Sensus Healthcare, Inc. — Q3 2017 Form 10-Q
Business context and period. Sensus manufactures and markets superficial radiation therapy devices, primarily the SRT-100 product line, for skin cancers and other skin conditions. This unaudited report covers the three and nine months ended September 30, 2017, compared with the same periods in 2016. The company reports one operating segment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.80 million | $3.33 million | $14.12 million | $9.93 million |
| Gross profit | $3.22 million | $2.25 million | $9.49 million | $6.50 million |
| Gross margin | 67.1% | 67.6% | 67.2% | 65.5% |
| Operating expenses | $4.18 million | $2.30 million | $12.80 million | $6.89 million |
| Operating loss | $0.97 million | $0.04 million | $3.32 million | $0.38 million |
| Net loss | $0.97 million | $0.03 million | $3.30 million | $0.38 million |
| Basic and diluted loss per share | $0.07 | $0.00 | $0.25 | $0.03 |
Revenue grew 44.1% in Q3 and 42.1% year to date. Management attributed growth primarily to higher sales of the higher-priced SRT-100 Vision; Q3 growth also reflected more units sold. Nine-month gross margin improved, which management attributed to the product mix, while Q3 margin edged down year over year.
Operating costs increased materially: nine-month selling and marketing rose 91.4% and research and development rose 246.1%, primarily due to additional sales personnel, marketing activity and new R&D projects. General and administrative expense increased 9.9% year to date. Revenue growth did not offset these expense increases, and losses widened.
Cash, liquidity and debt
- At September 30, 2017, cash and cash equivalents were $6.84 million, short-term debt securities were $3.01 million, and total current assets were $17.13 million. Current liabilities were $6.12 million; working capital was approximately $11.01 million.
- Cash plus investments totaled approximately $9.85 million, down from $12.61 million at December 31, 2016. Total assets were $18.12 million and stockholders’ equity was $11.99 million.
- Accounts receivable increased to $5.07 million from $3.10 million at year-end; inventory increased to $1.73 million from $1.25 million.
- Operating activities used $3.85 million of cash in the first nine months, compared with $2.34 million in the 2016 period. Investing activities provided $4.31 million, mainly from $4.82 million of debt-security maturities; financing activities provided $1.34 million, mainly from credit-line borrowing. Cash increased $1.80 million during the period.
- Revolving-credit borrowings were $1.63 million at September 30, versus none at December 31, 2016. The facility rate was prime plus 0.75% (5.00% at quarter-end), and the facility was secured by company assets. The company disclosed that it failed a financial covenant in April and May; the defaults were waived and covenants amended in June.
Material developments, outlook and risks
- After quarter-end, on October 31, the company amended its credit facility, increasing the commitment to the lesser of $5 million or the borrowing base plus a $2.5 million non-formula sublimit, and extending maturity to October 31, 2019. The facility retains a monthly adjusted quick-ratio covenant and other restrictions.
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management noted that liquidity needs depend on revenue generation, margins, expenses and working capital, and that sales, marketing, distribution and R&D expansion are near-term capital needs. It may seek additional financing.
- Customer concentration is significant: one U.S. customer represented 69% of Q3 revenue and 58% of nine-month revenue, and 85% of receivables at September 30. The company also reported that approximately 99% of nine-month 2017 revenue came from U.S. customers.
- The company relies on a third-party manufacturer; purchases from it were $3.07 million in the first nine months, with $658,000 payable at quarter-end. Management cautioned that a change in this relationship could adversely affect the business.
- Ordinary-course legal proceedings were disclosed; management did not believe they were likely to have a material effect. No material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no significant quarterly changes in internal control over financial reporting.
- The company was evaluating adoption of the new revenue-recognition standard, planned for January 1, 2018, and anticipated using the modified retrospective method; it expected no significant impact for most arrangements but had not completed its review.
Most important facts for investors to verify
- Whether SRT-100 Vision sales and unit growth can continue, and whether revenue growth can outpace selling, marketing and R&D spending.
- Receivable collection and customer concentration, particularly the major customer’s share of revenue and accounts receivable.
- Ongoing operating cash burn, working-capital requirements and the availability of credit under the borrowing-base formula and covenant terms.
- Compliance with amended credit-facility covenants and the effect of the facility’s asset security and borrowing restrictions.
- Manufacturing continuity and any material changes in the third-party manufacturing relationship.