Sensus Healthcare, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Sensus designs, manufactures and markets superficial radiation therapy devices, primarily the SRT-100 product line, for healthcare providers. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the same periods in 2016. The company reports one operating segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $4.97 million | $3.57 million | $9.32 million | $6.61 million |
| Gross profit / margin | $3.41 million / 68.7% | $2.32 million / 65.0% | $6.27 million / 67.2% | $4.25 million / 64.4% |
| Operating expenses | $4.18 million | $2.67 million | $8.62 million | $4.59 million |
| Operating loss | ($0.77 million) | ($0.35 million) | ($2.35 million) | ($0.34 million) |
| Net loss | ($0.76 million) | ($0.35 million) | ($2.34 million) | ($0.35 million) |
| Basic and diluted loss per share | ($0.06) | ($0.03) | ($0.18) | ($0.03) |
Cash flow and liquidity. For the six months, operating cash use was $2.94 million, investing activities provided $0.96 million (principally net maturities of debt securities), and financing activities provided $1.16 million, mainly from credit-facility borrowings. Cash and cash equivalents were $4.22 million at June 30, down from $5.04 million at year-end. Cash plus investments totaled approximately $10.61 million, compared with $12.61 million at year-end. Current assets were $17.75 million and current liabilities $5.96 million, yielding working capital of approximately $11.79 million.
Debt and balance sheet. The company had $1.45 million outstanding on its secured revolving credit facility at June 30, versus none at December 31, 2016. Total assets were $18.83 million, total liabilities $5.98 million, and stockholders’ equity $12.85 million. Accounts receivable rose to $4.78 million from $3.10 million; inventory rose to $1.56 million from $1.25 million. Deferred revenue was $0.87 million.
Material changes versus prior comparable periods
- Revenue increased 39.1% in Q2 and 41.1% for the six-month period. Management attributed growth chiefly to more sales of the higher-priced SRT-100 Vision and, in Q2, increased unit sales.
- Gross margin improved by 3.7 percentage points in Q2 and 2.8 points for the six months, primarily due to the SRT-100 Vision product mix.
- Operating costs grew faster than revenue: six-month selling and marketing expense increased 105% and R&D increased 224.6%, principally reflecting additional sales staffing and marketing activity and new R&D projects. The operating loss widened substantially.
- Six-month operating cash use increased from $0.30 million to $2.94 million, with higher receivables and inventory among the factors. Bad debt expense was approximately $176,000 for the six months, compared with $9,000 in 2016.
Outlook, commentary and risks
The filing provides no quantified revenue, earnings, or cash-flow guidance. Management identifies investment in sales, marketing, distribution and R&D as capital needs and says it may raise additional funds. It cautions that interim results are not necessarily indicative of full-year results.
- The company breached a financial covenant in April and May 2017; the lender waived the defaults on June 27 and amended covenants effective June 2017. The facility carried a 5.00% rate at quarter-end, was secured by company assets, and was scheduled to mature September 21, 2017. It restricts additional debt and certain asset transfers.
- Customer concentration is material: one U.S. customer represented approximately 52% of Q2 and six-month revenue and 59% of June 30 receivables. U.S. customers accounted for approximately 99% of first-half revenue, versus 61% in the prior-year period; China represented approximately 0% versus 22%.
- The company relies on a third-party manufacturer; it reports that a change in that relationship could adversely affect the business. It also cites commercialization and market-acceptance, reimbursement, competition, manufacturing and financing risks. The filing reports no material changes to the risk factors previously disclosed in its 2016 Form 10-K.
- Ordinary-course legal proceedings are disclosed; management does not believe they are likely to materially affect the business or results. No subsequent events requiring adjustment or disclosure were identified. Management concluded disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the revolving credit facility was renewed or refinanced before its September 21, 2017 maturity, and the company’s ongoing covenant compliance.
- Receivables collection, particularly the exposure to the major U.S. customer, and whether the higher bad-debt expense signals deterioration in credit quality.
- Whether revenue growth and improved gross margins can continue while selling, marketing and R&D expenses remain elevated.
- The cash runway and any need for additional financing, considering operating cash use and working-capital requirements.
- Future customer and geographic concentration, and progress adopting the new revenue-recognition standard, for which the company anticipated modified-retrospective adoption on January 1, 2018.