SANUWAVE Health, Inc. (SNWV) Earnings Call Transcript

Hello and welcome everyone joining today's Sanuwave earnings call. [Operator Instructions] Please note this call has been recorded. It is now my pleasure to turn the meeting over to Morgan Frank, Chairman and CEO of Sanuwave. Please go ahead.

Thank you very much. Good morning and welcome to Sanuwave's third quarter 2026 earnings call. As ever, our Form 10-Q was filed with the SEC last night, along with our earnings release, and our updated presentation was made available on our website in the Investor section. Please refer to that during the presentation. Joining me on this call is Peter Sorensen, our CFO, and after the presentation, we'll open the call to Q&A. Let me begin with the always popular forward-looking statements and other disclosures. This call may contain forward-looking statements, such as statements relating to future financial results, production expectations, plans for future business development activities, and expectations regarding impact changes in reimbursement levels and tariff rates on the company and its industry. 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. The description of these risks and uncertainties and other factors that could affect our financial results is included in our SEC filings. Actual results may differ materially from those projected in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements. Certain percentages discussed in this call are calculated for the underlying whole dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. As a reminder, our discussion today will include non-GAAP numbers. Reconciliations between our GAAP and non-GAAP results can be found on our recently filed Form 10-Q for the period ended September 30, 2026. Okay, so Q3 was really the story of the CMS proposed rule. As this came out on July 14th, it affected most of the quarter, and its effects were profound. Two issues in the proposed rule had a large impact on Sanuwave. The first was the choice by CMS not to increase the price for skin substitute reimbursement for 2027. Obviously, as we've discussed in the past, this is not a product area in which we participate, but it's a modality that has been used by a great many wound care companies, including a number of our customers. Many in the industry seemed to have been expecting an increase in the price per square centimeter and were sort of holding on in their business in hopes of a return to higher rates. Many, particularly in mobile wound care, especially in rural areas, were operating at losses, but were seeking to keep their patient, practitioner, and account bases intact in hopes of this return to higher pricing. Without that increase in rates for 2027, we saw sort of the last shoe to drop as series exits from the business occurred as folks seemed to decide that any eventual oasis that might emerge was simply too far away. This affected our customer base. We saw some significant accounts shut their doors or eliminate portions of their business, reducing staff and scope. Much of this occurred early in the quarter, and so those effects were present for most of Q3. This was somewhat offset by the addition of new customers and an increase in some other existing customers who seemed to be expanding into some of the empty space and accounts left by those exiting. As we've discussed in the past, the patients and wounds didn't go away, and someone will need to treat them, but of course such transitions are messy and they take time. While still representing our second highest quarterly total ever behind only Q2 of this year, overall, our applicator revenue declined approximately 4% in Q3 as compared to Q2. Larger revenue variance occurred on the capital equipment side, where systems sold in the quarter dropped from 82 in Q2 to 40 in Q3 as ongoing used systems in the market, as a result of customers closing their doors, continued to cannibalize sales, as well as from a great deal of the market taking a sort of wait-and-see approach to buying UltraMIST systems in response to the second aspect of the CMS rule, which affected Sanuwave: the proposed reduction in the reimbursement rate for CPT code 97610 based upon the nomination of that code as mispriced. This confluence of events led to some odd-looking outcomes, such as the company adding 60 new customers in the quarter while despite selling only 40 systems. Customers exiting, reducing practitioner counts, and acquiring used systems have, frankly, made a bit of a mess of the active systems number that we have traditionally reported, and we're simply not confident that it has the resolution to be worth sharing right now. So overall, the active customer count, which we measure by invoices, took a hit in July, from which we made up some ground as the rest of the quarter went on. The full number of customers who placed orders in Q3 was about 2% higher than in Q2. As many of you likely saw, we and many others submitted comments to CMS regarding this proposed change, and we're extremely grateful to those who did. In the end, CMS chose to mostly implement the rule as drafted, with some minor changes: the kit price, which is a subset component of the overall price, to $125 from $100, and the inclusion of saline expense. There seems to be some confusion about what this actually means. And so for the sake of clarity, our calculations based upon the RUC figures and the published conversion factor that's applied to all CMS payments, we're estimating a physician fee schedule payment for code 97610 in 2027 will be $314.54, down from $397.81 in 2026. For more detail on this and on other aspects of the proposed rule, including expected impact for 2028, you can see our press release from November 5th. So obviously this wasn't the news we were hoping for, but the news was also not all bad, and there were some silver linings amongst the rain clouds. The hospital outpatient rate for 2027 increased approximately 14% from 2026, rising to $235.04 from $204.98 in 2027. Perhaps more consequentially, code 97610 had its Q1 status indicator removed and replaced with a T. For those who don't speak reimbursement, which I'm presuming is most people, that means that the code will go from being paid only when no other separately billable or separately payable procedure appears on the same claim for the same day—whereas Q1 would package our code in such a circumstance and pay it $0—to being billable with other codes. That's actually a big deal. More than half of code 97610 HOPD treatments in 2025 were packaged and paid at $0, and we suspect that that figure significantly undercounts the issue, as incentives to bother billing at all are low when you know it's going to be packaged. So we look forward to getting this additional billing information, as we suspect that the instances that got zeroed were the ones with more complex and more expensive wounds, which will help us make the case that our code belongs to a higher APC group with higher reimbursement rates. The other interesting silver lining came in the comment from the AMA RUC and its CMS response to it within the Federal Register. For those not familiar, the RUC is an expert multi-specialty panel managed by the American Medical Association that makes recommendations to the federal government regarding relative value units for medical procedures. They weighed in and requested that—and I'm going to quote here to avoid putting words in other people's mouths—CMS delay finalization of changes to CPT code 97610 pending the RUC review process. This is very much what we were hoping for as well. Obviously, in the event, CMS did not delay finalization, but they did, however, make a specific statement that we found very interesting. And again, I'm going to quote here: "In the event that there is a new RUC review of this service, we would look forward to receiving any additional information, invoices, or new data about the broader coding structure, specifically regarding depth, size, wound quantity, or anatomic site distinctions and same-day billing restrictions." So that's quite a specific list. And interestingly enough, it's one that aligns very closely with many of our asks in our CMS comment. Compared to most other wound codes, code 97610 is unusual in that it contains no scaling factors for number of wounds, their size, their difficulties, or their site. It also subsumes other codes if multiple treatments occur at the same time and ends up having to cover the whole of the episode of care. So, you know, I know many have asked like why is CMS trying to wipe out your code? But honestly, having seen these responses, we're not seeing it that way. Like this actually seems like an invitation to help restructure this code into something that is better aligned with the reality of use cases, especially around large wounds and our patients with multiple wounds. Yes, the average wound care patient has 2.4 wounds. So, you know, our hope is to work with both the RUC and with CMS on this and to find a code structure that works for patients, physicians, and payers alike. In the meantime, we're continuing to rack up some wins in a number of out-the-box applications and user bases in which cost containment and reduction of inpatient length of stay and recidivism are the key metrics. HAPI, or hospital-acquired pressure injury, presents an excellent example. It is a $27 billion market, and the costs of such wounds rise rapidly with severity. Estimates we've seen from ICUs show that the difference in incremental cost—and this translates to $20 to $25 per patient per stay—rises from $40,000 of additional costs for stage 2 partial thickness HAPI to $69,000 for stage 3, which is full thickness with visible subcutaneous fat, and then up to $113,000 for a stage 4 wound that has gotten through to fat and now has visible muscle, tendon, or bone. Unstageable wounds can get worse still. So keeping one wound from moving from stage 2 to stage 4 will save over $70,000 across a patient hospitalization. So we see large opportunities here. It's one of the things we've restructured our sales force around, and we've been increasingly focused on this market over the last 12 to 18 months. Hospital sales cycles are considered longer, but I think we're reaching the point where they're starting to bear fruit, and once adopted, these customers tend to be great. With that, I will turn you over to Peter Sorensen, our CFO, who can walk you through the rest of our financials.

Thank you, Morgan. Revenue for the third quarter came in at $8.6 million, a decrease of 24% versus $11.3 million in the prior year quarter. Speaking directly to this decrease, the softness was concentrated in capital or system sales, while the recurring core applicator business held up well. Alternate applicator revenue grew 2% year-over-year, with applicator unit volume up 15% year-over-year, reflecting continued strong utilization across our active install base. Before turning to the financials in more detail, a brief update on the sales tax matter we discussed on prior calls and in our filing. We have now completed voluntary disclosure agreements with the majority of the applicable states and have been remitting the amounts due under them. In the third quarter, we paid approximately $2.3 million under these agreements, or about $2.7 million year-to-date, for the paydown of amounts we had previously accrued. For the remaining states, the agreements are in process, with most now under review by the states, and we expect to finalize them as responses come in. Throughout, the VDA process has done what it is intended to do, limiting the look-back period and evading penalties in many jurisdictions. In several cases, final settlements have come in below the amounts we had previously accrued. We continue to push this to completion with our third-party tax advisors. With that, let's take a closer look at the financial results for the quarter. Revenue for the three months ended September 30, 2026, totaled $8.6 million, a decrease of 24% compared to $11.3 million for the same period of 2025. The year-over-year decrease was driven by lower UltraMIST system revenue, which declined approximately 73% to $1.2 million from $4.4 million on a 74% decline in unit volume, reflecting weaker capital sales amid financial pressure across the industry and increased availability of used systems in the market. This was partially offset by continued growth in consumables. UltraMIST applicator revenue, the recurring core of the business, grew approximately 2% year-over-year as a 15% increase in unit volume was partially offset by an 11% lower ASP from a higher mix of reseller sales. On a reported basis, our consumables, parts, and accessories line, which is primarily applicators, but also includes parts and other miscellaneous items, increased approximately 5% to $7.2 million from $6.8 million. Gross margin as a percentage of revenue for the three months ended September 30, 2026, was 77.3%, a decrease of approximately 32 basis points year-over-year from 77.6%. The decline was driven primarily by a shift in revenue mix toward consumables and away from higher-margin system sales, together with lower ASPs resulting from a higher mix of reseller or wholesale pricing and higher personnel costs within cost of revenues. Operating loss for the three months ended September 30, 2026, totaled $1.1 million, a swing of approximately $2 million compared to operating income of $0.9 million in the same period last year. That swing reflects roughly $2.1 million of lower gross margin, partially offset by roughly $0.1 million of lower operating expenses. Operating expenses for the quarter were $7.7 million compared to $7.8 million in the prior year quarter, a decrease of approximately $0.1 million. By category, G&A expense decreased approximately $0.1 million, sales and marketing decreased approximately $0.2 million, R&D increased approximately $0.1 million, and depreciation and amortization increased approximately $0.1 million. Non-cash stock-based compensation within operating expenses was approximately $1.5 million compared to $1.4 million in the prior year quarter, spread across G&A, sales and marketing, and R&D. Within G&A, an approximately $0.4 million favorable year-over-year swing in state and local sales tax—as a prior-year sales tax charge gave way to a small net benefit this quarter from the resolution of voluntary disclosure agreements at amounts below previously accrued balances—together with modestly lower personnel costs, more than offset increases of approximately $0.3 million in bad debt expense and $0.1 million in software expense. Sales and marketing declined on approximately $0.3 million of lower personnel costs, partially offset by higher travel, and the increase in research and development reflects higher personnel costs, partially offset by lower development and legal spend. We remain focused on disciplined cost management. Net loss for the three months ended September 30, 2026, was $1.4 million compared to net income of $9.7 million for the same period of 2025. The prior year quarter included two significant items that did not recur this year: a $6.1 million non-cash gain on the change in fair value of derivative liabilities and a one-time $5.0 million gain on the sale of patents. Beyond those items, the year-over-year change reflects the swing in operating results I just described. Interest expense fell approximately $1.5 million year-over-year to $0.3 million from $1.8 million following our September 2025 refinancing with JPMorgan. EBITDA for the three months ended September 30, 2026, was negative $0.7 million. Adjusted EBITDA was positive $0.7 million compared to $3.2 million for the same period last year. The year-over-year decline reflects the lower operating results driven primarily by lower system revenue. Total current assets amounted to $19.3 million as of September 30, 2026, versus $24.6 million as of December 31, 2025. Cash and cash equivalents totaled $6.6 million as of September 30, 2026. During the first nine months of the year, we made $4.3 million in scheduled principal payments on our term loan, and as I mentioned earlier, paid approximately $2.7 million under a sales tax voluntary disclosure agreement year-to-date, $2.3 million of it in the third quarter. These payments were funded from cash on hand. At the close of our Form 10-Q, we were not in compliance with the fixed charge coverage ratio under our JPMorgan credit agreement as of September 30. On October 28, we entered into an amendment and waiver with our lenders that waived that default. We continue to closely monitor our covenant compliance. To summarize, the third quarter was a more challenging one on the top line, with capital sales pressured by the industry environment. At the same time, the recurring core of our business continued to grow, operating expenses came in below the prior year quarter, and we worked with our lenders to address the third-quarter covenant through an amendment and waiver. We are grateful for the continued trust and support of our stakeholders as we navigate the reimbursement changes Morgan discussed. Through the balance of 2026, we remain focused on cost management, operational discipline, and supporting adoption of UltraMIST. With that, I'll turn the call back over to Morgan.

Okay, thank you, Peter. As ever, I want to express my gratitude to the Sanuwave team for all their work and their commitment, and again thank all of our customers and partners who have been so supportive here. I appreciate you all. So that's it for prepared remarks. Can we please open it up for questions?

[Operator Instructions] We'll take our first question from Ethan Starr, private investor. Please go ahead.

Thank you for your helpful comments. I'm wondering if you have any sense of how long it might take for the market to absorb the used UltraMIST systems available for sale?

I mean, yeah, that's the question, isn't it? The short answer is that it's difficult to predict, right? Honestly, like the understanding of what that number is, you know, we're calculating it internally based on looking at who goes under and then trying to make a determination as to whether we think their systems are going to hit the market. I suspect it will be a factor in Q4. Like whether we're through that by the beginning of next year is possible, but difficult to tell.

Okay, sure. That's kind of what I expected—yes, no easy answer there. I'm not very familiar with the medical space. So is the earliest that reimbursement rates might change next year in early November?

So the process by which this works is you would have sort of engagement and surveys across the beginning of next year. CMS publishes its proposed rule for the following year in early July. So I think at this point, you know, our goal will be to interact with these agencies around the idea of hopefully getting some scaling factors, et cetera, included in the proposed rule for 2028 that would be published in July of 2027.

Okay. Thank you very much. I appreciate all the hard work of everyone at Sanuwave. Thank you.

[Operator Instructions] We'll take our next question from Larry Ward with Jackson and Partners. Please go ahead.

Hi, Morgan. Given all these sector conditions, et cetera, and some fallout, are there any M&A consolidation opportunities that you see for the company going forward?

Are you asking whether we're looking to acquire something?