediate term opportunities are there and, you know, what the long-term opportunities are there.

So, I realize that's probably a little bit unsatisfyingly vague, but, you know, give us a quarter or so on that, and I think, you know, we'll be able to come back with some more concrete plans.

Christopher Davis (Director)

Thank you.

Operator (participant)

Thank you. As a reminder, to ask a question, you may press star one at this time. Thank you. Our next question is from Andrew Davis with Overall Capital. Please proceed with your question. Mr. Davis, your line is live for questions.

Andrew Davis (Managing Partner)

Hi, guys. Could you give us a quick update on the specifics of the merger approval, when exactly the vote is and if there are any significant hurdles on the other side?

Morgan Frank (Chairman and CEO)

Sure. I'm happy to. So, as many of you likely saw, we filed our amended S-4 last Friday. So, you know, that was in response to the SEC's comments on our first draft of S-4. So at this point, you know, the ball is back in their court. We are expecting probably another round of comments and, you know, which is pretty typical. And, you know, hopefully based on, you know, hopefully those comments are fairly straightforward and presuming they are, and we can again, get a response back to them in, you know, a reasonable time frame, pretty good shot at trying to get the deal closed this year. But obviously, you know, when some of these matters are out of your control, there's always, there's always some limits on, you know, predictability.

In terms of you reaching the rest of the closing conditions, we're pretty good on our side. You know, the remaining issues become, you know, the votes, the exchange of the public warrants on the SPAC side, and then finishing the financing. You know, we're targeting, you know, $13 million of capital in the deal. We're sitting at approximately $9 million, $9 million committed, you know, having not started to actually raise the rest of PIPE yet. So, you know, I think we're in reasonable striking distance on that. And so, I mean, we're gonna this deal this year.

Andrew Davis (Managing Partner)

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

Morgan Frank (Chairman and CEO)

I don't think so. I mean, they're, 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.

Andrew Davis (Managing Partner)

Great. Thanks, guys.

Operator (participant)

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

Christopher Davis (Director)

Yeah, Morgan and team, congratulations for the progress. My question was going to be around the capacity going forward, both for the devices and the applicators.

Morgan Frank (Chairman and CEO)

Sure. Hi, Christopher. Morning. I guess good afternoon for you. You know, our plan, I think as we mentioned earlier in the call, you know, reached a point where, you know, we're up into a double-digit cadence weekly on making systems. And I think, you know, that, you know, that should take a, you know, that should, that should put us in pretty good shape for the next quarter or so. I think as we look forward to 2024, you know, we're aiming to have the production capacity on systems rise to, you know, something on the order of 2-3 times what it was in 2023. You know, on the applicator side, you know, we're paying a great deal of attention to that.

You know, it's obviously these are some 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, you know, we have plans underway there, including some work we're doing on a, you know, a minor redesign on the applicator that will make it a great deal more manufacturable. And so, you know, that could free up a great deal of capacity simply by taking some of the complicated steps out of putting the units together. So, you know, we have hired Andrew Wilcho during the quarter and had him, you know, 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, you know, both systems and on applicators, and so I actually feel really good about our ability to bring capacity up really meaningfully there next year.

Christopher Davis (Director)

Will you bring either side in-house at some point?

Morgan Frank (Chairman and CEO)

You know, it's something that, you know, we always look at and consider and say, you know, would we bring this in-house? You know, we don't have any plans to do that at this time. You know, it's a, 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, you know, better supply lines and better access to supply chain than we would. I mean, obviously, you know, look, if we were doing $200 million or $400 million of revenue or something, that might be a different equation, but I don't really see that happening in the next year or two.

Christopher Davis (Director)

Okay. Thank you.

Operator (participant)

Thank you. As a reminder, you may press star one to ask a question. Thank you. At this time, we've reached the end of our question and answer session. I'll turn the floor back to management for closing remarks.

Morgan Frank (Chairman and CEO)

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

Operator (participant)

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