Sensus Healthcare, Inc. annual report, FY2016

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Sensus Healthcare, Inc. — FY 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016, compared with FY 2015. This annual filing does not provide standalone fourth-quarter results. Sensus sells superficial radiation therapy systems, primarily the SRT-100 product line, for non-melanoma skin cancer and other skin conditions.

Financial performance and position

  • Revenue: $14.81 million, up 44.2% from $10.27 million. Management attributed growth to higher system volumes and a greater mix of the higher-priced SRT-100 Vision.
  • Gross profit and margin: $9.85 million and 66.5%, versus $6.58 million and 64.1% in 2015. The improved margin reflected greater Vision sales.
  • Operating expenses: $10.21 million, up from $6.80 million. Selling and marketing was $4.92 million; general and administrative was $3.47 million; research and development was $1.82 million.
  • Net loss: $346,448, compared with $237,267 in 2015. 2016 basic and diluted loss per share was $0.03. The 2015 loss attributable to common stockholders was $750,599, including a $513,332 preferential distribution.
  • Cash flow: Cash used in operations was $851,024, compared with $1.34 million in 2015. Investing used $7.85 million, primarily for debt securities; financing provided $8.68 million, mainly from the IPO.
  • Liquidity: Year-end cash and cash equivalents were $5.04 million; debt securities totaled $7.57 million, including $6.46 million classified as current and $1.10 million as long-term. The balance sheet therefore reports $12.61 million in cash, cash equivalents and debt securities combined.
  • Debt: No revolving-credit borrowings were outstanding at year-end, versus $422,702 in 2015. The facility’s stated maximum was $2.0 million, subject to an eligible-receivables borrowing base; it was secured by company assets and included financial covenants.
  • Balance sheet: Total assets were $18.95 million, total liabilities $3.67 million, and stockholders’ equity $15.27 million. Accounts receivable was $3.10 million and inventory $1.25 million.

Material changes and unusual items

  • The June 2016 IPO raised approximately $10.5 million net of offering costs. The company also received $1.13 million from warrant and option exercises.
  • Approximately $2.55 million was paid in cash to former preferred investors for accumulated distributions; additional distributions were settled in shares. The filing reports approximately $2.6 million in total distributions in its narrative.
  • General and administrative expense rose 118.7%, primarily due to stock compensation, directors’ and officers’ insurance, and other public-company costs following the IPO. A performance-based equity award generated approximately $465,000 of stock compensation expense in 2016.
  • The company converted from an LLC to a Delaware corporation on January 1, 2016. As a corporation, it recorded a full valuation allowance against net deferred tax assets; no income tax provision was reported.

Outlook, commentary and risks

  • No numerical revenue, earnings or cash-flow guidance is provided. Management expected selling and marketing expense to rise in 2017 as it expanded its direct sales force, and expected R&D expense to increase as development work continued.
  • Management cited revenue growth from system volume and product mix. It reported more than 270 installed units across 17 countries and said manufacturing capacity was adequate for foreseeable demand, while also exploring bringing some manufacturing functions in-house.
  • Key exposures include reliance on the SRT-100 product line, reimbursement and market acceptance, competition, dependence on a third-party manufacturer and a preferred x-ray-tube supplier, and concentration of sales in the U.S. and China. The filing reports approximately 81% of 2016 revenue from U.S. customers and 10% from China.
  • The revolving credit facility had been amended and extended through September 21, 2017. The company disclosed prior covenant noncompliance in October and November 2015, waived by the bank in February 2016; it reported compliance at December 31, 2016.
  • The company reported ordinary-course legal proceedings but said it did not believe they were likely to have a material effect. It reported effective disclosure controls; the filing did not include management’s assessment or auditor attestation of internal control over financial reporting under the new-public-company transition rules.
  • The independent auditor issued an unqualified opinion on the financial statements. The filing identifies no material subsequent events requiring adjustment or disclosure.

Important facts for investors to verify

  • Whether system sales, Vision mix and gross margin can sustain the reported growth as sales and R&D spending expand.
  • Receivables collection, inventory levels and operating cash use; operating cash flow remained negative despite higher revenue.
  • Available borrowing capacity under the receivables-based credit line, covenant terms and the facility’s September 2017 maturity.
  • The planned timing, cost and operational impact of any move to bring manufacturing in-house, and continuity of third-party and component supply.
  • Reimbursement developments, customer concentration and evidence of broader adoption beyond the company’s core U.S. and China markets.
  • The exact amount and settlement form of former preferred-holder distributions, and the terms and potential dilution from outstanding warrants.