Sensus Healthcare, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; unaudited. Sensus manufactures and sells superficial radiation therapy devices, primarily the SRT-100 product line, including the higher-priced SRT-100 Vision, and related services.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.33 million | $4.80 million | $18.35 million | $14.12 million |
| Gross profit | $4.17 million | $3.22 million | $12.05 million | $9.49 million |
| Gross margin | 65.8% | 67.1% | 65.7% | 67.2% |
| Operating loss | $0.42 million | $0.97 million | $2.04 million | $3.32 million |
| Net loss | $0.46 million | $0.97 million | $2.12 million | $3.30 million |
| Loss per share, basic and diluted | $0.03 | $0.07 | $0.16 | $0.25 |
For the nine months, operating cash flow was negative $6.91 million, versus negative $3.85 million in 2017. Investing cash flow was positive $0.34 million and financing cash flow was positive $13.60 million. Cash and cash equivalents were $17.12 million at September 30, 2018, compared with $10.09 million at year-end 2017. Current assets were $31.10 million and current liabilities $5.81 million. No revolving-credit borrowings were outstanding at quarter-end; $2.21 million was outstanding at December 31, 2017. Total liabilities were $6.34 million.
Changes versus the prior comparable periods
- Revenue increased 32.1% in Q3 and 29.9% year to date. Management attributed growth primarily to increased sales of the higher-priced SRT-100 Vision.
- Gross margin declined by 1.3 percentage points in Q3 and 1.5 percentage points year to date. Management cited a lower average selling price.
- Year-to-date operating expenses rose to $14.09 million from $12.80 million, led by a 25.8% increase in R&D spending. Management attributed the increase to continuing and accelerating R&D projects. G&A also increased, including a non-recurring $444,000 stock-compensation expense.
- Net loss narrowed in both comparison periods, but operating cash use increased. Management cited higher receivables, partly reflecting longer payment terms for a key customer, along with increases in inventory and prepaid assets.
- In September, the company sold 2,536,764 shares at $6.80 per share, generating $17.25 million gross proceeds and approximately $15.85 million net proceeds. The filing reports $2.21 million of revolving-credit repayment in the cash-flow statement.
Liquidity, outlook, risks, and unusual items
Management identified sales and R&D expansion as primary short-term capital needs and said it may raise additional funds in the future. The filing provides no specific revenue, earnings, or cash-flow guidance. The company said it did not anticipate further securities issuance under its shelf registration while baby-shelf limitations restricted capacity. The credit facility matures October 31, 2019, is secured by company assets, and imposes financial and other covenants; the company reported covenant compliance at September 30, 2018.
- Customer and receivables concentration is significant: one U.S. customer represented approximately 78% of Q3 revenue and 92% of period-end accounts receivable. U.S. customers represented approximately 93% of Q3 revenue.
- The company is cooperating with a Department of Justice investigation concerning a physician’s Medicare billing for treatments using SRT-100. The company disputes wrongdoing, says the Department has made no determination to its knowledge, and cannot estimate potential costs.
- The company relies on a third-party manufacturer; purchases from it were approximately $3.13 million year to date, and approximately $1.21 million was payable to it at quarter-end.
- Other disclosed risks include market acceptance and commercialization, reimbursement and regulatory requirements, competition, manufacturing and supplier dependence, and the ability to sustain profitability. Management reported no material changes to the previously disclosed risk factors.
- Operating lease commitments totaled $965,000 through 2022. The company adopted ASC 606 in 2018 and reported no material revenue impact. It was evaluating the effect of the upcoming lease-accounting standard.
Management concluded disclosure controls and procedures were effective as of September 30, 2018, with no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the key customer’s extended payment terms and concentration are affecting collections; receivables increased to $10.66 million from $4.96 million at year-end.
- How the company can convert revenue growth into improved gross margins, operating profitability, and operating cash flow.
- The status and potential exposure of the DOJ matter, for which no cost estimate was provided.
- Available borrowing capacity and covenant headroom under the secured credit facility, including the terms and implications of its October 2019 maturity.
- The amount of future financing capacity under the shelf registration given the stated baby-shelf limitation.