Sensus Healthcare, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; results are compared with the three and nine months ended September 30, 2015. The company designs, manufactures, and markets superficial radiation therapy systems, primarily the SRT-100 product line. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.33 million | $2.11 million | $9.93 million | $6.43 million |
| Gross profit / margin | $2.25 million / 67.6% | $1.42 million / 67.2% | $6.50 million / 65.5% | $4.17 million / 64.8% |
| Operating expenses | $2.30 million | $1.49 million | $6.89 million | $4.81 million |
| Operating loss | $(44,220) | $(74,314) | $(383,405) | $(642,453) |
| Net loss | $(30,414) | $(78,073) | $(379,632) | $(652,082) |
| Adjusted EBITDA, non-GAAP | $167,624 | $15,716 | $627,874 | $(375,162) |
Q3 revenue increased 57.9%; management attributed growth to more systems sold and a greater share of higher-priced SRT-100 Vision systems. Nine-month revenue rose 54.4%, principally for the same reasons. Gross margin improved modestly in both comparisons. Operating losses narrowed, but operating expenses increased, particularly general and administrative costs. The nine-month G&A increase included public-company costs and stock compensation, including a $465,000 one-time charge in Q2 related to an award triggered by the IPO.
Cash, liquidity, and debt
- At September 30, 2016, cash and cash equivalents were $4.61 million, with debt securities of $6.58 million ($4.85 million current and $1.73 million long-term). Management reported cash, cash equivalents, and investments totaling $11.2 million, compared with $5.1 million at December 31, 2015.
- Nine-month operating cash use was $2.34 million, versus $1.25 million in 2015. The filing attributes the 2016 use largely to increased accounts receivable, inventory, and prepaid expenses, and lower accounts payable and accrued expenses.
- Investing cash use was $6.84 million, mainly purchases of held-to-maturity debt securities ($6.58 million) and property and equipment ($262,437). Financing provided $8.72 million, including IPO proceeds and warrant exercises, partly offset by preferred distributions and repayment of the credit line.
- No borrowings were outstanding on the revolving credit facility at quarter-end; approximately $423,000 was outstanding at December 31, 2015. The amended facility provides up to $2.0 million through September 21, 2017, subject to borrowing-base limits and financial covenants; the interest rate was 4.25% at quarter-end.
- Total liabilities were $3.02 million and stockholders’ equity was $15.14 million at September 30, 2016. The filing reports no off-balance-sheet arrangements.
Material changes and notable items
- The June 2016 IPO issued 2.3 million units and generated approximately $10.4 million in net proceeds. Shares and warrants began trading separately in July. The company also received $1.13 million from warrant exercises and paid approximately $2.51 million in cash distributions to former preferred investors.
- General and administrative expense rose 108% in Q3 and 136% for the first nine months, driven by public-company costs, board fees, director and officer insurance, and stock compensation. Selling and marketing expense also rose as payroll and marketing activity increased.
- The company renewed and expanded its headquarters lease through September 2022. Future minimum lease payments totaled $1.07 million as of September 30, 2016.
- Revenue pending regulatory approval was $155,517 at quarter-end; total deferred revenue was $1.00 million. Customer payments for service contracts and product deposits also comprise deferred revenue.
- One contract manufacturer produces the company’s main product. Management notes that a change in this relationship could adversely affect the business. Purchases from this manufacturer were approximately $3.00 million in the first nine months of 2016.
Outlook, risks, and controls
Management expects revenue to increase as it expands sales, marketing, and distribution capabilities, broadens adoption of the SRT-100, and introduces new products. It expects a 0.0% effective tax rate for 2016 because it does not expect taxable income. The filing gives no quantified revenue, earnings, or cash-flow guidance.
Risks highlighted include achieving and sustaining profitability; market acceptance and commercialization; competition and sales-force expansion; reimbursement and coverage changes; regulatory approvals; manufacturing capacity, reliance on a third-party manufacturer and suppliers, and unit-cost reduction; product quality and liability claims; international operating risks; and limited trading activity in the stock. Management reported no material changes to the risk factors in the IPO prospectus and concluded disclosure controls were effective at September 30, 2016. Ordinary-course legal proceedings were disclosed; management did not believe they were likely to have a material effect.
Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results. The company reported a net loss despite positive adjusted EBITDA in Q3 and for the first nine months of 2016.
Important facts for investors to verify
- Whether sales growth and the higher-priced SRT-100 Vision mix continue, and whether revenue converts to cash given the increase in receivables and operating cash use.
- The facility’s borrowing-base availability and compliance with its quick-ratio and minimum-EBITDA covenants.
- The assumptions behind deferred revenue for sales awaiting regulatory approval and the timing of related revenue recognition.
- The durability of gross margins and the extent to which higher operating and public-company costs affect progress toward profitability.
- Reliance on the contract manufacturer, reimbursement conditions, and the company’s ability to meet demand while managing product and regulatory risks.