RLS released its Q1 2023 report. The net sales came in at SEK0.1m (SEK0.3m), and operating expenses amounted to SEK-7.2m (SEK-5.6m) compared to our OPEX estimate of SEK-7.0m. Moreover, EBIT came in at SEK-7.5m (SEK-5.4m), which was lower than our estimate of SEK-6.4m. The difference between our estimate vs the actual EBIT is mainly the sales, where we anticipated minor sales of SEK1.3m during the quarter.

Cash flow from operating activities was SEK-7.1m (SEK-6.7m), and by the end of the quarter, the cash and cash equivalents amounted to SEK13.4m. We believe that sales will start to ramp up during the second half of the year; however, we argue the current cash position will not be sufficient and continue modeling an expected capital raising of SEK20m (around Q3 2023e). The launch of ChloraSolv has taken time, and we argue information about the progress has been limited by the company.

In our view, the CEO message gave mixed feelings. We learned that the European launch has been delayed. However, the UK has shown positive signs at the end of the quarter and expects to increase sales later this year. Moreover, the launch of ChloraSolv is expected in additional countries in the latter part of 2023. We believe Convatec’s launch of ChloraSolv has taken a lot of time; however, due to the investments Convatec has put in, we expect that the company sees high potential in the product.

The feeling is that the Middle East launch is going according to plan. ChloraSolv was approved in the UAE in March, and approvals in Saudi Arabia and Qatar are expected later during Q2 2023, with product launches in June. Moreover, additional Middle Eastern countries are expected to be approved later in 2023 and in 2024.

We argue that the animal health segment is exciting and has high future potential. We learn that more than 20 veterinary clinics in Sweden are testing ChloraSolv, and the number of customers is increasing. We look forward to hearing the clinics’ feedback and believe the animal health segment is something one should keep an eye on since the potential is high and the market is easier to establish within.

Overall, the report did not include any major surprises as sales continue to be low, and OPEX remains at similar levels to previous quarters. However, we start feeling uncertain about the ChloraSolv launch and its time to enter the market.

In January, RLS announced that Lars Johansson had been nominated as the company's new chairman. Mr Johansson has great experience in the medtech and pharma industries, both from Sweden and international. He has close to three decades of experience from Johnson & Johnson as CEO of the Nordic region, where he was responsible for more than a hundred employees and several hundred million dollars in yearly revenues. Moreover, Mr Johansson is currently a board member of Schain Research AB and ProstaLund AB.

In March, Wounds UK published an article about debridement products. The study found that ChloraSolv demonstrated significantly better antibiofilm activity in complex in vitro biofilm tests compared to other debridement techniques/products. Although the study only examined the gel's in vitro antibiofilm activity, recent clinical studies have also highlighted its effectiveness in facilitating easier debridement of devitalized tissue. The combination of tissue softening and antibiofilm activity in ChloraSolv shows promise for effective and convenient wound debridement. This is particularly important as it enables routine availability of Wound Hygiene for patients with hard-to-heal wounds without the need for specialized training.

In May, we learned that Eva Jagenheim left the role as CFO of RLS and that the recruiting process has started. Eva Jagenheim will continue at RLS until October 2023 (at latest).

The report did not include any major surprises as the result was similar to previous quarters. However, we got mixed feelings of the CEO message and would like to see progress in the ChloraSolv launch during the next quarter.

We have chosen to only make some changes in our sales estimates for 2023e in relation to the report. We decrease our sales expectations for Q2 and does only expect minor sales during the quarter of SEK1.1m (previous Q2 estimate of SEK3.1m). Moreover, we slightly decrease our sales estimates for the second half of the year, resulting in FY’23e sales of SEK9.7m.

As the current cash position will not be sufficient to cover future business activities, in our view, we continue to expect a capital raising of SEK20m around Q3 2023. We update our estimated subscription price to current share price levels with a 30% discount.

The share price has significantly decreased during 2023. We believe the main reasons for the development are the lack of information from the company as well as the launch of ChloraSolv taking longer than investors have expected. We hope to see a ramp up in sales during the next quarters and that the company provides more information about the launch. As the stock market has been relatively unstable during 2022 and 2023, investors are far more careful with their investments, especially in smaller companies, such as RLS. Therefore, it is crucial that the company update its investors with its current position and future expectations. The current lack of information creates uncertainty and may result in a further share price decline. However, if sales start to ramp up, we believe quarterly reports and ChloraSolv orders could act as catalysts for the share.

As mentioned, we have made some sales estimate changes in relation to the report. Furthermore, we update the cash position and our capital raising assumptions (update our estimated subscription price to current share price levels with a 30% discount). These changes do render in an updated fair value range with a base case of SEK7 (8), bull case of SEK10 (11), and bear case of SEK2 (2).

We have estimated a capital raising of SEK20m during Q3 2023. As our capital raising assumptions significantly impact our valuation, we provide a sensitivity analysis where one can observe how our base case depends on different assumptions.