Sensus Healthcare, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Sensus manufactures and markets superficial radiation therapy devices, principally the SRT-100 product line. Results are unaudited.
Financial highlights
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Revenue | $4.35 million | $3.04 million; up 43.5% |
| Gross profit / margin | $2.85 million / 65.6% | $1.93 million / 63.7% |
| Operating expenses | $4.44 million | $1.92 million |
| Operating income (loss) | $(1.59) million | $9,588 |
| Net income (loss) | $(1.57) million; $(0.12) per diluted share | $2,081; $0.00 per diluted share |
| Cash from operations | $(2.76) million | $(0.59) million |
| Cash and cash equivalents | $3.14 million | $5.04 million at Dec. 31, 2016 |
| Debt securities | $7.91 million, all classified current | $7.57 million total at Dec. 31, 2016 |
| Revolving credit facility | $1.50 million outstanding | None at Dec. 31, 2016 |
| Current assets / current liabilities | $17.96 million / $5.44 million | $16.76 million / $3.66 million at Dec. 31, 2016 |
Cash, cash equivalents and investments totaled approximately $11.0 million at quarter-end, versus $12.6 million at year-end 2016. The filing reports no separate cash-flow margin or formal liquidity forecast. No income tax provision was recorded in Q1 2017.
Changes and management commentary
- Revenue rose 43.5%, mainly due to increased sales of the higher-priced SRT-100 Vision. Cost of sales increased 36.0%, and gross margin improved 1.9 percentage points.
- Selling and marketing expense increased 140% to $2.26 million, attributed primarily to added sales personnel, trade shows and marketing. Advertising expense rose to approximately $733,000 from $232,000.
- Research and development expense increased 287% to $1.14 million. Management attributed the increase to new projects and said spending was expected to continue as projects progressed during 2017.
- General and administrative expense increased 52.2% to $1.04 million, principally from directors’ and officers’ insurance, public-company costs and bad debts; lower legal and professional fees partly offset the increase.
- Operating cash outflow increased substantially, with higher receivables, inventory and prepaid expenses and lower deferred revenue contributing to working-capital use. The company attributed the receivables increase to sales growth.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or cash-flow guidance. Management identifies expansion of sales, marketing, distribution and R&D as primary short-term capital needs and says it may raise additional funds in the future.
- The $2.0 million revolving facility bears interest at prime plus 0.75% (4.75% at March 31, 2017), is secured by company assets and includes financial covenants and restrictions. It matures September 21, 2017. The company reported compliance with its financial covenants at March 31, 2017.
- Revenue and receivables are highly concentrated: one U.S. customer represented approximately 51% of Q1 revenue and 69% of accounts receivable at March 31, 2017. The U.S. accounted for approximately 99% of Q1 revenue, compared with 45% a year earlier.
- The company recorded approximately $169,000 of bad-debt expense in Q1 2017; its doubtful-account allowance was approximately zero at quarter-end. Management identifies collection risk and estimates for receivables and inventory as areas of judgment.
- The company relies on a third-party manufacturer; purchases from it were approximately $1.28 million in Q1, and approximately $967,000 was payable to it at quarter-end. The filing notes that a change in the manufacturing relationship could adversely affect the business.
- Management said ordinary-course legal proceedings were not expected to have a material effect. No material change to previously disclosed risk factors was reported. Management concluded disclosure controls were effective and reported no significant change in internal control over financial reporting.
Investor facts to verify
- Whether the large U.S. customer’s purchases and receivable balance convert to cash on schedule, and whether customer concentration persists.
- Whether higher SRT-100 Vision sales and improved gross margin continue to cover the sharply increased sales and R&D spending.
- Cash burn, working-capital needs and available liquidity, including the timing and terms of any facility renewal or repayment after September 21, 2017.
- Progress and expected spending on the new R&D projects, and any material effect from adopting the new revenue recognition standard in 2018.
- Reliability of the third-party manufacturing arrangement and the company’s ability to meet product demand.