Sanuwave Health - Earnings Call - Q3 2024
November 8, 2024
Transcript
Speaker 0
Please note this call is being recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Morgan Frank, Chairman and CEO of Sanywave.
Speaker 1
Thank you very much. So welcome, everyone, to Sanywave's third quarter twenty twenty four earnings call. As many of you saw, our Form 10 Q was filed with the SEC last night. Our earnings release was issued this morning, and our updated corporate presentation was made available on our website in the Investors section. You can please refer to these during presentation.
Joining me today is Peter Sorensen, our CFO. And after the presentation, we will open the call up for Q and A. Let me kick off with the always scintillating forward looking statements disclaimer. This call may contain forward looking statements, such as statements relating to future financial results, production expectations and 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. Company undertakes no obligation to update any forward looking statement. 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 09/30/2024.
Okay. So with that out of the way, let's get the good stuff. Last conference call, we spoke about our revenue growth rates in the 50s being sustainable, and we guided to above trend growth of 65% to 75% for Q3. We're extremely pleased to have meaningfully exceeded that guidance, posting revenue for the quarter of $9,400,000 by far the best quarter in the company's history, and an increase of 89% versus the same quarter last year and 31% sequentially from Q2 twenty twenty four. Obscator revenue, which was approximately 58% of our revenue in the quarter, grew 75% from a year ago and 14% sequentially versus Q2.
And this consumables revenue alone actually exceeded full Q3 revenues for 2023, which is a promising time for us given that we fundamentally view ourselves as being in the consumables business. Ultimate Systems sales for the quarter were the big swing factor with 144% growth year on year and 74% growth from Q2 as our ongoing mantra of rapid profitable growth that I've been so fond of repeating on prior calls continue to play out, and we saw a rise in our gross margins to 75.5%, about $2,000,000 of operating profit and $2,100,000 of adjusted EBITDA in the quarter. Company also turned the corner on being cash generative for Q3 as a whole, even after cash interest cost. You can get more detail here from the earnings call deck and from our website or our SEC filings. So all in all, we saw, like, a significant number of steps in the right direction for the company.
And as many of you likely saw, we took some further steps on October 18 to reverse split the stock, affecting note and warrant exchange in a variety of warrant exercises and closed a 10,300,000 PIPE deal funded by several new as well as several existing investors. Post this set of transactions, the company repaid certain debt and regained compliance with the covenants of our remaining loans, which is no longer in forbearance on any of our obligations. This has greatly simplified and stabilized the company's capital structure as a part of our efforts to create a simple and vegetable structure conducive to allowing us both to grow and thrive and to value for our business rather than our cap stack. On the business side, Q3 obviously came in ahead of plan. This underlines one of the challenges we're facing and forecasting at the moment, which is that which is what we're really internally referring to as sort of pigs and pythons problem.
As we've discussed on prior calls, companies are beginning to engage with a much larger, more sophisticated sort of customer. Obviously, it's a fantastic opportunity for us, and it's precisely the sort of thing that we need to be doing as we seek to transition to being, I guess, kind of a small business being a medium sized one. But it's also gonna make revenue, especially systems revenue, a bit trickier to predict in the near term. Applicator revenue tends to be much more linear and, therefore, easier to forecast because it's simply a function of how many systems you have in the field, how many patients they treat per week and the outskitter pricing. But system sales, especially with bigger customers, tend to have a less linear aspect.
And I think as q three shows, the pigs can sometimes make quite a lump as they pass through the python. Selling 124 systems in one quarter versus 55 in the prior year and 72 last quarter was a real breakout for the company. But, you know, as much as we'd like to this is a difficult outcome to draw trend lines to Infinity from. We expect it will become a bit easier to forecast this as we go forward and we get more customers into the adoption stage and sort of loss of averages and large numbers start to work for us. But in the near term, you know, it's it's gonna be a
And though, obviously, sometimes lumpy can be good. So with that, I will turn you over to Peter to run through the numbers in some more detail, and then I'll pick this team up a bit again as we speak about guidance.
Speaker 2
Thank you, Morgan. While reiterating what was previously said, it was another exciting quarter for SANUWAVE as we achieved all time record high quarterly revenues, including year over year growth of almost 90% and strong sequential growth of over 30% from last quarter's previous all time record quarter. We also increased our gross margins both year over year and sequentially, and we continue to execute on our goal of rapid profitable growth. So with that, let's take a look at the numbers. Revenue for the three months ended 09/30/2024, totaled $9,400,000 an increase of 89% as compared to $5,000,000 for the same period of 2023.
This growth is greater than the previous guidance of a 65% to 75% increase. Gross margin as a percentage of revenue amounted to 75.5% for the three months ended 09/30/2024, versus 71.5% for the same period last year, an increase of over 400 basis points, which is mainly due to completing a line transfer at a new contract manufacturer as well as positive pricing impacts compared to the same period last year. For the three months ended 09/30/2024, operating income totaled $2,000,000 which is an improvement of $2,500,000 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 09/30/2024, amounted to $5,100,000 compared to $4,100,000 for the three months ended 09/30/2023, an increase of $1,000,000 which was mainly driven by increased selling expenses. Net loss for the three months ended 09/30/2024, was $20,700,000 compared to a net loss of $23,700,000 for the same period in 2023.
The decrease in net loss was primarily due to a change in the fair value of derivative liabilities and an increase in operating income. Adjusted EBITDA for the three months ended 09/30/2024, was $2,100,000 versus a negative $264,000 for the the same period last year, an improvement of $2,400,000 Sanywave continues to execute its financial strategy to improve operational profitability and manage operating expenses. As previously discussed with the subsequent event of the Note and Warrant exchange, we're thrilled to be moving on from most of the derivative liability that has previously clouded our bottom line results. Total current assets amounted to $9,900,000 as of 09/30/2024, versus $9,800,000 as of 12/31/2023. Cash totaled $3,300,000 as of 09/30/2024.
We thank you for the continued support of SANUWAVE, and I'll now transfer the call back to Morgan.
Speaker 1
Thanks, Peter. So moving on to guidance. As you likely saw in our press release, we're guiding to 9,700,000.0 to $10,500,000 in revenue for Q4, which would represent roughly 40% to 50% growth from what was another sort of picture of Python quarter last year in q four when we had our first full quarter without supply constraints on our ultimate system, and we were catching up on backlog. Q4 twenty twenty three was up over 40% sequentially from Q3 of last year. So it's a bit more difficult of a quarter to comp against.
But obviously, this guidance takes us up to revenue estimate in excess of $32,000,000 for 2024 as a whole, which is a bit ahead of our previous guidance and would put us at a 50% or 57% year on year growth rate. The company's also been looking at requirements to uplift to Nasdaq and currently believes that it will be able to do so using the market value standard, presuming it is able to sustain a $4 bid price and a $75,000,000 market cap for ninety trading days. Yesterday, made fifteen days so far, not that we're counting anything. So, again, I can really just close by reiterating that we're building for long term here and that we're very excited by the progress we've made. We remain hungry for more.
I would like to thank the whole SangWave team for their extraordinary efforts here and to remind everyone that as our internal mantra is the reward for good work is more work, that there's going to be plenty more opportunity to come. So with that, I will open the call up for questions. Operator?
Speaker 0
And we'll take our first question from Alex Silverman with AWM Investments. Your line is open.
Speaker 3
Hey, good morning. Congratulations.
Speaker 1
Hey, Alex. Thanks for calling.
Speaker 3
Curious, a couple of questions. Can you spend a little bit of time talking about the your process of moving to a new manufacturer, both for systems as well as disposables and where you are in that process?
Speaker 1
Sure. So on the system side, we successfully completed the transition to two new contract manufacturers that we are using to manufacture the ultimate system now. We're now up we're now up and running there and are getting, you know, are getting systems in at a kinda 25 to 30 a week cadence. So that seems to be going very well. On the applicator side, we have been working through a minor redesign on a product that would remove a couple of ultraviolet sure if you should steps in the production process.
Once we have that design, you know, nailed down, we're looking to go and cut, you know, new larger molds that we can use and we're hoping to have kind of, I think at this point, probably sometime in Q2 next year have the second source stood up on applicators with the new design. Great. And sorry Our goal is to maintain multiple sourcing on these so that there's no single point of failure.
Speaker 3
Okay. Makes perfect sense. Given I assume your systems are a FIFO accounting. How many of this quarter's systems were on the new more profitable manufacturing as opposed to the less the lower margin prior?
Speaker 2
I'll take that one, Morgan. So just a few
Speaker 1
you want to fill that, Peter?
Speaker 2
Yeah, I'll take that. So just a few at the end of the quarter as these new contract manufacturers got stood up near the end of the Q3. And we still had leftover inventory from our previous ones. So in Q4, we'll start to see another uptick in our gross margin as our COGS comes down on those systems.
Speaker 3
Got it. Got it. So there will sort of be a step function on the margin on systems Q3 to Q4 and then starting in 2025 a step function on the applicators?
Speaker 1
Correct.
Speaker 3
Okay, helpful. And then in terms of the 124 systems that you sold in the quarter, which is kind of mind boggling. Can you walk through how many of those are to the, quote, unquote, more sophisticated, bigger customers, and how many of those are to the mom and pop? Well, so
Speaker 1
yeah. I guess it's it's always a little tricky to sort of to break it down that way. I mean, what we can say is, you know, we've had a couple new customers that have been you know, that that started to ramp aggressively in q three. And that, you know, between a couple of large customers, they were, you know, they were a very significant effect on the quarter. Okay.
I think we're sort of trying to stay away from, like, you know, revealing data about our customers and, like, who's buying how much what.
Speaker 3
And and if you could spend a moment on new customer pipeline and sort of what you're seeing out there?
Speaker 1
Yeah. I mean, the top of our funnel right now is exciting. Like, it's it's the best we've ever seen it, but it's also a little different than anything we've seen before where, you know, these are these are bigger customers. They're, you know, they're more sophisticated. They're potentially much bigger buyers of product.
You know, they also tend to take you know, if you're gonna buy a hundred systems, you think about it very differently than if you're gonna buy two. And so it's we're still sort of learning, you know, what it takes to move these guys through the funnel and, you know, the speed at which they move. But, you know, we're very excited about what we're seeing. It's you know, I think over the next several quarters, it really feels like we could be turning the corner here.
Speaker 0
Thank you. We'll take our next question from Christopher Davis with Founding Asset MGMT. Your line is open.
Speaker 4
Thank you. So Morgan and team, congratulations on executing frankly as efficient and comprehensive a turnaround as I've ever seen. So
Speaker 1
really Hey, we appreciate So
Speaker 4
maybe fill in a little bit of the profile over the next year of OpEx us. And maybe also talk about numbers of salespeople, what you had four quarters ago, what you intend to have what you have now and what you have what you may have next year.
Speaker 1
Sure. Thanks. So
Speaker 4
Thank you.
Speaker 1
We started this year with, I believe, three salespeople. There's there's actually been some turnover in Salesforce since then. I believe we're now at nine and should be at 11 by kind of the middle of this month. So that's obviously, we're starting to get some we're starting to get some traction there, and we're increasingly focusing on how to get more deeply involved with some of the bigger, more sophisticated customers. From an operating expense standpoint, obviously, headcount does add to OpEx.
We don't expect it to be anything like proportional. Q2 number expense reversals back out on a GAAP basis. This quarter had Q3 had some expenses in it associated with the transaction that we consummated in October with some of the proxies with the nonrecurring engineering expense associated with standing up the new production lines. And so I think in spite of having added a fair bit of headcount, I think it's reasonable to assume that operating expenses in Q4 are going to be about flat in dollar terms with Q3. And there should be some modest growth across 2025.
I mean, some of the swing factors will include things like weather and to what extent we're going to pursue some additional clinical studies. But overall, I think using the dollar value for Q4, pretty similar to what we experienced in Q3 is a reasonable assumption. Okay. Thank you.
Speaker 0
Thank you. We'll take our next question from Nathaniel Hearst, Private Investor. Your line is open.
Speaker 5
Morning. Morgan, just a couple of quick questions, if you don't mind. Looking here Page twelve and thirteen of your 10 Q that you guys filed last night, sections seven and eight, going senior secured debt in default of '26, just over 26,000,000 and a promissory note payable with $1,300,000 in default. Just looking to see when those might be getting cleaned up, if you will.
Speaker 1
Sure. So the $1,300,000 note has already been repaid as of this time and is no longer an obligation of the company. And the the default on the LH expansion debt was associated with noncompliance with a minimum cash covenant of $5,000,000, and that that covenant has also now been met. So at this time, we are no longer in default or in forbearance on any of our debt obligations.
Speaker 5
Okay. Beautiful. And page 16, the breakdown of U. S. Revenue and international revenue.
Obviously, you guys have done a tremendous job of growing revenue here in The U. S. International side, however, seems a little sluggish, if not meandering. I know you guys are focused on The U. S.
Side. Any comment on the international side?
Speaker 1
I mean the international sales were predominantly or I think exclusively actually associated with the dermaPACE and profile product line. And so the company's primary focus at the moment remains UltraMist in The US. And so given that UltraMist is not cleared for use in, like, the EU, we're it's just that's not going to be a focus in the near term. Like, the opportunity in The US is so large that we really we've chosen to focus there and really don't wanna be the dog that chases one bunny and comes home fed rather than trying to chase two and coming home hungry.
Speaker 5
Okay. And last question, the bottom of Page 25 and the top of Page 26, it says the company has still identified the following material weaknesses. It lists three of them. And then it says, as a result, management concluded that its internal control over over reporting was not effective as of September thirtieth of this year. Any any any ideas on that?
Speaker 1
Well, so, I mean, obviously, it's not it's not uncommon for companies our size to have various forms of material weaknesses in their reporting. It's something that we have chosen to focus on internally. We're now we've we've hired a full time employee whose entire job is to remedy these reporting issues, and, you know, she reports both directly to Peter, our CFO, and to the audit committee on our board. So these are issues that we believe are well within our remit to remediate and that we're currently working on.
Speaker 5
Thank you very much.
Speaker 0
Thank you. We'll take our next question from John Lundy, Private Investor. Your line is open.
Speaker 3
How soon do you expect to be cash flow positive? And if it's not in the near future, is there going to
Speaker 5
be more debt? How are you going to handle that?
Speaker 1
Well, as we mentioned on the call earlier, the company was cash generative in Q3.
Speaker 5
And you expect that to continue?
Speaker 1
I think we haven't given any guidance there. But I think based based on what we've said about operating expense and about expected revenue levels for Q4, I think you can probably do some reasonably good math.
Speaker 0
We'll take our next question from Ian Cassel with ISCM.
Speaker 6
Hi, Morgan. Congratulations on the quarter. I had a question about the clinical studies or validation studies that you may be working on now or may be working on in the future. I was just curious if you're quite honestly, if you're working on any more or do you see the need to do additional ones to get further penetration in the market?
Speaker 1
Yeah. Thanks, Ian. I don't know that it's so much a function of penetration in the market in that the you know, there's there's a fair bit of data out on Altamis, and we have a lot of we've we've a fair number of users out now that have history using the product, and there's general sense of, you know, have had good experiences with it. You know, the question becomes, you know, one, how do we bolster our claims using real world data? This is obviously something that both CMS and insurers have become increasingly interested in is do post approval studies show us that your product is working out in the field.
You know, we have some users that have, you know, repositories of data and are, you know, very interested in working with us on this. And so I I suspect, you know, we'll certainly be pulling together some data along those lines over the next year. You know, the question of prospective studies then becomes an issue of, is there something else, you know, we might want to be able to pursue and, you know, be able to make claims about. We have a couple of things in mind. I'm not sure this is really the place to discuss on, but it's there there are a couple of prospective studies that we think could be, managed fairly easily and that would that might yield some data that could be really beneficial to us.
Speaker 0
And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.
Speaker 1
Great. Well, thank you all for participating in the call. Thanks for the attention. Thanks for the questions. And we will speak to you next quarter.
Speaker 0
That concludes today's teleconference. Thank you for your participation. You may now disconnect.