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SNWV: Revenue Momentum Continues As Does International Expansion. Two New JVs Signed in Q2

By Brian Marckx, CFA



Q2 Results, Operational Update: International Expansion Continues With 2 New JVs Signed in Q2….

SANUWAVE (OTC:SNWV) reported Q2 2018 financial results and provided a business update. Revenue continues to gain momentum, reflecting initial contribution from the recent U.S. launch and, to a greater degree, SNWV’s ever-expanding international footprint. Q2 revenue of $453k, which is the second-highest quarterly revenue in company history, was up more than 300% from the prior year and 32% from Q1 ’18. It also marks the fourth consecutive quarter of sequential revenue growth and extends the number of consecutive quarters with revenue of more than $300k to three – a new record.

Initial sales to Premiere Shockwave accounted for approximately one-third of SNWV’s total revenue in Q1, although U.S. sales contributed relatively little (~6%) in the most recent period. Instead, international expansion and consummation of additional JV agreements were the major catalysts in Q2. While we continue to believe that domestic activity and related revenue will gain traction, we think the bulk of the opportunity for near-term topline growth is overseas.

SNWV is delivering on their strategy to bring in additional JV partnerships – including two agreements signed in Q2 alone. These new JVs are expected to expand their reach to 14 more countries in southeast Asia and Latin America. In addition, the upfront fees, including $500k received by SNWV in Q2 (with another $500k expected in Q3) from the initial agreement with Johnfk Medical Inc. (“FKS”), provide meaningful and non-dilute operating funds. As a reminder, these upfront fees are brought on the balance sheet and then amortized to revenue (including during the remainder of 2018).

The JV with FKS covers distribution in Taiwan, Singapore, Malaysia, Brunie, Cambodia, Myanmar, Laos, Indonesia, Thailand, Philippines and Vietnam while a JV with Tarbaca Lightning covers Costa Rica, Panama and el Salvador. We expect we will hear more in the near future relative to regulatory and commercialization activities surrounding these JVs as well as MundiMed (for Brazil).

Encouragingly, management expects revenue to continue to grow through the remainder of 2018 and benefit from international shipments to and demand from Romania, SE Asia, Italy, Benelux region and Australia. In early May SNWV announced that AMBIENSYS SRL will handle distribution in Romania (with expected revenue of $400k over 3 years). The Middle East may soon present an opportunity as well – SNWV brought on MenaCare (consultants) to help with their commercialization strategy in that part of the world. ANVISA (Brazil) approval, which previously had been expected to happen by current year-end, is now more likely an early-2019 event. Nonetheless, that represents another potential near-term revenue catalyst.

Canada represents a fairly new opportunity and, with a KOL now ‘onboarded’, dermaPACE could begin to generate meaningful interest there. In May SNWV announced that Dr. Perry Mayer, principal of The Mayer Institute, joined the company’s Clinical Advisory Board. SNWV’s PR notes that TMI is “one of Canada’s prominent preventative diabetic foot care, advanced wound care and diabetes education clinics”. TMI treats 80 to 90 wounds per day. While we do not expect significant revenue from Canada in the immediate term, having a resident-KOL in place is a key piece of SNWV’s initial commercialization strategy and one which should afford relatively efficient means of building early awareness of dermaPACE to the Canadian wound therapy community. Case studies as well as, potentially, post-marketing studies are also key components of initial awareness-building efforts.

In terms of the U.S., management indicated that Premier has already been busy at trade shows and visiting military bases. 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 later this year. Nonetheless, we continue to think the U.S. market is likely to be one where incremental gains are made over time, particularly pre-reimbursement. (See our updated report for background on the U.S. market).

So, 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 management’s initial U.S. strategy – 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.

SNWV dedicated much of 1H ’18 to initial awareness-building – essentially ‘introducing’ dermaPACE to the U.S. wound community with attendance at numerous industry events. 2H ’18, as explained on the Q1 call, is the next step – that is, educating wound experts and KOLs on how and when to use dermaPACE. This timeline sets up early 2019 for a more dedicated commercialization push – which corresponds to when SNWV expects to have a CPT III (‘tracking code’) in place (Jan 1, 2019).

Q2 revenue was $453k, up 308% yoy, up 32% yoy and inline with our $445k estimate. This was the highest Q2 revenue in company history and follows the same record in Q1 – which also means that revenue in 1H’18 was the best 1H in company history. This is also the only consecutive three quarter period in with revenue in each quarter above $300k.

Contribution from distribution fees totaled $170k, or 38% of total revenue, and represented a significant portion of both the yoy and qoq growth. But, international device and applicator sales were also meaningful components of total revenue (42%) and international revenue growth. International device and applicator sales, which increased $120k (+167%) from Q2’17 and $71k (+59%) from Q1’18, is a (rough) gauge of OUS demand.

Meanwhile, U.S. sales were just $25k in Q2’18, compared to $6k in Q2’17 and $123k in Q1’18. While not particularly meaningful and down significantly from Q1 of this year, we had expected as much. In fact, we had modeled only $20k in estimated U.S. revenue for Q2 (as noted, we expect incremental gains in the U.S. over time). The sequential contraction was anticipated as Q1 benefitted from initial device sales for training purposes.

Most of our forecasted 2018 revenue is still OUS. Recognition of upfront fees from the JV agreements will show up as revenue in 2H’18 and into 2019. dermaPACE is still awaiting ANVISA approval in Brazil – assuming that happens, MundiMed related revenue contribution could be material – but likely not until next year. Meanwhile, recent expansion of SNWV’s OUS footprint, 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 an 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, finally, as it relates to potential international catalysts – SNWV has delivered on its previously announced strategy of new JV agreements – and more could be forthcoming.

OpEx was $2.4M, compared to $1.4M and $1.3M in the prior year and quarter periods – almost all of the difference relates to non-cash stock compensation (to employees and/or consultants). SG&A has ticked up considerably since Q3 of last year. 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 through the end of the year. But, we also expect sales growth will offset at least a portion of the incremental cost.

Recently bolstered by additional net borrowings and upfront JV fees, cash balance was $671k at Q2 quarter-end, up from $154k at the close of Q1’18. Cash flow from operating activities was actually an inflow of $250k in Q2 and an outflow of $1.9M through 1H’18. Excluding changes in working capital, cash flow from operating activities was negative $1.2M in Q2 and $2.5M in 1H’18. SWNV continues to guide for cash burn to average $375k - $675k per quarter. Additional cash could come from warrant exercises – as of the close of Q2, warrants representing more than $7M were in-the-money. And, as noted, new JV agreements could be another source of funds.

We cover SNWV with a $0.75/share price target. See link below for free access to our updated report which includes our valuation methodology and financial model.

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