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SNWV: Q4 Results, Operational Update: OUS Sales Finally Rebound, Initial U.S. Revenue Expected Q1

04/10/2018
By Brian Marckx, CFA

OTC:SNWV

SANUWAVE (OTC:SNWV) reported Q4 2017 results and provided a business update. Revenue was relatively strong and about twice the average through the first three quarters of the year and the third highest in company history. And while full-year revenue was largely disappointing, falling 46% from 2016 and the lowest since 2010 ($728k), we continue to expect revenue to return to meaningful growth in 2018.

With the U.S. strategy firming up, including initial distribution through Premier Shockwave (targeting VA and Indian Health) and initiation of various clinical (marketing-focused) clinical studies, SNWV is wasting no time in capitalizing on the domestic opportunity. Management expects revenue contribution from the U.S. as early as Q1 – and (mostly) depending on initial rates of VA-related adoption and utilization as well as (likely more incremental) OVA (i.e. outside VA in U.S.) interest, we could see material growth in U.S. revenue throughout the year.

But, with (effectively) no reimbursement, we continue to think 2018 will be more important as an opportunity to build additional awareness and clinical evidence and to educate wound-care KOLs about dermaPACE. We are encouraged by the reasonableness of the initial U.S. strategy management outlined on the call – which, essentially, clearly recognizes challenges posed by lack of reimbursement and addresses those challenges by what appears to be a systematic approach towards both initial commercialization (via already established Premier relationship targeting non-insurance providers) and evidence-based approach to encourage adoption.

Most of our forecasted 2018 revenue is still OUS. dermaPACE is still awaiting ANVISA approval in Brazil – assuming that happens, MundiMed related revenue contribution could be material – but likely not until later in 2018. Meanwhile, recent expansion of SNWV’s OUS footprint from 9 to 14 countries, expanding ‘label’ from orthopedics-only to now include wound treatment in several territories and new distributor relationships are all potential catalysts that could have a positive impact on international revenue growth. Certainly FDA clearance, while largely meaningless from a OUS regulatory standpoint, can act as a proxy ‘stamp of approval’ and prove an important and influential marketing message and help drive adoption. Clinical studies are also expected to initiate outside of the U.S. – including in Canada and Australia. And, finally, as it relates to potential international catalysts – SNWV indicated that they have had discussions with at least two more potential JV-type partners.

Financials

Q4 revenue was $316k, while down 51% yoy, it represents 96% sequential growth and more than twice the $141k average of the first three quarters of 2017. SNWV did not provide specifics regarding what was behind the relative strength in revenue in Q4 – although at least a portion can be attributed to receipt of the upfront fee from MundiMed. And, while management had predicted earlier in 2017 that full-year revenue would increase from the ~$1.4M level in 2016, the premonition fell fall short. Instead, revenue fell 46% to just $736k in 2017.

As we noted in our Q3 update, we had opined that revenue weakness during the first half of 2017 may have been related to mostly non-fundamental reasons such as adverse timing or, in the case of S. Korea, political turmoil. But, when Q3 numbers showed another disappointing topline number with (again) no obvious relationship between the misses and the presumed causes, we felt that it was clear that demand-related traction via expansion of the distribution footprint would not materialize as quickly as we had previously anticipated.

S. Korea, which SNWV has indicated remains the company’s leading market, was expected to represent much of the anticipated revenue growth during 2017 as a result of availability of reimbursement. That appears to not have materialized – whether that is due to the political upheaval earlier in 2017 or something else, is still not completely clear. But, the fact that SNWV’s distributor accounts for 78% of the company’s A/R balance and 48% of their bad debt balance, may suggest that their S. Korean partner is having difficulty finding buyers.

Despite the issues, we do think that it is more likely than not that revenue growth will materialize from S. Korea. Management noted on the Q3 call (Nov 2017) that utilization in S. Korea had been increasing – which should be highly correlated to sales – and that the order book for 2018 is “dramatically larger than we’ve ever seen out of any one country”. Additionally, SNWV mentioned that new clinical and published data should be forthcoming from S. Korea in both DFU as well as scar tissue (following C-section) – our experience is that positive and compelling published data is typically the single-most influential aspect of any sales/marketing strategy.

Another issue that management pointed towards that has hampered demand growth is longer-than-anticipated regulatory approval in many of the territories where SNWV recently signed distribution contracts. While SANUWAVE brought on distribution in six new territories during 2017, regulatory approval is still outstanding in many of these. We think another factor may be slower than anticipated adoption of SNWV’s device in countries where it has recently gained regulatory clearance. KOL-support and leading with clinical data is now at the forefront of marketing strategies, which may improve uptake.

Q4 OpEx
was $1.46M, compared to $1.02M in Q4 2016 and $742k in Q3. Most of the increases relate to SG&A, which came in at $1.1M in Q4 – up from $939k and $475k in the year and quarter-earlier periods, respectively. For the full year, OpEx was $4.3M, compared to $3.8M in 2016. With some incremental headcount additions planned throughout 2018 – which could include positions in R&D/clinicals, reimbursement/billing, sales and accounting – as well as implementation of the initial U.S. strategy, we think operating expenses will increase during the year. But, also expecting meaningful sales growth, we think at least a portion of the incremental cost will be offset.

Cash balance was $730k at year-end. Cash used in operating activities was $584k and $1.53M ($969k and $3.39M ex-changes in working capital) in the three and twelve months ending December 31, 2017, compared to $490k and $3.2M ($196k and $2.70M ex-changes in working capital) in the year-earlier comparable periods. SNWV raised almost $2.1M in cash via the issuance of convertible and other debt during 2017 and another $1.4M subsequent to year-end. The (up to $1M) NFS equipment financing line will be used to launch SNWV’s U.S. strategy. Additional cash could come from warrant exercises – 102M common shares worth of warrants are currently in-the-money (with exercise prices of $0.11 or less), all of which expire by March 2019. In addition, if and when SNWV inks another JV agreement, similar to that of MundiMed, upfront fees could be another source of funds.

See our full report (link below) for our discussion and comments about SNWV’s U.S. strategy

READ THE FULL RESEARCH REPORT HERE.

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