Sanuwave Health - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue reached $10.3M, up 47% year over year and 10% sequential, with gross margin at 77.9%—both new company records; operating income was $2.5M and adjusted EBITDA was $3.7M, despite a GAAP net loss driven by derivative liability fair value changes.
• UltraMIST® momentum continued: 135 systems sold (vs. 79 in Q4’23 and 124 in Q3’24) and consumables revenue of $5.9M, comprising 58% of total revenue; no single customer contributed more than 7% of revenue in the quarter.
• Management introduced FY2025 revenue guidance of $48–$50M and Q1 2025 guidance of $8.4–$9.0M, highlighting ongoing sales-force ramp and stronger pipeline; Q1 seasonality expected to temper sequential performance from Q4.
• Capital structure simplified in October (1-for-375 reverse split, note/warrant exchange, $10.3M PIPE), followed by uplisting to Nasdaq Global Market in March 2025—key catalysts positioning the equity to be valued on business fundamentals rather than balance sheet complexity.

What Went Well and What Went Wrong

What Went Well

• Record quarterly revenue and margin: Q4 revenue $10.3M; gross margin 77.9% (vs. 69.1% in Q4’23 and 75.5% in Q3’24), reflecting scale benefits and pricing discipline.
• Systems and consumables growth: 135 UltraMIST® systems sold; consumables revenue up 59% YoY to $5.9M and 11% QoQ; balanced customer mix with no account >7% of revenue.
• Positive operating leverage and adjusted EBITDA: Operating income $2.5M (up 143% YoY); adjusted EBITDA $3.7M (vs. $0.7M in Q4’23); management emphasized “turning a corner” and positive operating cash flow even after cash interest.

Management quotes:

• “Breaking into 8 figures at $10.3 million was a meaningful milestone… the result of strong growth in both our systems and our consumables.”
• “This feels like turning a corner… we’re especially excited about our gains in gross margin and adjusted EBITDA.”
• “Q4 was a quarter without any exceptionally large orders where no customer exceeded 7% of revenues.”

What Went Wrong

• GAAP net loss of $(12.7)M, driven by non-cash derivative revaluation, valuation adjustments from share/warrant exchange, and debt extinguishment accounting; prior year Q4 showed a derivative-driven net profit.
• Operating expenses rose to $5.5M, notably from $1.5M in stock-based compensation following option grants for the first time in six years, dampening GAAP operating leverage optics.
• Persistent derivative and financing noise: change in fair value of derivative liabilities ($13.78M), gain on debt extinguishment ($(1.121)M), and other adjustments required to arrive at adjusted EBITDA—complicating comparability and screening.

Transcript

Operator (participant)

Good day, everyone, and welcome to today's Sanuwave Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star, then the one key on your telephone keypad. You may withdraw yourself from the queue by pressing the star two key. Please note today's conference is being recorded. 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 Sanuwave.

Morgan Frank (Chairman and CEO)

Thank you, Margo. Good morning, everyone. Welcome to Sanuwave's fourth quarter and full year 2024 earnings call. Our Form 10-K was filed with the SEC last night. Our earnings release was issued this morning, and our updated presentation was made available on the website in our investors' section. You can please refer to that during your presentation. Joining me on this call is Peter Sorensen, our CFO, and after the presentation, we'll open the call up to Q&A. Let me begin with the obligatory forward-looking statements. 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, and actual results may differ materially from those projected in the forward-looking statements. The company undertakes no obligation to update any forward-looking statement. Okay. As a reminder, today, our discussion will include non-GAAP numbers. Reconciliations between our GAAP and our non-GAAP results can be found in our recently filed Form 10-K for the year ended December 31, 2024. Okay. With that out of the way, let's get to good stuff. Last conference call, we spoke about pigs and pythons and how engaging with larger and more sophisticated customers who were capable of purchasing large boluses of products and having profound effects on our quarterly numbers was going to be one of the key characteristics of our revenue stream going forward.

Q3, as I think many of you noticed, was definitely a pig quarter. Q4 gives us a chance to look at what a non-lumpy sort of non-pig quarter looks like as we had no outsized orders in the quarter nor any customers exceeding 7% of sales. We are pleased to have come in around the high end of our quarterly guidance and slightly above our guidance for the full year and have set yet another record revenue for revenue and systems in the quarter. Breaking into eight figures at $10.3 million was a meaningful milestone for the company, and it was the result of strong growth in both our systems and our consumables. We sold 135 UltraMist systems in the quarter, outpacing even the 124 pig quarter from Q3 and far exceeding the 79 that we placed in Q4 of 2023. That's 71% growth in systems sold year-over-year.

We ended 2024 with 1,047 systems in the field, up from 647 at the end of 2023. Applicator sales in Q4 were $5.9 million, up 68% from Q4 2023 and up 11% sequentially from Q3. They constituted 58% of our overall revenue in the quarter, in line with our 55-65% target for consumable sales. We're really excited to be performing on model there and with reasonable predictability. Benefits from scale, from new manufacturing agreements, and from price discipline have resulted in increased gross margins that have reached 77.9% in the quarter. This extra margin and our focus on cost controls led to expansion in operating and adjusted EBITDA margins for the quarter, and the company was, for the second quarter in a row, cash-generative from operations even after making its cash interest payments. The last several months have really been a pivotal time for Sanuwave.

What has come to be internally referred to as Shock and Awe Friday last October 18th represented a major step in simplifying our cap structure by exchanging our convertible notes and warrants, rationalizing our share price through a reverse split, strengthening our balance sheet with a $10.3 million PIPE transaction. We paid off some of our non-compliant debt. We also paid down a $2.8 million revenue factoring facility to zero by the end of Q4. This set the stage for the company to uplist to NASDAQ, which occurred on March 7th of this year and represents a major step toward our long-cherished goal of becoming a company that can be valued for the quality of its business instead of the complexities of its cap structure.

Now, to walk you through some further financials and to help you assess this alleged quality of our business, I will hand you over to Peter Sorensen, our CFO.

Peter Sorensen (CFO)

Again, achieving 10% sequential growth from last quarter's previous record, as well as strong year-over-year growth of 47%. In addition to top-line expansion, we also saw continued improvement in gross margins, both year-over-year and sequentially, reinforcing the strength of our business model. We continue to execute on our goal of rapid, profitable growth. With that, let's take a closer look at the numbers. Revenue for the three months ended December 31, 2024, totaled $10.3 million, an increase of 47% as compared to $7 million for the same period of 2023. This growth is in line with our previous guidance of 40-50%. Gross margin as a percentage of revenue amounted to 77.9% for the three months ended December 31, 2024, versus 69.1% for the same period last year.

For the three months ended December 31, 2024, operating income totaled $2.5 million, which is an improvement of $1.5 million compared to the same period last year, which aligns with our continued initiative to drive towards profitable growth and manage spend effectively. Operating expenses for the three months ended December 31, 2024, amounted to $5.5 million compared to $3.8 million for the same period last year, an increase of $1.7 million. This change was largely driven by an increase in non-cash, expense of stock comp of $1.5 million as we granted stock options to our employees and board of directors for the first time in over six years. Net loss for the three months ended December 31, 2024, was $12.7 million compared to net income of $18.2 million for the same period in 2023.

The decrease in net income was primarily due to a change in the fair value of derivative liabilities, which was a $20.3 million gain in 2023 versus a $13.3 million loss in 2024. Most of the derivative tailwagging should be behind us in future quarters as part of the note and warrant exchange that Morgan alluded to that we completed in Q4 2024. EBITDA for the three months ended December 31, 2024, was negative $9.7 million. However, adjusted EBITDA for the three months ended December 31, 2024, was a positive $3.7 million versus $0.7 million for the same period last year, an improvement of $3 million year-over-year. We'd like to take a moment to walk through the bridge from EBITDA to adjusted EBITDA this quarter, particularly to highlight several non-cash infrequent items related to cap table restructuring and cleanup activities completed in October 2024.

First, consistent with our historical practice, we adjusted EBITDA for the non-cash change in fair value of derivative liabilities, primarily related to the quarterly valuation of warrants. This adjustment reflects the impact of warrants that were exchanged for common stock in October. Additionally, we adjusted for a non-cash gain recognized from the conversion of principal and interest associated with our convertible notes, which were also exchanged for common stock. The gain resulted from our stock price being below the note conversion price at the time of exchange, $12 per share versus the $15 issuance price. We further adjusted EBITDA for a legal settlement and severance expense, totaling $156,000 during the fourth quarter. Finally, we adjusted EBITDA to exclude stock-based compensation, which is a non-cash expense.

This adjustment was partially offset by the release of certain historical accruals following our board of directors' decision to remove their previously accrued cash compensation. Going forward, the board of directors' compensation will be paid in stock options as opposed to cash. As previously discussed with our operating expenses, we are pleased to be able to grant stock options to our employees and board of directors in Q4 for the first time in over six years. A detailed reconciliation and further breakdown of adjusted EBITDA can be found in our recently filed Form 10-K and accompanying press release. We remain focused on executing our financial strategy, driving operational profitability, and maintaining disciplined management of operating expenses. Total current assets amounted to $18.4 million as of December 31, 2024, versus $9.8 million as of December 31, 2023. Cash totaled $10.2 million as of December 31, 2024.

We appreciate the continued support of SANUWAVE through this transformative past year and look forward to building on this momentum in 2025. With that, I'll turn the call back over to Morgan.

Morgan Frank (Chairman and CEO)

Thanks, Peter. Moving on to guidance, as you likely saw in our press release, we're guiding to $8.4 million-$9 million in revenue for Q1, which would represent 45%-55% growth from Q1 of 2024. Q1 is always a somewhat seasonally slower period for medical device, including both systems and consumables, as both budgets reset and so do customer deductibles. We're expecting a slightly smaller drop on a percentage basis versus Q4 than the drop that occurred in Q1 of 2024 as compared to Q4 of 2023. Alas, Q1 seasonality remains a fact of life and lifestyle. For the year, we're initiating guidance of $48 million-$50 million in revenues, representing a 50% year-on-year growth rate, plus or minus 3%. We feel good about our opportunity, about our sales funnel, and about our sales and productions teams and their ability to generate and meet demand.

I mean, it's sort of wild to me that it's already been 22 months for me here as CEO. I guess time flies when you're having fun. It really does seem like we're getting to the good part here. I just want to reemphasize that none of this just happens. Companies exist downstream of their culture, and I could not be more proud or grateful to the team at Sanuwave. As ever, our highest reward for good work is more work. We're going to keep at it, and we look forward to speaking to you again soon about our further progress. With that, let's open the call up to questions. Margo, if you could begin to queue them up.

Operator (participant)

Thank you very much. At this time, if you'd like to ask a question, please press the star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one for a question. We'll take our first question from Chris Plumb with Tall Pines Capital. Please go ahead.

Thanks, guys. Great year. I noticed you hired a new head of sales.

Morgan Frank (Chairman and CEO)

Hey, Chris. Morning.

Good morning. I noticed you guys hired a new head of sales back in January. Can you walk us through what's changing versus last year and how it's going so far?

Sure. Yeah, good question. We started 2024 with two salespeople. We ended the year with nine, and we will likely end Q3 also with about nine, but three of them will be different than the nine that we ended Q4 with. Ultimately, the change in strategy is reflective of our change in the perception of the best way to sell and market this product. We have moved to a deeper, more consultative sale where we're going past the easy economics of engaging with customers and trying to find ways to build long-term partnerships where we are built in to their treatment plans, their therapy plans, even their patient enrollment guidelines. This takes a different kind of sale. It tends to come more from the top down. We're starting to engage with, because we've discussed, some substantially larger customers.

We have changed the salesforce and the head of sales as a way to reflect that. We are really excited about hiring Tim Warne. I am not sure if you are aware. Tim was the number two for our board member, Jeff Lazar, when Jeff was the head of sales at Abiomed. These are sort of the two guys that took that company from $15 million to $400 million. He came highly recommended, and we are really excited to get the band back together again with those two.

Great. Thanks.

Operator (participant)

Our next question comes from Carl Byrnes with Northland Capital Markets. Please go ahead.

Thanks for the question, and congratulations on the quarter and the progress. You noted in your.

Morgan Frank (Chairman and CEO)

Hey, Charles. Good morning.

Oh, thanks. Thanks. Good morning to you as well. You noted in your prepared comments that no customer represented more than 7% of revenue. I'm wondering with the 135 UltraMist placements or installs in the fourth quarter, how you might characterize these placements with respect to large, multi-order enterprise-type accounts or small kind of one, two-system order accounts. The same with respect to your outlook for 2025. This is obviously as you move to a larger customer focus. Thanks.

The answer to that question gets a little bit complex. We certainly sold a number of ones and twos in the quarter. We were excited to see a substantial number of new customers in the quarter. We are also excited to see some of our existing customers growing their businesses substantially. We had one significant-sized customer in the quarter come back and order, I believe, almost 20 systems. It is going to be a mix. I think as we sort of think about planning for our base business, we are assuming sort of an ongoing pace of smaller sales, of ongoing uptake from our existing customers. We are sort of looking at the really big potential sales that might be out there as upside.

It's still early for us in terms of getting the grips with exactly how some of these bigger customers are going to want to roll out, whether they want to do things all at once, whether they want to do things on a more measured pace. I think it's difficult to give too, too much guidance about that. What we are gearing up for internally is to be able to take yes for an answer in a situation like that, where we're trying to build our we're trying to build up our inventory of systems quite substantially. We're currently manufacturing UltraMist systems at a pace of about 25 a week. We're working to be able to double that on 60 days of notice.

That's sort of the challenge I've given to the ops team is, if we need to double that, let's be able to do it in 60 days. I think we're starting to get close to being ready to do that, or at least able to do that. It's probably a better way to describe that.

Great. Thanks. That's very helpful. With respect to the larger customers, I mean, with essentially 20-plus placement orders, is there any way that you can manage that so there's not lumpy scenarios in any particular quarter?

I mean, I guess I'm not entirely sure what you mean by manage it just from a standpoint of if somebody wants to put getting systems in the field is obviously our goal, and systems in the field generate consumables. From our standpoint, we're always sort of excited to do that earlier and to get more patients under care. I think it is going to continue to be when we give guidance, I think we sort of like to talk about what we think the base rate of the business likely is. This is what we plan to. You don't want to build your business on the assumption that there's going to be a there's going to be a pig in the python every quarter. I think when they come, we want to be able to move at them quite rapidly.

I've got it. That totally makes sense. Thanks so much, and congrats again.

Thanks.

Operator (participant)

Thank you. We will next go to Ian Cassel with IFCM. Please go ahead.

Hi, Morgan. Congratulations on your.

Morgan Frank (Chairman and CEO)

Hey, Ian. Good morning.

Good morning.

Thanks.

I was wondering if you could provide some color on advancing additional kind of confirmatory studies and also maybe perhaps new studies to potentially open up more use cases for UltraMist.

Yeah, sure. It's a good question. I guess we're looking at it a couple of ways. Obviously, with the company now on sort of sounder financial footing, it's great to be able to start to think about these things again. We've started some more concerted outreach with some of our KOLs, with some of the researchers who have done some studies in the past. I think a couple of our customers have some very significant repositories of data. I think a couple of at least one or two will likely have papers, posters at SAWC this year. One I know of that actually has an interesting new application of the product. I don't want to get into too much detail and steal their thunder. We're excited about that. As we go back and look, those obviously would tend to be retrospective data analyses.

I think as we go forward and say, "Okay, what prospective studies would we want to do going forward?" There are a number that have been interesting to us, particularly several that were done in the past, showed really promising results, but that were simply underpowered. We had some study we had a study in it's up on our website. We had a study in 2015 on the split-thickness donor sites that result from skin grafts. Despite only having 27 people in the study, it hit statistical significance on time to re-epithelialization, time to first time to no drainage, and very nearly hit stat sig on wound recurrence at six weeks. That is a big deal because these split-thickness wounds, they are really painful, and they have a nasty tendency to come back.

The recurrence rate at six weeks under standard of care was 45%, and the recurrence rate at six weeks under UltraMist was 8%. To only kind of hit a 0.6 p-value there was, I mean, it's disappointing, but I think it really was just a fun. I mean, if we can replicate that with a larger study size that's sufficiently powered, that seems like a really interesting application. I think that there are a number of other places we could take that sort of idea. Recurrence rates are a big cost. They're a big fear in things like diabetic foot ulcers. There are lots of places where it stands to reason that we could have a useful effect on recurrence rates. I think getting into the clinic and trying to validate it could get pretty interesting. Stay tuned on that.

I think over the next quarter or two, we should start to get some concrete plans in motion.

Great to hear. Thanks for the color.

Operator (participant)

Thank you. At this time, we have no further questions. I'd like to turn the call back over to Morgan Frank for any final or closing remarks.

Morgan Frank (Chairman and CEO)

Thank you, guys. I appreciate everyone attending this morning, and have a great Friday.

Operator (participant)

Thank you. Ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at any time.