SANUWAVE Health, Inc. (SNWV) Earnings Call Transcript & Summary

Greetings. Welcome to SANUWAVE Health, Inc. 2020 10-K Investor Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Kevin Richardson, CEO. Thank you. You may begin.

Thank you, Sherry. Good morning, everyone. Today, we'll provide an update on the following, the 10-K for 2020 and a brief review of the financial numbers; an update on 10-Qs for Q1, Q2 and Q3 of 2021 will be filed; an update on our conversations with representatives from the OTC. We will also provide business update and we will provide guidance on Q4 revenue. I will read the forward-looking statement. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to certain current and future events and financial performance. Forward-looking statements include all statements that are not statements of historical fact regarding intent, belief or current expectations of company, its directors and its officers. Such forward-looking statements include, without limitation, any statements regarding expected benefits of the transaction and its impact on the company's expected sales, marketing and other synergies of the combined company, cost-saving opportunities, cross-selling opportunities, new revenue channels and product lines. The company's pro forma sales coverage and organization, sales force growth, international market opportunities and sales model and growth strategy. Words such as expects, anticipates, projects, intends, plans, believes, estimates, variations of such words and similar expressions are also intended to identify such forward-looking statements. Investors are cautioned that any 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. Actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, without limitation, risks associated with the company's ability to successfully integrate the UltraMIST business, the transactions may not result in the expected benefits, risks associated with the regulatory approval, marketing of the company's product candidates and products, unproven preclinical and clinical development activities, regulatory oversight, the company's ability to manage its capital resource issues, competition and other factors discussed in detail with the company's periodic filings with the Securities and Exchange Commission. The company undertakes no obligation to update any forward-looking statements. With that out of the way, I'm going to dive right into the numbers. We've finally got the 10-K done after a long period of time. It's good to have it done and behind us, and now we can start beginning to talk about where performance has been and more importantly, where it's trending currently. And I'll end on that note, which will be pretty positive. So revenue for 2020 came in at $4.7 million versus $1.0 million the prior year, $3.68 million of the growth was due to acquisitions. The revenue for the core dermaPACE business was flat in 2020. Gross margins in 2020 were 82% versus 48%. This is due to the mix of products that we're now promoting, UltraMIST, dermaPACE and the recurring revenue associated with that. R&D was $1.4 million. That's up 18%. Sales and marketing were $5.1 million versus $1.6 million, 224% increase, that's due mainly to the acquisition and the classification of our sales team that we picked up in the acquisition. G&A was $13.1 million versus $6.4 million in 2020, an increase of $7.3 million. It's primarily related to the acquisition expenses, higher payroll with more employees and outside cost of consultants. In the 10-K, you'll also see that cash burn would be expected to be $500,000 to $1 million a month in the first half of '21. We also gave guidance that it will drop to less than $100,000 in the second half of 2021 due to cost savings and revenue growth. We are currently -- and this is currently kind of real-time experience, some months were actually EBITDA positive. So with the cost savings and revenue growth of the projections that are in the 10-K are accurate, we've kind of crossed over to that close to breakeven standpoint. I'm going to review a little bit of 2020 from the MD&A section. 2020 was off to a really strong start, and then COVID hit. We have had significant impact on the dermaPACE placements at that time after the strong start. As we stated previously, Wound Care Center visits in that initial COVID period were down 40%. I'm at a conference right now and some of the statistics that have come out of the studies about the decrease in patient visits is pretty staggering. That's the bad news. The good news is most of the facilities are now back to normal, getting back to normal and opening up so that our sales team are now able to go back in, it's -- and we're seeing it in the top line. For SANUWAVE the ability -- that an ability to grow new accounts really had an impact. We were not allowed into hospitals, so you can only visit existing revenue streams. And this really had a tough impact on dermaPACE last year. This led to a flat dermaPACE revenue in 2020, which I actually think was fairly good, given we couldn't really grow the business. But 2020 is going to be marked by the acquisition of the UltraMIST assets and the distribution agreement with Celularity. Bringing the 2 energy devices under one roof was transformational and the opportunity to make the ENERGY FIRST platform, premiering the Wound Care was and still is why we did the acquisition. The rebranding took place April 20 and relaunch of the ENERGY FIRST platform where we began to just push all the energy products and that will walk through some of the numbers since that relaunch in April, which we talked about back in the spring. But let me be clear, we bit off more than we could chew in the acquisition. We were not ready for going from a $1 million company with 100 customers to over -- well over $10 million and 800 customers, multiple product lines. We attempted to use third parties to help supplement and help on the implementation and roll up and ramp up. But despite the consulting expenditures, the back-office integration, quite frankly, was a failure moving to the new accounting platform. This led to improper billing invoicing, general ledger entries, a bloating of our accounts receivables and coupled with the restatement of the Q3 financials due to an uncaught error in the warrant liability accounting led to delays in our filings, which we are now getting back on track, and I'll explain the plan forward as we tackle these. COVID was still impacting the business as well in the second half as that second wave hit and many states restricted access to hospitals. Suffice it to say, great acquisition opportunity, but it did not initially go as expected on the integration of systems. That's mainly a back-office issue and the hit by COVID did have an impact and kind of kept the ceiling on our new sales as we entered 2021. Our products are new to the market and depend on in-person demos, which could not occur. So that really, like I said, put a damper on things. So what do we do to fix this? We put a plan in place to tackle the issues and slowly -- painfully slowly address each item. First was fixing the NetSuite implementation bringing in the right customer service and accounting people to get going on invoicing, collections, all while launching and relaunching the Energy First platform. So we were kind of building the business yet at the same time fixing the problems. We brought in the right resources. We brought in an experienced public company CFO to help run the accounting department. And methodically, that team and he have done a great job getting the processes in place so that we can move forward, finally get the K on file and now start to work on the other filings. But while we're doing that, we're also fixing a lot of the systems issues that we had. We also used this crisis, call it, as an opportunity to let go of some unproductive employees. Most of the salespeople let go were really unproductive despite having great products with great reimbursement in major markets. So that happened in the late April, early May time frame. And that was really when there was a pivot or a reset on the focus to the ENERGY FIRST platform. It's when we relaunched our marketing campaign, began with some adds in different Wound Magazines, conferences we're opening back up, and we were able to bring on some new employees from great organizations like KCI or again Genesis, even places like MiMedx and so forth. So we got, I would call it, got rid of those that were not performing, which lowered our costs and then started adding people that are really productive. So it was a little bit of a purge, so to speak. The reinvigorated sales team has seen our monthly revenue, and I'm going to start getting into some of the numbers, the revenue was up over 10% month-on-month since that time. For the year, we're averaging over 10% month-on-month growth. But since that May period, it really had a major impact. In fact, since that purge, we've more than doubled our monthly revenue with less people. So the productivity went up as the team has really done a super job. We're currently averaging over 30 -- well over 30 device placements a month, that compared to 5 prior to the acquisition. That refocus is nothing short of energizing the entire team. I can tell you at this DEF CON Conference we're at right now, we're getting a lot of interest because people are well aware of the clinical evidence of the devices. But when they look at the reimbursement profile that it has currently, it really is kind of one-two punch to get hospitals and practitioners excited about the product. Also, since May, we've decreased cost with lower headcount, not just at the sales level, but in the infrastructure level, as we've gotten more efficient using the systems and getting them the right way. We also have the plan move from 2 manufacturing and customer service locations up to 1. That will conclude in the following few weeks. So everything will be up in Eden Prairie, Minnesota. And just having everything in one location, the flow of information and how people are operating has just been pretty fantastic. And there's, again, good cost savings associated with that. We are still incurring third-party costs that are higher than we want as we are getting caught up on the filings, but those will abate before year-end as we do get all those costs caught up. So we'll have a, what I would call, a real run rate probably in the December, January time frame of where our cost structure is. And I expect to be EBITDA positive at that point in time, just given the growth and the lower cost structure. In summary, the past year, we have had our setbacks, initially with the top line due to COVID and poor integration on the back-office, but we have attacked this with vigor and are getting systems on track and importantly, sales are beginning to really take off. Let me talk about the Q1, Q2 and Q3 10-Qs, with the 10-K done. And again, it was a lot of work from the team, and I give them a lot of credit. It was almost having to put everything back together starting in February, March time frame, again, the outside help we brought on in April has been spending the summer making sure all the systems are right and everything is done the right way so this never happens again for us. And -- but we're going to get the Q1, Q2 and Q3 done as fast as we can. It will be a faster process than the 10-K, that is for sure. I'm not going to put a target date on when we expect these things to happen because quite frankly, I've been very -- I've been wrong on my timing expectations on the K and other filings. And so I would just tell you that we have 5 people in the accounting group, we're adding another one, and it's getting done as fast as we can. And then after each Q, what we will do is we'll have a call like this to review the quarter numbers and then we'll give an update on guidance and outlook. And then once we're caught up and fully caught up on our financials, we will go into a -- we might even have like an Investor Day where we can give everyone a look and feel for what is going on with our products, show off kind of what we've done on some of the innovations and at that point in time, we can probably give some guidance into 2022 as well, which -- and a quick peek into that based on our -- based on what the sales team is doing is going to be substantial from 2021. With regard to the OTC, we have ongoing dialogues with the senior people there. We will keep investors updated as to when we will be relisted from the expert market to either the Pink Limited, Pink Current or OTCQB based on what we've seen from other companies, my best guess based on these discussions and again, the discussions are ongoing, so this could change. It will probably be when we get the Q2 number filed. If we can get the Q2 number filed quickly, that may be the time and then the process is actually fairly quickly. It's not the 5 months that some folks think, it happens in 24, 48 hours. So hopefully, we can have that happen once we get caught up. And as I mentioned before, the team is working diligently to get the Qs done. Finally, I want to provide some guidance on where sales and breakeven results stand. As mentioned, Energy System, and I'm going to give some specific numbers as to how the revenue growth has progressed throughout the year. Energy Systems, month-on-month have seen revenue growth over 10%. The sales team has quoted, is in trials. They have to do a certain number of placements each month and we track that in just the trial, just so people understand, it's usually a 60-day trial. During that 60-day period, what the doctor's office, the hospital and nursing home are doing is they're making sure that the -- they've got the right patient base, they've done the training right clinically, they can see some of the clinical results. And also, importantly, they can do some billing and get the money and say, yes, we're getting paid for this, the return on economics is really strong, we'll take the device. And I'll get into some of the backlog numbers just so people understand that as well. But in general, the sales team is exceeding at least my expectations. The initial getting 2 placements a month on UltraMIST, 1 at dermaPACE. They're doing it, and it's been really rewarding. We have great products. Clinically, they're superior to a lot that's on the market. Our reimbursement is fantastic right now for docs and hospitals, and we're cracking some of the mobile markets, some of the assisted living, skilled nursing and that's a whole new opportunity that didn't exist a few years ago for either company. The strength of the reimbursement this past year also led us to increase prices. So because of the strength and the acquired company, UltraMIST didn't -- has never increased prices since they kind of rolled the product out. So this year, we increased like applicator pricing 50%. And so that's a big jump. The numbers you're going to hear are actually fairly sizable. We increased rental prices double. So we doubled our rental -- monthly rental pricing. We also increased the average selling price for the units by 25%. So in general, we had price increases in the 25% to 100% range. And at the same time, as I mentioned earlier, we've seen the product placement go from 5 a month to over 30. So we're -- despite price increases, we're continuing to see demand and that's due to the clinical and the reimbursement rates that they're getting for these. We also introduced lease financing options as well this year, and we're seeing that mix between rentals, lease and purchases that balance out -- about 3 to 5 rentals a month and about half of the 30 that get placed are leased and half are purchased. So it's a good balance and something we like having that balance in the mix. Applicators, I'm going to go through some usage numbers. Again, I went through the 5 going to 30 applicators used on a monthly basis. So the number of applicators used on a monthly basis is up over 50% since that time period. This means that we're not just placing more, but people are using it more. And so that's, quite frankly, the best indicator of how we can measure success. And quite frankly, that's how they're saving patients. The monthly energy system revenue is up over 140% since that April, May time period. So we're seeing an increase on a monthly system revenue up over 140% during that time period. Again, it was a good reset. Again, it was getting rid of some of the bad wood and keeping the good stuff. So despite the smaller sales teams, they're far more productive. We currently have a pipeline, and so I'm going to give some pipeline numbers. And I'll do this on each of the calls going forward, so you can see how we're progressing. We're up over $12 million in pipeline right now and pipeline is sales that are expected in the near term to close. They include kind of the yearly value, so they also have a tail to it. So I don't want to make it sound like we'll have $12 million in the next 3 months. That $12 million represents revenue that can be signed up and then recognized over the following 12 months. That number in the pipeline compares to the last call we did where we gave a guidance number with $7 million. So it's up 71% since June. We have over 90 trials. That's up from 54 in June. So again, we've got the right -- the team, despite all the noise that's in the 10-Ks and so forth, the team has done a great job getting trials out there and pipeline out there and driving revenue. Based on this information, we'll continue to see strong growth on a month-on-month growth basis through the end of the year and well into 2022. I won't go into some of the big initiatives for 2022, but there'll be some large centers in large groups that we begin to roll out. And those are multiple site groups. Some are 10 systems, some are over 100. And so those will be ones that the national account teams have been working on, and we expect to announce in the coming months for rollout in 2022. So we're going to expect to see revenue in Q4 exceed what we did all of last year. So in 2020, we did $4.7 million. We'll see at least that in Q4. I don't know if it's going to be $5 million or $6 million, but we'll give updates on each of the coming quarter calls, but that will be -- our Q4 will be higher than what everything was in 2020. I don't know if it'll be positive EBITDA for the full quarter -- fourth quarter, but we're right in that range. And so we are going to have some months. We've already had certain months in the third quarter that were EBITDA positive. In the fourth quarter, just depends on when some of the expense items hit, but we're right at that cusp of EBITDA positive in Q4. It doesn't mean we're cash flow positive, but we are looking and trending towards that. So we've been tackling the remaining accounting issues. We're going to get the filing complete. We will continue to show top line growth and control expenses. So I guess, the summary that I'd like to kind of conclude with is that the metrics between pipeline, placements, sales, are all trending in the right direction with pricing increase, that means gross margins will be strong and that with the lower cost structure means that we're getting to that EBITDA positive standpoint as a company. The one area of concern that I do have, and I just want to highlight it for folks is that given our pipeline, our strength and the large opportunities we have, and again, I'm looking forward on the future calls to talk about those victories when we get them, is just managing our supply chain and nothing to report currently, but that is a challenge that the team has been working on to make sure we can meet our demand. We're currently -- the growth has outstripped what we had planned for earlier this year on certain aspects of the business. And so we're working with our supply chain to make sure we continue to meet the demand of the customers. I mean, there's a revenue reason for that, but there's also a patient need reason for that. We don't want to ever have a patient not get treated because of a supply chain issue. So we're going to really stay focused on that. We're going to keep you updated on this. But right now, that's the only thing I could see us derailing the momentum we've built right now. I'm going to conclude the call, but I guess the key takeaway that people should focus on is that we've addressed -- or addressed -- we've identified and addressed all the issues with regards to the SEC filings. We've got the team, the right team onboard to focus on growth. The metrics between pipeline, month-on-month sales growth, gross margin and costs are all trending in the right direction. And I can't wait to get the rest of the filings done and have the conversations with OTC. So we're back to "normal" again and get everyone on a call where we can go through more details on clinical plans, reimbursement plans and some new product plans and also talk about IP monetization, which is moving forward as well. So we've got a pretty robust pipeline, but this call was really meant to give an update on the 10-K that it's done, give some highlights of what's in the 10-K and then dive into the business itself, which, again, we're heading in the right direction. And it's an exciting time here. The team's really charged up. With that, thank you very much. If you have any questions, concerns, calls, please contact us, that you can do, I think it's [email protected] or [email protected] or [email protected], we'll be glad to chat. And again, thank you, shareholders, for your support in all this. It's not been fun on the filing side of things, but I can tell you the team is having a fun time rolling out the products and having a lot of big wins, and we're looking forward to sharing those as we move forward. Thank you very much, and have a great day.

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