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

Greetings. Welcome to SANUWAVE's Business Update Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to Kevin Richardson, CEO. Mr. Richardson, you may now begin.

Thank you, Rob. Good morning, and welcome to the SANUWAVE Q3 2021 Earnings Call. SANUWAVE filed their 10-Q with the SEC on February 28. My name is Kevin Richardson, the CEO of SANUWAVE Health. Today, we will review Q3 results, update on progress made in the fourth quarter. We will also provide some visibility into how 2022 is shaping up. We will update our status on trading on the OTC and on future SEC filings. Lastly, we have been collecting questions over recent weeks from investor inquiries. We will attempt to answer some of those on this call. As always, if investors have follow-up questions, they can reach out directly to the company at the contact information provided. First, let me start with the obligatory forward-looking statement. This presentation contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 218 of the Securities Exchange Act of 1934. Statements that are not A description of historical facts constitute forward-looking statements that may often, but not always be identified by the use of such words expects, anticipates, intends, estimates, plans, potential possible, probably believes, seeks, may, will, should, could, or the negative of such terms or other similar expressions. Such statements include the quotation from SANUWAVE's CEO and statements related to the company's 2022 financial outlook. More detailed information about SANUWAVE and the risk factors that may affect the realization of the forward-looking statements as set forth in SANUWAVE's annual report and Form 10-Ks for the fiscal year ended December 31, 2020, SANUWAVE's quarterly reports on the Form 10-Q and other filings submitted with the SEC. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and actual results may differ materially. All forward-looking statements are qualified in their entirety by this cautionary statement, and SANUWAVE undertakes no obligation to revise or update this release to reflect events or circumstances after that date hereof. Those who have been on our last few calls have heard this before, but I do believe it's worth repeating because it provides the context on how we arrived, where we are today? We aren't proud of this path, but we are proud to say most of the tough days are behind us and with the most recent filing made September 28, and the trending of the business. Hopefully, this will be the last time I have to review what happened in 2021. For those who have not heard, we acquired UltraMIST assets from Cellularity on August of 2020. The rationale was to combine the 2 best energy devices on the market for wound healing, leverage the Cellularity sales force and footprint for cross-selling and then work on combination strategies to bring a comprehensive healing paradigm to the wound healing world. We're taking one small company and combining with a larger company that didn't have the infrastructure support. We engaged outside consultants to assist on this integration. We took 2 accounting platforms and merged it onto a brand-new 1 NetSuite. We rolled out the salesforce.com along with other data tools to help run and drive the business. And this all went live November 1, 2020. As I've said before, it's the [ tale of 2 ] companies in some regards. The integration was a disaster on the accounting front, and it failed. Things that were supposed to happen didn't, and we did not have the internal team to fix the problems, which caused a triple whammy, so to speak. To address the fix, we had to leverage outside resources, which are expensive to say the least. With the dollars going towards the fixed instead of growth, it also impacted us. Second, it has delayed our ability to file timely with the SEC and our investors. This led to SANUWAVE being moved to the expert market at the end of September. The third and probably most damaging was our inability to use the systems to diagnose and analyze and understand the business trending at that point in time, kind of like driving without a dashboard. The integration and my estimate set us back probably about a full year in performance. While that was taking place, we restructured the business, focused solely on the energy products, eliminating the unproductive salespeople, consolidating offices, shrinking the number of employees to better optimize the companies. This was initiated in May of '21. And since that time, the top line has seen consistent growth. I will share metrics later on, which will show that, but we knew the underlying products were great clinically, had solid reimbursement, easy to use in a wound setting. So once we ridded the ship, we knew that the sales team focused solely on energy could make the magic happen. And that's what got us to today. Going forward, we have the systems and processes largely fixed. So a lot of what I've discussed is behind us. The pipeline has never been stronger, and we'll share that with you today, and our outlook for '22 is extremely bright. Let me dive into third quarter results. For the 3 months, revenue was $3.7 million compared to $1.4 million. That's an increase year-over-year of 173%. Revenue for 9 months was up 448%, $8.75 million versus $1.6 million. Gross income for the 3 months was $2.2 million versus $0.7 million. That's up 184%. The gross margin increased from 56% to 59%. Gross income for 9 months increased to $5.1 million from $800,000. The margin increased to 58% from 48%. International in the quarter year-over-year was flat, but was up 198% for the 9 months to $573,000. Third quarter was really the first quarter where the actions in May, the restructuring to focus on energy only took hold. It was during this time period, the sales team began to achieve their new quotas based on the number of trials they need to place per month. The team not only met their required quotas, they exceeded them. A trial, as we define it, comes from a qualified lead in the last 60 to 90 days. The majority of these turn into sale of revenue for us. It is during the trial period that the physician, the clinician and their office managers or CFO, are looking to see clinical effectiveness. How it works in the workflow, but also extremely importantly, how they're getting reimbursed? That's why it's a 60- to 90-day period. Without reimbursement being positive, they just won't use the product. Fortunately for us, we have seen reimbursement year in, year out increase for both products, dermaPACE and UltraMIST. UltraMIST has gone up threefold over the last 4 years. It's an extremely profitable part of a physician's practice if he uses it effectively on those wounds that are applicable. The trend with trials continued into the fourth quarter with strong results. In December alone, we crossed over $2 million a month in revenue and importantly, $1.2 million of that was the recurring revenue. The recurring revenue is the portion that is driven by our sale of onetime applicators, rental units, the required refurbishment of shockwave applicators and wound kit sales. We did, however, have a supply chain issue in Q4, which spilled into Q1. It's now mostly behind us. The supply chain issues were due mainly to our supplier of applicators for the UltraMIST products and their inability to keep up with the speed of our growth. We had forecast this growth to them. But quite frankly, I don't think they believe that we would be able to double and triple the number of placements of UltraMIST devices in such a short period of time. We've also run into material-related shipment delays like tubing, resin, even clamps. The latest impact is around the shortage of tieback, which is used in our pouches that we store the wands for the [ UltraMIST ]. We're working extremely diligently with our suppliers to make sure we have enough stock to handle our growth and feel comfortable at this point in time, large -- many of these issues are behind us. On a monthly basis, if I look at it, it impacted us in the fourth quarter by roughly $700,000 of lost revenue due to back orders. In January, the impact was a similar size, and that was where the peak of our supply chain issues hit. By the end of February, we are now back to normal. And March is looking to be particularly strong. Given the supply chain issues and given the reimbursement increases our customers were receiving, the company decided and has implemented an across the board 10% price increase in our business. This allows us to expand gross margins and incremental margins throughout 2022, as we roll pricing out as contracts come up for renewal and as we put in -- as devices are put in place for a first time. The supply chain issues aren't going to go away. They're largely behind us, though. Again, similar to accounting systems issues that are now behind us, most of the supply chain issues are behind us. Despite those supply chain issues, we still saw tremendous growth throughout 2021, as mentioned previously. As we head into 2022, we have no doubt we will have revenue up dramatically from 2021, which was up materially from 2020. Why are we so confident in 2022? A year ago, we didn't have a dashboard, today we do. And we will begin sharing this with investors to provide greater visibility and transparency into our numbers. We will put these numbers. I'm about to review with you into our investor presentation, which will come out later today. We managed the business by the number of opportunities. Our team is focused on the number of trials, which all lead to close new business. We know the wound market is billions of dollars, some estimate to be $40 billion just in the U.S. When we focus on the applicable market that we can address, wounds that are specific to our indications, it's around a $15 billion opportunity. As you can see from our revenue, we've capped less than 1% of our applicable wounds that are being treated and where our devices could be used. So even though our numbers are doubling and tripling, and they sound good and are trending in the right direction. We really haven't even tapped the true potential of our market share that we can garner. And that's really what '22 is about is beginning to capture market share in specific markets for the wounds that were indicated for. The way we measure these things is our sales funnel. We track opportunity, trial and closes and opportunities where we know the customer has interest and have a high degree, they will trial our product in the near term. A trial, as I mentioned, is a 60- to 90-day period where they use the devices to look for efficacy and reimbursement. And at the end of the trial, the 60 to 90 days, it converts to a sale, lease, rental or a return product. Once a product is placed, we then generate recurring revenues through applicator sales, shockwave refurbishments and wound kits. The ratio of a placement to the recurring, recurring is roughly 40% to 60% on a -- ongoing yearly basis once a device is placed. Every salesperson is now required for their quota to deliver 1 trial of dermaPACE and 1 of UltraMIST per month. They should have, on average, 5 to 6 trials at any given time taking place. And when we measure trials, we only measure the actual trial in place. It does not include multiple orders that can come from a single trial. Currently, we have 1 trial at 3 locations, but ultimately, that's a 20 system order. So let's get into the numbers. And again, this will be on our investor deck. So if you don't want to take notes, don't worry. The comparison they'll be making are against a year ago. So it's live as of [ 02/28 ]. The number of system sales value. So these are the system sales that we have in our opportunity set. A year ago, it was just under $6 million at 5.9%. Today, that stands at $16 million. That's an increase of 171%. The actual number of trials that we have ongoing currently. A year ago, they were 17. We currently have 85. That's an increase of 400%. That system trial revenue equates a year ago, it was roughly visibility on $400,000 of revenue. Today, we have visibility on $3.2 million of revenue, an increase of 690% compared to a year ago. That revenue that I discussed in the trials, again, it's expected to close within 60 to 90 days. This growth in the funnel and the trials is pretty staggering, especially when you consider our sales team is 50% smaller than a year ago. Also, I want to note that the funnel data that we'll be sharing do not include the over 30 distributors, which we have selling our products, that would be incremental to these numbers. But what I'm equally impressed with is the recurring revenue statistics that we'll share on our -- in the presentation as well. The recurring revenue, monthly recurring revenue increased to $1.1 million per month up from $400,000 a year ago. That's an increase of 185%. When you annualize that, that's annualized revenue today of $13.7 million in recurring revenue versus $4.8 million a year ago, an increase of 185%. When I translate the recurring revenue, just to clarify how we think of it here at SANUWAVE, if we sold no new systems and just left our base intact, we'd do $13.7 million in revenue for 2022 with no new sales and no growth from our existing customers. That's not the plan. The plan is to have each salesperson deliver roughly $1 million of new sales in 2022. Not all of the salespeople will, and we'll eliminate some of them, and then we'll add new ones. That's the plan as we move forward to add salespeople and to continue to drive to grow market share from our very small level today to a much larger level as we exit 2022. Let me discuss now SEC and OTC status. And these are somewhat related to the Q&A that I'll be answering as well. We filed our Q3 on Monday and the OTC markets moved us from the OTC expert market to the OTC pink late filer. When we are current with our next filings, we will then be able to move to a pink current and then apply to be on OTCQB as is the process, just so everyone is aware. We anticipate filing the 10-Q -- sorry, the 10-K, hopefully within the extension period in early April and then our Q1 filing for 2022 should be on track for the May period. So at that point in time, in that time period, sometime between April and May, we should be completely caught up, completely current and with the OTC putting us in the current status. It's been a long process. It's been an expensive process. But largely, this is behind us, and it's just a matter of getting the worksheets done, getting the auditors to work with us, and we're fortunate to have the group from Marcum working with us that we have that have been terrific getting it across the board. As far as other questions that have been coming up, I'm going to go through kind of the 5 that have been most prominent. They revolve around trading of the stock, revenue guidance, breakeven, intellectual property, new verticals in cash burn. So I'll address those items, and hopefully, that covers the -- a bulk of things. On the trading front, I just went over that, we are now on the OTC pinks. We have heard from different brokerage houses. They are allowing accounts to trade again, both buy and sell. There are some issues on people being able to deposit shares at certain brokerage firms. Hopefully, we'll be able to rectify that as we get to the OTCQB. On revenue guidance, we'll be issuing full year '22 revenue guidance when we come out with our 10-K conference call. I've provided some highlights today on -- in metrics that will be in the investor deck, which will come out later about where we are trending and how we're looking at things from a trial standpoint and a recurring revenue standpoint. We also provide our forecast for the international, which for 2022 is $1.5 million versus $700,000 a year ago. So that's where we'll be -- how we'll be managing revenue guidance, and we'll be showing the trends in the funnel to people on a quarterly basis so they can track how the funnel is either increasing or decreasing and how our close rates are going as well. On expenses and breakeven, until we get past getting caught up on all the audits and financials and using consultants and so forth that the burden of those costs are still going to be not get us to breakeven, but we will soon thereafter, our breakeven revenue number is somewhere right around $2 million. And I'm hoping that we'll be sustaining that on an ongoing basis beginning here in March and then growing from there. We will be investing mainly in the sales force, and then we have some specific items that need to be invested in up in Eden Prairie around customer service and shipping fulfillment operations. So incrementally not huge dollars, but there are some that we've neglected over the last year as we've focused on getting the SEC requirements met. I was asked about new verticals because we have mentioned that in the past. We are -- we're trying to enter into some new verticals without expending capital. So we're looking at partnerships and joint ventures and finding trustworthy distributors for those products. In the cosmetic field, that will be both UltraMIST and the shockwave products for different indications, UltraMIST on the -- think about facials in the med spa market. There are some other products that you use, ultrasound to help with the -- making people look more beautiful and help with collagen growth and things like that. We have some good clinical support behind that. And so that's an area where we've already begun. Early demand for that's somewhere in the 40 to 60 product range. And again, we'll be going through partners so that we're not going to go build out that as a sales force. On the shockwave side, there are certain indications around scar, scar tissue and cellulite that we have that will probably be more of a second half of 2022 in that same cosmetic med spa market. And then on the shockwave side, the orthopedic market, these are chiropractors, PT offices. We're tipping our toes in that water with the product called profile again, initial demand looks strong, but don't have anything more to report on that. And then the last question that was sent in that I'll get to is intellectual property. It's something that we've talked about and the question specifically was what are your plans to monetize? We're -- the first category of IP that we will begin monetizing and engaging. We've had -- it's around the cardiac and cardiovascular space. We've had inquiries from large international companies, domestic companies around our patents in that field. And we're talking to bankers and others about how best to monetize that, whether it be a direct license to those that need to license our IP? Is it best to work royalties? Is it exclusive or nonexclusive or to just sell the entire portfolio to an existing party. That process is underway with, again, deeper in discussions. And I should probably share, but we're going to make progress on that side of it as well. So that -- those were the main topics that came in from folks. We will be presenting today at 11:00 to the emerging growth stock conference. We'll also be holding another conference call when the Q4 is filed. We plan to be a little more vocal this year now that we're caught up on our filings and get out and talk to people. I think the transparency of the sales funnel is a really good first step in helping people understand how we think about the business, which are making sure we take care of people in the wound centers, making sure that we're adding new markets, new verticals as well. So with that, I'm going to end the call. Hopefully, people are as excited as I am about where we're headed. It's going to be a really exciting 2022. So with that, thank you very much, and have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.