Sensus Healthcare, Inc. Q2 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to the Sensus Healthcare First Quarter 2021 Financial Results Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Kim Golodetz. Ma'am, the floor is yours.

Thank you, operator. This is Kim Golodetz with LHA. Thank you all for participating in today's call. Joining me from Sensus Healthcare are Joe Sardano, Chief Executive Officer, and Javier Rampolla, Chief Financial Officer. As a reminder, some of the matters that will be discussed during today's call contain forward-looking statements within the meaning of federal securities laws. All statements other than historical facts that address activities Sensus Healthcare assumes, plans, expects, believes, intends, or anticipates, and other similar expressions will, should, or may occur in the future are forward-looking statements. The forward-looking statements are management's beliefs based on currently available information. Sensus Healthcare undertakes no obligation to update or revise any forward-looking statements except as required by law. All forward-looking statements are subject to risks and uncertainties, including the continuation and severity of the COVID-19 pandemic and its impact on sales and marketing as described in the Company's forms 10-Q and 10-K. During today's call, there will also be reference to certain non-GAAP financial measures. Sensus believes these measures provide useful information for investors, yet should not be considered as a substitute for GAAP nor should they be viewed as a substitute for operating results determined in accordance with GAAP. A reconciliation of non-GAAP to GAAP results is included in today's financial results press release. With that said, I'd like to turn the call over to Joe Sardano. Joe?

Thank you, Kim, and good afternoon, everybody. Thank you all for joining us. It's been quite a year and I hope that you all have continued to remain healthy. Now that fully half the country has had at least one COVID-19 vaccine, perhaps before too long, we'll be able to move forward. Indeed, we are seeing significant improvements in economic activity, which stands in stark contrast to when I spoke with you one year ago when Sensus was so negatively impacted by the complete shutdown of the U.S. economy. Our first quarter 2021 revenues of $3.1 million were significantly higher than the prior year. More specifically, revenues were up 83% and reflect progress in our return to normalcy. Revenues featured both domestic and overseas sales. We are cautiously optimistic that the signs of market recovery will allow continued revenue growth as the year progresses, noting our historical seasonality during the summer months. We were delighted to ship 7 SRT systems during the quarter, including 6 domestic direct sales and 1 to China. We're particularly pleased that the SRT systems installed at customer sites are operating with good volumes. This is likely reflecting not only the safety and efficacy of using SRT to treat non-melanoma skin cancer but also a favorable reimbursement environment as of January 1, 2021. As of that date, the Centers for Medicare and Medicaid Services or CMS revalued our main procedure and other codes following years of lobbying by Sensus and a host of key opinion leaders who went to bat for us with CMS, highlighting the efficacy and safety of SRT. The American Cutaneous Oncology Society, in particular, was most helpful in working alongside Sensus with the American Academy of Dermatology. We have a lot of people to thank for believing in us and our technology. As we had previously indicated, Q1 has had us focused on helping the market better understand the new reimbursement coding. We stated that this will be a major part of our activities throughout the first half of 2021. Our sales force, along with our field applications team has been engaged with customers and prospects in delivering this message, and we'll continue to do so throughout the year. Reimbursement increased not only for the main SRT code but also increased for the evaluation and management codes. The combination of these increased values provides SRT users with as much as a 50% increase over the reimbursement values of the past several years. In addition, codes were revalued upward for the ultrasound capability in our SRT-100 Vision Systems. This has caused greater interest in our Vision products by our existing customers and prospects alike, since breakevens are improved. It has also increased interest in shared revenue programs. To date, we have penetrated only about 2% of the U.S. market. So clearly, there is plenty of upside for growth. Customers and prospective customers alike appear to be satisfied with the new reimbursement levels, and we anticipate this acceptance will be reflected in our revenue during the second half of this year. In addition, we have developed a fair market value lease with our leasing resources, which provides another reason for our customer base and prospects to consider our higher-priced SRT-100 Vision product. The FMV program offers much the same as on higher-line vehicles, whereby the monthly payment is much less than the capital lease, which has a dollar buyout because of the higher residuals placed on our products. We see good interest with prospects beginning in Q2. We feel this program will grow in popularity, as we lower payments for our customers, while at the same time helping them achieve breakeven sooner. We were thrilled with the 500 installations since the formation of Sensus Healthcare a decade ago. A sale was to the Mid-Atlantic Skin Surgery Institute in Maryland. It was their second purchase of an SRT system as they expand their practice to a second location. We're looking forward to the installation of the next 500 units, and as previously mentioned, we feel we can install our next 500 units in half the time. During the fourth quarter, we shipped an SRT system to Holy Name Hospital in Teaneck, New Jersey, for the use of superficial radiation therapy treating the lungs of hospitalized COVID-19 patients. This hospital has been at the forefront of treating patients from the early days of the pandemic, being situated adjacent to New York City, which was impacted early on. During the first quarter of 2021, Holy Name successfully treated its first patient with the patient leaving the ICU ward the day after treatment. Since then, the second patient has been treated, and we will learn of the outcome soon. The hospital is developing protocols for treatment, and we continue to expect data on the efficacy of our system for this indication during the second quarter. As a reminder, in evaluating this opportunity to help our frontline workers and patients, history shows a very successful approach to treating pneumonia with radiation, going back nearly 75 years. We engaged an outside physics lab to evaluate our radiation and provide us with a non-biased opinion on whether or not our radiation credits efficiently penetrate the body to treat the lung. They published a paper that provided us the confidence that our SRT technology was capable of doing so. Our SRT systems are well-suited for COVID-19 because they are portable and allow for bedside treatment in the ICU rather than transporting patients to a cancer treatment center for radiation therapy and possibly exposing vulnerable oncology patients to the virus. Turning now to our aesthetic users, we are approaching the launch of our new aesthetic lasers and the integration of the Sentinel IT Solution Software into the lasers. Phase one is complete. Sentinel provides asset management and HIPAA-compliant patient data and storage capability, and it also contains the software necessary to support shared service models, including direct patient billing. We expect the sale of aesthetic lasers will become a meaningful source of revenue, in particular as we rollout disruptive rental strategies. These strategies are designed to generate consistent revenue for Sensus while providing physician customers with access to multiple lasers. We are also looking at expanding our Mobile Aesthetic Laser business beyond Florida via strategic transactions. We will introduce our family of laser products with Sentinel, known as smart lasers, at the upcoming South Beach Symposium — Aesthetic Laser Symposium being held in September at the Miami deployment hotel. It will be a live event as over 1,000 dermatologists and plastic surgeons have already registered. Sentinel IT has started to generate high-margin recurring revenue, although still early in its lifecycle. Sentinel holds significant promise as an integrated feature, not only with the new lasers but also with the SRT-100+ and the SRT-100 Vision. Turning now to our international efforts, business in China looks very promising. Following the sale of 3 systems there during the fourth quarter of 2020, we sold an additional system this past quarter. We expect several more sales in the coming year. As of the start of the first quarter, we engaged a new distribution partner for China and Hong Kong. Our new VP of International Sales has developed an extensive network of prospects in China, and we're optimistic that China represents an excellent growth opportunity. In preparation for growth, we will be engaged with the Chinese health authority in renewing our license for another 4 years. This will be an expensive endeavor and will require almost the entire year to accomplish. This will be our third license renewal. In addition, we are finalizing a new distributor in Taiwan and are preparing Sculptura for the regulatory process in China. Sculptura is our anisotropic radiation therapy with beam sculpting capabilities and robotic respiratory tracking for up to 17 different indications. During the first quarter, we were granted an important U.S. patent for Sculptura, which describes the method of beam splitting and sculpting. This patent covers 31 separate claims dealing with how our electron beam generator is able to sculpt and direct X-rays precisely where they are wanted. The technology that's embedded in our Sculptura system differs from the conventional intraoperative radiation therapy or brachytherapy systems in its ability to control the radiation beam and has a longer useful operating life. Ours is the first device in the world with this capability, and we believe it opens up new doors for the delivery of radiation to treat solid tumors of all kinds. In addition, there may be uses for this technology and devices other than Sculptura as well, providing potential licensing opportunities. In the meantime, later this year, we expect our research partners at the University of Pennsylvania to begin supportive studies in breast and other cancers that have been on pandemic-related hold. With that, I'll turn the call over to Javier Rampolla, our CFO, who will go over our Q4 and full-year financial results in more detail. Javier?

Thanks, Joe. It's a pleasure to be speaking with all of you this afternoon. As Joe mentioned, revenues for the first quarter of 2021 were $3.1 million, and this compares with revenue of $1.7 million for the first quarter of 2020. Revenues for the 2021 quarter reflect the sale of 7 SRT systems, including 6 direct domestic sales and 1 system sold to China, as well as service contracts and our new mobile laser business. The 2020 quarter was impacted by the start of the COVID-19 pandemic. Cost of sales for the first quarter of 2021 was $1.5 million compared with $1 million for the prior-year quarter. The increase was commensurate with higher sales during the first quarter of 2021. Gross profit for the first quarter of 2021 was $1.6 million or 51.7% of revenue. This compares with gross profit of $0.7 million or 42.2% of revenue for the prior-year quarter. The increase in gross margin was primarily driven by the higher number of units sold in 2021, service revenue on installed units, and the impact of COVID-19 on the first 3 months of 2020. Selling and marketing expense for the first quarter of 2021 was $1.1 million, down from $1.8 million for the first quarter of 2020. The 40% decrease was primarily attributable to lower threshold expense due to cancellations related to COVID-19, reduced marketing activities including travel, and lower salary and benefit expenses due to reduced headcount. General and administrative expense for the first quarter of 2021 was $1 million compared with $1.3 million for the first quarter of 2020. The 27% decrease primarily reflects lower salary and benefit expenses due to the reduced headcount, partially offset by higher insurance premiums costs. Research and development expense for the first quarter of 2021 was $0.7 million, and this compares with $1.2 million for the first quarter of 2020. The 46% decrease was mainly due to lower expenses related to Sculptura development, as Sculptura enters the production phase. Sensus reported that our net loss for the first quarter of 2021 was $1.1 million or $0.07 per share compared with a net loss for the first quarter of 2020 of $3.6 million or $0.22 per share. Adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization, and stock compensation expense, was a negative $0.8 million for the first quarter of 2021 compared with a negative $3.3 million for the first quarter of 2020. Cash and investments were $13.7 million as of March 31, 2021, compared with $14.9 million as of December 31, 2020. The company had approximately $0.2 million in long-term debt and no outstanding borrowings under its revolving line of credit as of March 31, 2021. We're confident that with our continued attention to expenses along with current cash and access to our existing revolving credit agreement, we continue to be financially well-positioned to support our expected growth during 2021. As a final comment, please see the table in the news release we issued earlier today for our reconciliation of GAAP to non-GAAP financial measures. With that, I will turn the call back over to Joe.

Thanks, Javier. I continue to voice my strong appreciation and admiration for our staff and the way they have maintained focus on customers and patients throughout this pandemic. I believe we further strengthen those relationships and that we are poised to resume meaningful domestic growth with the worst of the pandemic behind us. We look forward to showcasing our SRT systems along with the Sentinel technology at the South Beach Symposium Aesthetic Laser Symposium in Miami and the Fall Clinical Dermatology Conference during October, which is another live show in Las Vegas. We're looking forward to that conference and especially to the prospect of seeing our industry colleagues once again in person. I'll remind you that our products have enormous room to grow; our SRT systems are well positioned in the large market consisting of some 14,000 dermatologists, 1,000 plastic surgeons in the U.S. representing more than 7,500 offices and growing. Not to mention a further 6,500 plastic surgeons and 5,500 radiation oncologists. Our SRT systems provide a compelling alternative to surgery for millions of patients and arguably the only solution to prevent the recurrence of keloids following surgical excision. With those comments, I'd like to thank you for your time and attention, and now our operator, we're ready to take questions.

[Operator Instructions] And our first question comes from Yi Chen from H.C. Wainwright.

My first question is, do you expect any seasonality in terms of sales SRT systems to try it?

That's hard to say because of the economic condition in China. I would have to say from our own viewpoint, because we have an upcoming licensing renewal coming up in November, we might see additional activity from customers or potential customers wanting to order prior to that happening. We don't anticipate any problems with the renewal of the license, but in this political climate, we don't know. We can't answer that, but we're hoping to see some additional orders between now and November from the China market.

Got it. And second, could you give us an update on the capacity the dermatologist office in the U.S. are operating at currently?

I'm sorry, I didn't hear the end of the question.

The capacity of dermatologist offices in the U.S. Are they operating at pre-COVID levels?

Yes, I don't think that they are operating at pre-COVID levels, especially in certain states where they still might have very strict guidelines on how they can see patients and when they can see patients. I think that for instance in the State of Florida and some of the other sunbelt states, I would see some very, very active conditions. So I see the market, they're back to what it was pre-COVID. So states like Florida, Texas, Arizona, I think those are very, very strong comeback states: I'm not seeing as much in California and in New York. So I don't think that we're 100%, but I would think that we're about 80% to 85%, 90% back to where we were pre-COVID.

Got it. And lastly, do you expect sales aesthetic lasers to make a significant contribution to the top line revenue this year?

I don't know if it will make a significant, but it will definitely give us a percentage of sales. And I think that it will have an impact for us. So we're looking forward to getting those products on the market. When I said that we went through Phase 1, we just completed Phase 1 with the Sentinel product being implemented into the lasers, so we are going to go on an aggressive marketing kick in the second quarter to talk about those lasers. But as in everything else, I think the biggest opportunity we're going to have is at the South Beach Symposium, which is strictly for aesthetic lasers, and that's where we'll be able to display the products as well as to explain directly to customers what the Sentinel package means to them.

And we'll take our next question from Anthony Vendetti from Maxim Group.

I just wanted to see what specific steps—obviously 01/01/21 is an important day for the company. It's been many years in the process of trying to increase reimbursement to put you on a level playing field. How have you gone about educating the market? What kind of steps have you taken or has that been a little difficult as we're trying to emerge from COVID-19?

Well, I mean, we've obviously got some tough road ahead in the marketing side since we don't have meetings and we don't have a lot of face-to-face interactions. But we have conducted 2 Zoom meetings where we've had a little over 100 physicians attend each time. One was an evening session around 8 o'clock at night on a Thursday, which is amenable to a lot of doctors working after hours versus during the day. And then on a Saturday morning at 11 o'clock for a couple of hours where we had ACOS or the American Cutaneous Oncology Society project introduce the reimbursement codes as they are right now. So those are 2 of the events that we've had, and we've had good turnout and some good interest as a result of that. Again getting back to the live shows where we've regularly done extremely well is going to be really helpful, and we don't see any of those coming back until the fall clinical happens towards the end of the year. But we're going to continue to do the Zoom meetings on a regular basis. I think that will pick up in the second quarter and I think the third quarter, all the way through to the end of the year, we'll be doing these on a regular basis. It's a matter of getting the proper doctors at the right time when they are able to present. So that's going to be the main thrust we want to do it face-to-face, heart-to-heart, and doctor-to-doctor.

Sure. Understood. Obviously, that's always the desirable and more effective way to do it. Are you looking Joe right now to increase the sales force, or are you taking it slow right now as each—like you said, each geographical area is a little bit different in terms of how quickly they are opening up? But I was just curious, what's the sales force or territory goal by the end of the year versus where you are right now?

We've been very, very aggressive in building back up our sales force. I would tell you we're back to about 95% of where we were prior to COVID, and I believe that by the end of the second quarter, we will probably be over that amount where we ended up prior to COVID. So we're aggressively adding more people on board because the more people we have on board, the more training they'll get, and then the more education and training we'll be able to get out to the field face-to-face, and that's where we prefer to do our business. So we want to have a very strong sales force, bigger and better than we've ever had before, to launch into the second half of the year.

And Joe, you mentioned the sales force. I know you mentioned the Mobile Aesthetic business you're looking to expand outside of Florida. Have you identified certain territories where that makes sense to go next? And then just a little more color on your proprietary Laser—Aesthetic Laser launch.

We've identified 3 cities that we want to go to with the growth in that area: Dallas, Atlanta, and Scottsdale, Arizona, Phoenix area. Those are the big markets that we want to attack. We've even looked at various opportunities, 2 to 3 different options in those areas, and I will say we're not looking for the biggest group in those areas; we're looking for the best group, the ones that have the longest and best relationships with their customer base, as well as the ones that are best operated. So that's what we're targeting there. And the second half of your question, I'm sorry, was...

On your proprietary aesthetic lasers that you're launching.

Yes. The smart laser is something that we're bringing to the market that doesn't exist with anybody else or with any other aesthetic laser manufacturer. So we've developed a system that can provide our customers, as well as ourselves, an asset management program that allows us to see where this product is in its daily utilization with the number of patients, the protocols that are being used, and the patient data for the customers' use only because it is HIPAA compliant. They will be able to store all that data and information on the cloud. There are billing capabilities, where we can direct bill the accounts of the patients or their credit card, their bank account. All of those things can be pretty well integrated, and one of the first steps that we have, and we already have a couple of our units already in motion in Central Florida. They're in a van, and they're being used to service some of the customers that we have in Central Florida with the Sensus name on the laser. So we're adapting it one scanner at a time, and we're going to implement it in that vein, and hopefully we'll start selling them directly as well, just—not just on the rental side, but also on the sales side.

Okay, great. And then just one last question on Sculptura. I know that sales cycles are obviously longer since the ASP is much larger than on an SRT system, but any color on how those discussions are going, any expectation at this point of maybe selling one of those before the end of the year? What can you say about that?

Yes. I think that it's hard to say that we're disappointed, although we are. But with the pandemic, the pandemic has really put a lot of our major hospitals on their backside. I mean, I don't think that we really realize how this has impacted our overall healthcare system and what it does. I know what it's done to a lot of the hospitals in the area here in the State of Florida that surrounds our offices, but I also know what the hospitals that we're dealing with are going through and how it's impacted them. So we continue to push forward; we have good relationships. As a matter of fact, we're looking at even extending those relationships for the time being, but the protocols are being put together, and we fully expect that the patients will be treated and that sometime before the end of the year, we will have a bunch of patients that have been treated with results that will be better known to our market and to the rest of the world. How that impacts potential opportunities? We do have a nice list of prospects that continue to—we interact with them on a regular basis. They're all involved and in contact with our installation bases, wanting to know where things go, but quite frankly, they all have a great understanding of what this COVID situation has done to those hospitals. So they're not pressing it; they understand, and they are anxious to get the results as well.

[Operator Instructions] And there appear to be no further questions at this time. I'd like to turn the floor back over to Mr. Sardano for closing remarks.

Thank you, Karen. So in closing, I want to thank you once again for your time this afternoon and for your interest in Sensus. We continue to move forward on multiple fronts and are optimistic about our prospects as we drive towards a more typical business pattern and hopefully begin to put the COVID-19 pandemic in the rearview mirror. Please stay safe, everyone. I look forward to talking to you. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.