Sensus Healthcare, Inc. — Q2 2018 Form 10-Q
Business and period: The company manufactures and markets superficial radiation therapy devices, primarily the SRT-100 product line, for healthcare providers. This unaudited report covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Sensus opened a wholly owned Israeli subsidiary in February 2018.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $6.06 million | $4.97 million | $12.01 million | $9.32 million |
| Gross profit | $3.94 million | $3.41 million | $7.88 million | $6.27 million |
| Gross margin | 65.1% | 68.7% | 65.6% | 67.2% |
| Operating loss | $0.50 million | $0.77 million | $1.61 million | $2.35 million |
| Net loss | $0.54 million | $0.76 million | $1.67 million | $2.34 million |
| Net loss per diluted share | $0.04 | $0.06 | $0.12 | $0.18 |
Q2 revenue rose 21.9% and first-half revenue rose 28.9%, primarily reflecting greater sales of the higher-priced SRT-100 Vision. Gross margin declined in both comparisons; management attributed the decrease to lower average selling prices. First-half operating expenses increased 10.1%: R&D rose 33.5% as projects continued and accelerated, G&A rose 15.0% (including $444,000 of non-recurring stock compensation, partly offset by lower bad-debt expense and professional fees), while selling and marketing expense fell 4.3%.
Cash, liquidity and debt
At June 30, 2018, cash and cash equivalents were $8.01 million, down from $10.09 million at year-end 2017; the company had no debt securities remaining. Current assets were $18.79 million and current liabilities $4.95 million. Stockholders’ equity was $10.67 million.
First-half operating cash use was $4.69 million, versus $2.94 million in 2017, mainly reflecting higher accounts receivable, inventory and prepaid assets. Investing activities provided $0.65 million, principally from maturity of debt securities, while financing activities provided $1.97 million, mainly from increased revolver borrowings. Cash decreased by $2.07 million during the half.
Revolver borrowings were $4.22 million, up $2.00 million from December 31, 2017. The facility has a $5 million commitment, matures October 31, 2019, is secured by company assets, and bears interest at 5.75% or 6.50% depending on borrowing type. The company reported compliance with its financial covenants at June 30, 2018. Management said cash declined partly because higher sales and longer payment terms to certain customers increased receivables.
Outlook, risks and unusual items
The filing provides no quantified revenue, earnings or cash-flow guidance. Management says capital needs include expanding sales, marketing and distribution and increasing R&D; it may seek additional funding. Results are not necessarily indicative of full-year performance.
A single U.S. customer represented approximately 68% of Q2 revenue and 71% of first-half revenue, and 94% of accounts receivable at June 30. The United States accounted for approximately 94% of Q2 and 97% of first-half revenue. The company also relies on a third-party manufacturer; purchases from it were $1.83 million in the first half, and $0.97 million was payable to it at June 30.
The Department of Justice investigation concerns Medicare billing by a physician who treated patients using the SRT-100. Sensus says it has cooperated, disputes wrongdoing, and cannot estimate potential costs; the Department had made no determination known to the company about Sensus’s involvement or whether to pursue action. The company reported no subsequent events requiring disclosure and no material changes to previously disclosed risk factors. It adopted ASC 606 in 2018 and reported no material revenue impact.
Key facts for investors to verify
- Whether the higher revenue growth and SRT-100 Vision sales can be sustained while gross margins remain below prior-year levels.
- Customer concentration, extended payment terms, and the collection of the large receivable balance.
- Cash burn, revolver availability and covenant compliance, including the October 2019 facility maturity.
- Any developments in the DOJ investigation and the company’s dependence on its third-party manufacturer.
- The filing describes ASC 606 adoption using both modified-retrospective and full-retrospective wording; confirm the transition method in the underlying filing.