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Greetings. Welcome to SANUWAVE announces third quarter results. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Morgan Frank, Chairman and CEO of SANUWAVE. Morgan, you may begin.
Thank you. Good morning, and welcome to San Wave's Third Quarter 2023 Earnings Call. Our 10-Q was filed with the SEC Thursday night and our earnings release was issued this morning, along with our updated presentation, which is available on our website in the Investors section. Please refer to those during the presentation. Joining me on this call are Tony Rinow, our CFO; and Tim Hendricks, our EVP and Head of Sales. After this presentation, we will open the call up to Q&A.
Before we begin, let me start with the customary 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 is included in filings. Actual results may differ materially from those projected in the forward-looking statements. The company undertakes no obligation to any forward-looking statement. As a reminder, our discussion today will include non-GAAP measures. Reconciliations between our GAAP and non-GAAP results can be found in our recently filed third quarter Form 10-Q. Okay. With that behind us, Q3 was a busy quarter for SANUWAVE on the number of factors internally. Our move to a flatter management and information structure has allowed us to move a great deal faster and to collaborate more effectively, and this is really starting to pay dividends both in terms of planning and in terms of expense management. In conjunction with some key hires, this has led to significant operational progress in cash management and business model development and the management of our manufacturing. I'm sure that many of you have gotten a bit sick of hearing about the production constraints that have been impeding growth. And believe me, no one has been more sick of this and we have. And so I'm really pleased to be able to tell you that Q3 saw major steps towards the elimination of these limitations. And the 55 UltraMIST units sold in the quarter were achieved despite having had only 5 to sell in the entire month of July. Our current manufacturing cadence has reached and stabilized a double-digit rate per week. This is a figure that we were struggling to hit in many full months in the first half of the year.
As inventory to sell falls away as our primary revenue constraint, we've been exploring some new business model ideas that we think can increase our market penetration and produce predictable revenue streams that better serve our customers. Our goal is really to sort of sit down next to the customers and ask them what they needed. And what they told us is that they would like to be able to get UltraMIST out of their capital budget and into their operating budgets. And so this has led us to develop extended trial model/RTO model. But bear with us here, we're still sort of workshopping the name. But the gist is that a customer would agree to an 8- to 12-month period, in which the company would allow the customer to bundle the payment of the UltraMIST and the applicators into 1 easy monthly payment. This allows the customer to avoid the large initial capital outlay and to view UltraMIST as an operating cost rather than a capital cost. From the SANUWAVE side, this generates predictable recurring revenue and cash flow that amounts to something akin to a captive financing arm, but that does not consume significant operating funds and thus can support rapid growth of increased number of systems in the field without placing undue stress on our balance sheet. At the end of this period, the customer will own the device outright and will just shift to shipping the applicators as to they were any other customer. We're pleased to say that we placed the first 13 systems into this program literally just last week. So this one feels like a big win for both sides. And while it may reduce near-term revenues a little bit as the whole of the sale will not, in most cases, be recognized upfront but rather ratably as cash is collected. The medium-term effects here are likely a growth acceleration as getting more units in the field means more users, more patients and more applicator consumption, which is, of course, SANUWAVE's primary business goal. As we discussed on the last call, we're in the consumables business and the recurring revenue associated with ongoing use represents the core of our business model. We continue to pursue our key goals of rapid profitable growth, and Q3 showed some significant progress here despite some extra costs associated with the manufacturing ramp-up and our M&A deal with Sweat Equity Partners. It feels increasingly like we're getting everything aligned and like we're starting to really move in the right direction. I'm now going to turn the call over to Toni to walk you through our Q3 numbers.
Thank you, Morgan. Revenue for the 3 months ended September 30, 2023, totaled $5 million, an increase of 19% as compared to the $4.2 million for the same period of 2022. This growth falls within the guidance range of 15% to 25% provided last quarter and slightly above the range from our October pre-announcement. Revenue for the month ended September 30, totaled $13.4 million, an increase of 19% as compared to $11.2 million for the same period of 2022. Gross margin as a percentage of revenue amounted to 71% for the 3 months ended September 30, versus the 72% from the same period last year. For the 9 months ended September 30, 2023, gross margin amounted to 71% versus 72% for the same period last year, with specifically reasonable volatility around our product cost timing variability and some expense lumpiness. Operating expenses for the 3 months ended September 30, operating loss totaled $0.5 million, which is an improvement of $2 million compared to the same period last year, which aligns with our initiative to drive profit and growth and manage spend through 2023. Operating expenses for the 3 months ended September 30, amounted to $4.1 million compared to $5.5 million, a decrease of $1.4 million, which we believe shows the effectiveness of our cost and expense management initiatives. SANUWAVE continues to execute its financial strategy to improve profitability and manage operating expenses. Net loss for the 3 months ended September 30, 2023, was $23.7 million compared to a net loss of $1.1 million for the same period in 2022. The increase in net loss for the 3 months ended September 30, was primarily due to continued noncash losses on the change in fair value of our derivative liabilities, which totaled $19.3 million of expense for the period, which contributes to volatility and net loss. Adjusted EBITDA for the 3 months ended September 30, 2023, was negative $0.3 million versus negative $2.2 million for the same period last year. an improvement of $1.9 million, indicating improved operational profitability. Total current assets amount to $7.4 million as of September 30, versus $6.6 million as of December 31, 2022, cash totaled $1.1 million as of September 30, 2023. In July 2023, the company closed an additional financing with gross proceeds receiving totaling approximately $3 million, which is intended to support operations towards continued growth. We thank you for continued support of SANUWAVE, and I'm now transferring back to Morgan. Morgan? I'm transferring back from Morgan.
Thanks, Toni. So next up will be Tim Hendricks, who is going to provide an overview of current market development and sales opportunities.
Great. Good morning. Everyone, as we come up close to the holiday season, it's my pleasure to share with you the progress we continue to make as an organization and our sales efforts is our unwavering commitment to help clinicians treat more patients suffering from chronic wounds that drive these efforts, and so the third quarter in 2023, I would like to share 4 notable items related to these efforts. First development is that our results in Q3 of 55 UltraMIST systems sold is amplified by the fact that greater than 40% of those systems were to new customers or expansion locations. The obvious effect of some many new offices, mobile wound practices, hospitals and long-term care facilities now utilizing UltraMIST will who benefit to scores of patients and to our business results. Growth with new customers and in key markets will be a key performance indicator that my team focused on consistently through 2024 and beyond. Second item I'd like to reference is the pricing discipline that has instituted throughout this year. The market has responded and shown us what reasonable and acceptable pricing levels are for both capital equipment and the single-use disposable. Significant progress has been made, and this trend should continue over the next several quarters. Number three, but I'd like to echo Morgan's comments about key hires that have been made. This has already begun with the sale of the commercial field team and a significant number more will be made throughout the first half of next year.
My fourth and final item for today is a springboard from the improved inventory levels you heard about, which will continue to allow us to place the valuation strategically. The goal is to place individual units into trials with practices, too, if the trial goes well, we'd be looking to purchase multiple units.
Overall, we're going to engage with new customers with a focus on those busy practices of high utilization rates and to generate a good mix of smaller, midsize and increase in the larger customers to create a robust and flexible sales funnel that can support our growth without undue dependence on any 1 customer or channel. So with that, I'll turn it back over to Morgan.
Thanks, Tim. So I'd like to hit on a few key metrics for the quarter. I guess, as we previously mentioned, system sales in the quarter got off to a slow start with only 5 sold in July due to supply constraints, but this number rose to 23% in August and then 27% in September, which is what got us to 55% for the quarter. Overall, UltraMIST revenues grew in excess of 25% year-on-year in the quarter. We ended the quarter with 581 active systems in the field, up from 526 at the end of Q2. That an 11% increase sequentially. Our UltraMIST consumables revenue similarly grew 11% from Q2 and 24% versus the third quarter last year. It -- consumables for UltraMIST constituted 62% of overall revenues in the quarter. This is a figure we're pleased with. And while we may see some choppiness in the ratios over the next couple of quarters as we have a lot more systems available for sale. This is a number we aim to see trend higher kind of over the medium and long term as the appeal of the sort of classic razor-razor blade model is immense. We're extremely excited about the prospect of the merger with Sweat Equity Partners and both the capital and enhanced capability that they will bring to the table. We're also excited to move up to Nasdaq and place the company on a sound financial footing such that we can, with any luck, begin to be valued for our business and not for our capital structure. We remain committed to the pulsar of rapid profitable growth what will allow us control of our own destiny. And we're really focusing on our own internal principles here, which at the risk of ripping off a bunch of sports aphorisms are we play offense, we skate not to the puck, but to where the puck is going to be and nobody's job is done until the job is done. And you -- this is how we make progress, and this is how we're going to become the company that can create real change in wound care. Moving to Q4 guidance. The company anticipates revenue growth in the 15% to 25% range versus the December quarter in 2022. We are not anticipating any meaningful production capacity constraints in the quarter, but the ramp-up of new salespeople and partners and the addition of a new sales model with the potential for volume spread out revenue recognition, it's a little difficult to predict. So this seems like a prudent range for us to use here. So look, there's a lot of road ahead here, but we're really starting to chew up some ground. And I think the sense of change and the sense of progress that the company is just becoming palpable. And I just want to take this opportunity to thank the whole SANUWAVE team for their faith and for their efforts to make all this happen. It's really an exciting time to be here, and I am both pleased and proud to part of it. With that, I'm going to open up the floor for questions. Operator, if you could key that up.
[Operator Instructions] Our first question comes from the line of Albert Hanser with KESTREL.
Congratulations on the progress. Exciting to see and appreciate communication. You talk a lot about success and growth and placement of UltraMIST. Can you just touch on dermaPACE and kind of what is the state of dermaPACE and kind of will that look like going forward?
Sure. Thanks, Albert. I appreciate the question. So our dermaPACE was a bit slow in Q3. We're making some assessments there in terms of the directions in which we want to take that product. In particular, I think we are rationally -- we're looking at our various international channels and figuring out which ones are likely to bear fruit and which are not. We're looking at some of our -- 2 of our U.S. channels as well, particularly in some cash pay applications that don't require as much -- that don't require the sort of studies and reimbursement work. And I think we're also looking to get involved with a couple of longer-term studies on dermaPACE that would generate sort of data that could support you really attractive long-term reimbursement in a number of applications. It's -- in general, it's just it's always a little harder with products that don't have the kind of nationwide codes. And so we're having a bit of a rethink on UltraMIST or it's not UltraMIST, on dermaPACE and getting a sense of what the immediate term opportunities are there. And what the longer-term opportunities are there. So I realize that's probably a little bit unsatisfyingly vague, but give us a quarter or so on that, and I think we'll be able to come back with some more concrete plans.
[Operator Instructions] And our next question is from Andrew Davis with Overall Capital.
Could you give us a quick update on the specifics of the merger approval when exactly the vote is and if we're seeing any significant hurdles on the other side?
Sure. I'm happy to. So as many of you likely saw, we filed our amended S-4 last Friday. So that was in response to the SEC's comments on our first draft of S-4. So at this point, the ball is back in their court. We are expecting probably another round of comments and -- which is pretty typical. And hopefully, based on -- hopefully, those comments are fairly straightforward and presuming they are, and we can again get a response back to them in a reasonable time frame, I think we have a pretty good shot at trying to get the deal closed this year. But obviously, when some of these matters are out of your control, there's always some limits on predictability. In terms of reaching the rest of the closing conditions, we're pretty good on our side. The remaining issues become the votes, the exchange of the public warrants on the SPAC side and then finishing the financing, we're -- that we're targeting $13 million of capital in the deal, we're sitting at approximately $9 million committed, having not started to actually raise the rest of pipe yet. So I think we're in reasonable striking distance on that. And so I mean we're going to try very hard to get this deal closed this year.
Great. But yes, I mean, it sounds like you've locked up most of their shareholder base, so you're not worried about the vote per se on their end?
I don't think so. I mean they're -- they -- their holders seem very supportive, our holders seem very supportive. I don't have any reason to suspect that either side doesn't want to do this.
Our next question is from the line of Christopher Davis with Founding Asset Management.
Morgan and team, congratulations for the progress. My question was going to be around the capacity going forward, both for the devices and the applicators.
Sure. The -- our plan, I think as we mentioned earlier on the call, we've no reached a point where we're up to a double-digit cadence weekly on making systems. And I think that should take a -- that should put us in pretty good shape for the next quarter or so. I think as we look forward to 2024, we're aiming to have the production capacity on systems rise to something on the order of 2x to 3x what it was in 2023. The -- on the applicator side, we're paying a great deal of attention to that. And obviously, these are sort of the lifeblood of the company. Like we will next year start to need to expand capacity meaningfully to keep up with what we are projecting to be demand. And we have plans underway there, including a -- including some work we're doing on a minor redesign on the applicator that will make it a great deal more manufacturable. And so that could free up a great deal of capacity simply by taking some of the complicated steps out putting the units together. So we're having hired Andrew Walco during the quarter and had him really just jump right in with both feet and get to work on this, it feels like we've made a ton of progress on both systems and on applicators. And so I actually feel really good about our ability to bring capacity up really meaningfully there next year.
Will you bring either side in-house at some point?
It's something that we always look at and consider and say, would we bring this in-house. We don't have any plans to do that at this time. It's a lot of work. It's a lot of stand up. And honestly, like I think we have great partners who may well just be able to do this more cheaply than we ever could and who have better supply lines and better access to supply chain than we would. I mean, obviously, look, if we were doing $200 million or $400 million of revenue or something, that might be a different equation. But I don't really see that happening in the next year or 2.
[Operator Instructions] At this time, we've reached the end of our question-and-answer session. I'll turn the floor to management for closing remarks.
Thank you very much, and I appreciate everyone making the time this morning, and we look forward to speaking to you again next quarter. Thanks.
Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.