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Greetings, and welcome to the SANUWAVE Health Second Quarter 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Morgan Frank, CEO. Thank you, Morgan. You may begin.
Thanks, Paul. I just want to welcome everyone to SANUWAVE's Second Quarter 2023 Earnings Call. Our Form 10-Q was filed with the SEC last night. And our earnings release was issued this morning, and we have an updated presentation that was made available on our website in the Investors section, and you can please refer to that during the presentation. Joining me on the call are Toni Rinow, our CFO; and Tim Hendricks, our EVP of Wound Care Sales. And after the presentation, we will open the call to Q&A. So let me begin with the obligatory forward-looking statements 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 included in our SEC filings. Actual results may differ materially from these projected in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements. 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 second quarter Form 10-Q. Okay. So as most of you likely know, after joining SANUWAVE as its Chairman last August, I became CEO this past May. And I'd like to start by speaking to you a bit about current projects and priorities of the company as we seek to step up into being a rapidly growing and profitable company that can transform the wound care market. SANUWAVE has fantastic products. Honestly, some of the best I've seen in my career. And the market for Advanced Wound Care is large, growing and hungry for effective treatment modalities. In order to position the company to thrive as it [ addresses ] this opportunity, one of my first act as CEO was to flatten our management and informational structure so that all of our internal groups are working from one data environment and sharing rather than siloing information. A company only moves at the speed of its slowest processes and the goal is to have strong autonomous groups supporting one another, so that we can identify and solve for our bottlenecks. This is starting to yield significant progress in manufacturing, finance and sales. We've made some key hires like new President and Head of Manufacturing, Andrew Walko and are setting up key relationships like Pacific Medical that will expand and professionalize our reach. As we reduce and then eliminate our manufacturing and supply chain issues, a process which we expect to continue to show results in Q3 and especially in Q4, we seek to enable our ability to engage with larger customers, partners and markets that we simply lack the capacity to serve previously. The company has undertaken aggressive moves to streamline operations and to cut costs in pursuit of one simple goal, and that goal is rapid, profitable growth. Our philosophy going forward is to seek to create a self-sustaining business that can support itself and therefore, gain control of its own destiny without constant reliance on capital markets. Our Q2 results show some positive steps in this direction. And I will now turn the call over to Toni to walk you through it. Toni?
Thank you, Morgan. Revenue for the 3 months ended June 30, 2023, totaled $4.7 million, an increase of 20% as compared to $3.9 million for the same period of 2022. This growth falls within the previously provided guidance range of 15% to 25%. Revenue for the 6 months ended June 2023 totaled $8.5 million, an increase of 19% as compared to $7.1 million for the same period of 2022. Gross margins as a percentage of revenue increased for the 3 months ended June 2023 to 74% from 72% for the same period last year, primarily due to stronger pricing initiatives. For the 3 months ended June 30, 2023, operating income totaled $0.9 million, which is an improvement of $4 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 3 months ended June 30, 2023, decreased to $2.5 million or 54% of revenue, which we believe shows the effectiveness of our cost and expense management initiatives. SANUWAVE continues to execute the financial strategy to improve profitability and manage operating expenses. Net loss for the 3 months June 2023 period was $7.3 million compared to a net income of $1.6 million for the same period in 2022. The increase in our net loss for the 3 months was primarily due to the continued noncash losses on the change in fair value of our derivative liabilities, which totaled $3.8 million of expense for the period. Adjusted EBITDA for the 3 months ended June 30, 2023, totaled $171,000 as compared to negative $1.9 million during the prior year period. Adjusted EBITDA removes the impact of interest expense, depreciation and amortization, the change in fair value of derivative liabilities, which causes our net loss to be very volatile and other noncash onetime charges, including a onetime release of $1.25 million for a reversal of accrued expenses. Please refer to Slide 5 of the presentation, which is on our website for our reconciliation from net loss to adjusted EBITDA. Total current assets amount to $6.1 million as of June 30, 2023, versus $6.6 million as of December 31, 2022. Cash totaled $1.2 million. In July 2023, the company closed an additional financing with gross proceeds received totaling approximately $3 million, which is intended to support operations. We thank you for your continued support of SANUWAVE, and I'm now transferring back to Morgan. Morgan?
Thanks, Toni. So next on the call will be our fearless sales leader, Tim Hendricks, who will give you an overview of some current market developments and opportunities. Tim?
Thank you, Morgan. Good morning. It's great to join you all as we're running through the dog days of summer, and I'm happy to provide a few highlights from the sales perspective. [ What our ] sales results in Q2 and overall market interest continue to reinforce is that our fastest-growing channels of the private offices, nursing homes and mobile wound care groups. [ Hospitals ] are an important legacy channel and one we will always want to support, but the former channels mentioned are where more current activity is coming from. We associate this with the continued push to treat patients outside of the hospital walls. And though it did not occur until Q3, it is worth noting that the recent proposed changes by the Medicare administrative contractors, i.e., Novitas, First Coast and CGS could have a significant impact on the marketplace as it relates to the use and insurance coverage for advanced skin substitutes. These changes would greatly reduce covered products and limit applications of remaining products significantly, taking them down from 10 to 4 applications per wound. Skin substitutes have been a $5 billion space, and we anticipate these proposed new limits as being a tailwind for UltraMIST, as low frequency, noncontact ultrasound remains a strong and viable option to treat chronic wounds in all of the max. Another material development worth noting is the recently signed distribution deal with Pacific Medical. This partnership will provide SANUWAVE with a seasoned sales group that has deep wound care market experience. The deal focuses on California and 6 other western states. The rest of the direct sales team and distribution partners continue to add new customers and increased brand awareness as inventory ramps up. So for the balance of the fiscal year and planning for 2024, I will continue to make strategic partnerships for distribution with Wound and industry veterans, and that's the top priority. And we are in the process of finalizing our direct hiring plans for several W2 sales and clinical personnel. Morgan, I'll turn it back to you.
Great. Thanks, Tim. So a significant part of determining a company's future is really making a determination about just what a company's core business is and what the key measures to which you want to manage are. And for SANUWAVE, this is simple. We're in the consumables business. We place UltraMIST Systems in the field and each time they use, they consume a single-use applicator that generates a recurring revenue stream [indiscernible] razor-razorblade model. UltraMIST consumables were 59% of overall revenues in Q2. And while our anticipated increase in system production over the next couple of quarters may reduce this number slightly in the near term, we expect that number to rise significantly in future years. In the end, this creates a really simple model to understand. It's how many active systems do you have in the field, times how many consumables does each system use, this is a term we call attach rate, times the price paid per consumable. And it's really that simple. And we think that the trends here are really favorable. [ Precise ] usage rates and pricing are sensitive business data that we can't really share in detail at this time. But what we can share is this, the higher reimbursement rates for UltraMIST are now enabling much better pricing for consumables and the company's focus on bigger, higher traffic customers is leading to greater usage. So these higher attach rates and better pricing, the core of our new customers have roughly twice the consumables value per month in dollar terms as our existing base. The existing base has the opportunity for improvement, both as we increase usage there and as old contracts from years ago roll off and pricing starts to catch up. At the end of Q2, the company had 526 active UltraMIST Systems in the field. This is a new metric. It's one that company hasn't talked about before. There's no particular comparability here to pass data on full systems count. This includes only systems owned by customers who are currently ordering consumables and have done so in the last 6 months. It's a more limited and restrictive measure than we've used in the past. But this less inclusive nature we think makes it the best number for really understanding the -- and predicting the consumable stream that represents the core value of SANUWAVE, and this is going to be the figure that we manage to and report going forward. We expect that base to increase materially in Q3 and especially in Q4 of this year and to provide the basis for ongoing growth in consumables revenue. So on to Q3 guidance. Similar to Q2, the company is anticipating revenue growth of 15% to 25% year-over-year in Q3. We think the Q3 should be [indiscernible] one of those interesting words, but the last quarter of significant capacity constraint in our production. But there will -- as there will still be meaningful limitations in this quarter, we're not going to take our guidance up above 15% to 25% at this time. And we still anticipate being unable to meet the full demand for UltraMIST products in the short term. But if it all goes to plan, we're looking forward to this issue soon being behind us. SANUWAVE has fantastic products that align the needs of patients, physicians and payers. This is a very exciting time in the wound care market. We look forward to continuing to rise to the challenge. And I just want to thank our employees for all the hard work to enable this transition, and I want to thank the investors who have continued to support us. I know this has been something of a heavy lift, but it's really starting to pay off. With that, I will open this up for questions. So if we could please open for questions, Paul.
[Operator Instructions] Our first question is from [ Walter Holden ], private investor.
You did not mention anything about the -- is it the [indiscernible] product? I was wondering what -- if you have any comments about that.
Thanks for the question. So looking at dermaPACE, it is a -- I mean we are still actively selling dermaPACE units, both domestically and internationally as well as the Profile system that serves the orthopedic market in the U.S. It hasn't -- it wasn't focused on the conference call as it's a relatively small portion of SANUWAVE's revenue. It's a product that we are hoping to place renewed focus on in coming quarters, but in the next several, we continue to anticipate UltraMIST being 95% plus of SANUWAVE's revenue.
There are no further questions at this time. I would like to hand the floor back over to management for any closing remarks.
Well, I'll take that as a sign that our new more inclusive conference call format answered a lot of questions. And thanks, everyone, for dialing in, and have a great rest of your August.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.