Sensus Healthcare, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparison is FY 2017. This is an annual filing, not a standalone fourth-quarter report, and it does not provide clear Q4-only financial results.
Business context
Sensus develops and sells superficial radiation therapy devices, primarily the SRT-100 product line, for skin cancers and other conditions. It also earns service revenue. The company reported one operating segment and an installed base of 395 units in 17 countries at year-end. Substantially all revenue came from the SRT-100 line and related products and services.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $26.43 million | $20.59 million |
| Gross profit / margin | $16.91 million / 64.0% | $13.80 million / 67.0% |
| Operating expenses | $18.92 million | $17.52 million |
| Operating loss | $(2.01) million | $(3.72) million |
| Net loss | $(2.02) million | $(3.71) million |
| Net loss per share | $(0.14) | $(0.28) |
| Cash used in operating activities | $(8.56) million | $(3.06) million |
Revenue grew 28.4%, driven by higher system volume and a greater mix of higher-priced SRT-100 Vision units. Gross margin declined three percentage points, primarily due to product mix; cost of sales rose 40.2%. R&D expense increased 14.0% to $6.26 million, largely due to accelerated projects, including development of the IORT device. G&A rose 10.8%, including $444,000 of expense for fully vested director shares.
At December 31, 2018, cash and cash equivalents were $12.48 million and short-term debt securities were $2.89 million, for combined cash and investments of $15.38 million. Current assets were $31.90 million and current liabilities $6.02 million. Working capital was approximately $25.88 million. The company had no revolving-credit borrowings, versus $2.21 million at year-end 2017; its facility had a $5 million commitment and was scheduled to mature October 31, 2019. Stockholders’ equity was $26.46 million.
Operating cash use increased substantially, with accounts receivable rising to $13.15 million from $4.96 million. Management attributed the working-capital use mainly to sales growth and longer payment terms on certain sales. Financing provided $13.60 million, principally from the September 2018 stock offering: approximately $17.25 million gross and $15.85 million net proceeds. Investing activities used $2.64 million. The statements report ending cash of $12.48 million; the filing’s MD&A gives a different operating cash-use figure ($8.52 million), so the discrepancy should be checked.
Material changes and notable developments
- Revenue increased, while net loss narrowed; the company remained unprofitable and had cumulative losses of approximately $13.5 million.
- Cash and investments increased, supported by the equity offering, and the company repaid its outstanding revolving-credit balance.
- One U.S. customer represented approximately 71% of 2018 revenue, up from 59% in 2017, and 87% of year-end accounts receivable. The U.S. accounted for approximately 96% of revenue; China about 1%.
- The SRT-100+ received FDA clearance in August 2018. Sculptura, the company’s IORT system, received FDA clearance announced in February 2019, after the fiscal year-end.
- R&D expense was approximately $6.3 million, versus $5.5 million in 2017. Regulatory-compliance and quality-standard expenses were approximately $1.04 million, versus $0.87 million.
Outlook, risks and contingencies
The company provided no quantified revenue, earnings or cash-flow guidance. Management stated that it believed public-offering proceeds, borrowing capacity and access to capital were sufficient for anticipated operating and funding needs for the foreseeable future. It expected most 2019 revenue to continue to come from the SRT-100 line. These statements are forward-looking and subject to significant risks.
- Key risks include ongoing losses and operating cash use, reliance on the SRT-100 product family, customer and geographic concentration, reimbursement and market-acceptance uncertainty, competition, regulatory requirements, and reliance on a contract manufacturer and a preferred supplier for major components.
- A Department of Justice investigation concerns Medicare billing by a physician who treated patients with the SRT-100. The company said it cooperated, disputed wrongdoing, and could not estimate the matter’s cost; the Department had made no determination known to the company.
- The company disclosed ordinary-course legal proceedings and no off-balance-sheet arrangements. It reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
- Management’s liquidity assessment should be considered alongside substantial receivables growth, operating cash use, the credit facility’s covenants and maturity, and the reliance on equity financing.
Most important facts for investors to verify
- Customer identity, payment history and collectability of the receivable balance, particularly the customer responsible for 71% of revenue and 87% of receivables.
- The operating-cash-flow amount: the cash-flow statement reports $8.56 million used, while MD&A states $8.52 million.
- Status and potential financial exposure of the DOJ investigation, and any developments after the filing date.
- Commercial launch progress, demand, costs and revenue contribution for SRT-100+ and Sculptura; Sculptura clearance occurred after year-end.
- Current availability, terms and maturity of the revolving credit facility, and whether future funding may be needed.
- Warrant overhang: 2.438 million warrants were outstanding at year-end, with a weighted-average exercise price of $6.75 and stated expiration through June 2019 for the IPO warrants.