Sensus Healthcare, Inc. Q4 FY2022 Earnings Call

Welcome to the Sensus Healthcare Fourth Quarter 2022 Earnings Conference Call. Please also note that this event is being recorded today. I would now like to turn the conference over to Kim Golodetz with LHA Investor Relations. Please go ahead.

Thank you. This is Kim Golodetz with LHA. Thank you all for participating in today's call. Joining me from Sensus Healthcare are Joe Sardano, Chairman and Chief Executive Officer; Michael Sardano, President and General Counsel; 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 as of the date of this conference call, February 9, 2023. Sensus Healthcare undertakes no obligation to revise or update any forward-looking statements except as required by law. All forward-looking statements are subject to risks and uncertainties as described in the company's Forms 10-K and 10-Q. During today's conference call, references will be made to certain non-GAAP financial measures. Sensus believes these measures provide useful information for investors yet they 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, everyone. I address you today with the highest confidence that Sensus Healthcare is better positioned today than ever before in our history with all the pieces in place for even greater execution of our business plan. We believe our superficial radiation therapy technology remains the #1 choice for noninvasive treatment of skin cancer by both physicians and patients. Our improved reimbursement, combined with our fair market value lease program, provides our customers with an excellent patient acquisition tool, making the acquisition of our lead technology an easy transplant. Our new and improved high-resolution ultrasound technology provides see-and-treat capability, which leads to great outcomes and patient reassurance. During the fourth quarter and throughout 2022, we strategically executed, delivering strong revenue and profits. Importantly, we also took a number of steps to position Sensus for future success. These included assembling the staff and strategies to drive exceptional growth, building inventory, developing new aesthetic products that are anticipated to receive FDA clearance in the latter half of 2023, further investing in our Sentinel IT solutions capability, and increasing sales and marketing programs, headcount, and capabilities. As we've been saying for some time, with better reimbursement of superficial radiation therapy for non-melanoma skin cancer and lower reimbursement for Mohs surgery along with data suggesting that 1 in 5 Americans will develop skin cancer, we have powerful tailwinds to support our programs. Recall that in January '21, our SRT therapy received improved reimbursement from the Centers for Medicare and Medicaid Services when they revalued our main code upwards by 66% for a course of SRT in non-melanoma skin cancer. Additionally, ancillary codes received a double-digit boost. We continue to capitalize on these reimbursement changes, and more and more practitioners are recognizing SRT as a best practice for the noninvasive treatment of non-melanoma skin cancer. Our rigorous physician education program, highlighting the improved return on investment for SRT, is ongoing, especially at dermatology conferences and trade shows. This weekend at the important South Beach Symposium in Miami, a key opinion leader, Dr. Michael Gold, will be discussing SRT and its benefits. This will be followed up 2 weeks later at the Winter Clinical Conference in Miami by another key opinion leader, Dr. Mark Nestor. We recently launched important upgrades to this system, including new state-of-the-art solid-state high-frequency ultrasound, which provides the industry's best view of the epidermis and utilizes a new ergonomic design probe with single-use disposables. This upgraded system is garnering interest among physicians, and the SRT-100 Vision has become our leading SRT product. The fair market value lease program we launched earlier last year continues to support purchases of our feature-rich SRT-100 Vision system, and its percentage of system sales continues to increase. Although we are maintaining focus on our core dermatology business and providing products our customers need and want, radiation oncology is another important avenue for growth. We're gaining awareness among radiation oncologists and recently sold an SRT-100+ system to a large luminary hospital in the Northeast. With that overview, I'd like to turn the call over to Michael Sardano for a bit more color on the quarter.

Thanks, Joe. We've been executing extremely well, as evidenced by record high revenues for both the fourth quarter and the full year. We expect continued top-line momentum in 2023 and beyond from our unique line of superficial radiation therapy devices, which will continue to lead our revenue growth throughout the coming years. We expect the recently acquired aesthetic devices to materially add to our revenue in the latter part of 2023 as we advance through the regulatory process. Additionally, we now have a dedicated and experienced aesthetic sales professional to manage this part of our business. During the fourth quarter, we shipped 36 SRT units, of which 27 were the SRT-100 Vision. Despite higher interest rates, our fair market value lease program continues to draw interest as an efficient way to acquire our devices. Our international business is also doing well, as we shipped a record 16 units during 2022 and 6 during the fourth quarter, most of which went to Asia. We are concentrating on opening new markets in Latin America, Australia, and the EU. So we have enormous potential outside the United States. With that, I'll turn the call over to Javier Rampolla for a discussion of our financial results.

Thanks, Michael. It is a pleasure to be speaking with all of you this afternoon. Our revenues for the fourth quarter of 2022 were $13.1 million, compared with revenues of $13 million for the fourth quarter of 2021. Gross profit for the fourth quarter of 2022 was $8.4 million or 63.7% of revenue, compared with $8.9 million or 68% of revenues for the fourth quarter of 2021. The decrease was primarily driven by the higher manufacturing costs in 2022, all due to inflationary pressures, yet our gross margin remains in our target range of the mid-60s percentage. Selling and marketing expense for the fourth quarter of 2022 was $1.6 million compared with $1.3 million for the fourth quarter of 2021. The increase was attributable to higher advertising expense and higher compensation expense due to increased headcount. General and administrative expense for the fourth quarter of 2022 was $1.4 million compared with $1.1 million for the fourth quarter of 2021. The increase was primarily due to higher professional fees along with higher compensation and bad debt expense. Research and development expense for the fourth quarter of 2022 was $1.2 million, unchanged from the current year quarter. We expect R&D expense to remain at this general level each quarter of 2023. We recorded a provision for income tax in the fourth quarter of 2022 of $1.6 million as we had no such provision in the fourth quarter of last year. Net income for the fourth quarter of 2022 was $2.8 million or $0.17 per diluted share, compared with net income of $5.3 million or $0.32 per diluted share for the fourth quarter of 2021. The decline was largely attributable to the income tax in 2022, and to a lesser extent, the increase in cost of goods. Adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, and stock compensation expense was $4.3 million for the 2022 fourth quarter compared with $5.6 million a year ago. Turning briefly to full-year financial results, revenues for 2022 were $44.5 million compared with $27 million for 2021. The 65% increase was driven by a higher number of units sold in 2022 due to the increase in demand. Cost of sales for 2022 were $14.9 million compared with $10.1 million for 2021, with an increase reflecting the higher number of units sold. Gross profit for 2022 was $29.6 million or 66.5% of revenue compared with $17 million or 62.8% of revenue for 2021. The increases were driven by a higher number of units sold in 2022 and service revenue on installed units. Selling and marketing expense for 2022 was $6.3 million compared with $4.8 million for 2021. The increase was primarily attributable to higher spending on marketing activities and increase in headcount. General and administrative expense for 2022 was $5 million compared with $4.6 million for 2021. The increase was primarily due to higher compensation and bad debt expense. Research and development expense for 2022 was $3.5 million compared with $3.4 million for 2021. The company reported other income for 2022 of $13.2 million compared with $0.01 million for 2021. The increase was mostly related to a gain on the sale of a noncore asset. Net income for 2022 was $24.2 million or $1.46 per diluted share compared with $4.1 million or $0.25 per diluted share in 2021. Net income for 2022, excluding a gain on the sale of a noncore asset, was $11.5 million or $0.69 per diluted share. Adjusted EBITDA for 2022 was $28.1 million compared with $5.1 million for 2021. Turning now to our balance sheet. Cash and cash equivalents were $25.5 million as of December 31, 2022, compared with $14.5 million as of December 31, 2021. The company had no outstanding borrowings under its revolving line of credit as of December 31, 2022 or 2021. In preparation for the future growth, we placed orders for inventories. We stood at $3.5 million in inventory and $6.3 million in prepaid as of December 31, 2022, up from $1.8 million in inventory and $1.9 million in prepaid a year ago. Accounts receivables were $17.3 million, up from $12.1 million on December 31, 2021, reflecting the increase in sales. Our attention to expense management is front and center, and we continue to be in a stronger financial position than in the company's history. Our balance sheet positions us well to take advantage of the compelling growth opportunity we may come across. As a final comment, please see the table in the news release we issued earlier today for a reconciliation of GAAP to non-GAAP financial measures. With that, I'll turn the call back over to Joe.

Thanks, Javier and Michael. As Javier just said, Sensus Healthcare has never been in a better position to meet the challenges of the future. We are well capitalized and have business momentum. In addition, we're very excited about the portfolio lineup we have planned for later this year, especially in 2024, along with future enhancements to our SRT-100 Vision and Sentinel IT Solutions software. Sentinel is a proprietary HIPAA-compliant software solution and is available on all our new products. It allows physicians to easily and accurately document and store patient data for clinical billing and asset management purposes. This technology has been a game changer for our SRT customers and for Sensus, as it clearly demonstrates the attractive ROI for the SRT-100 Vision and the SRT-100+ systems. A priority focus for Sensus is expanding the capabilities and indications of our Sentinel technology. Under the leadership of our newly promoted Chief Technical Officer, we have already doubled the number of engineers at Sensus to six as we work to include artificial intelligence and diagnostic capabilities in Sentinel. I want to add that our new lasers, including all six of our Sensus-branded aesthetic smart lasers, will have the Sentinel IT Solutions capability embedded in them. In recent months, this portfolio has expanded to include the Silk diode laser, a truly portable laser with a lightweight handpiece, super cold cooling tip, and the highly repetitive ring. The ability to blend wavelengths while emitting light vertically towards the skin increases efficiency by maintaining the density of the laser in the selected area, resulting in deeper and better penetration and more homogeneous energy distribution. Importantly, the laser is sensitive to all skin types, making this laser removal available to everyone. We have showcased Silk at the Fall Clinical and will also showcase the laser this weekend in our booth at the annual South Beach Symposium. While we're very excited about the potential of Silk, we're also excited about the new lasers we plan to introduce later this year and early next year once cleared by the FDA. We have stepped up our marketing as well. We're pleased with the early success of our new digital advertising initiatives to increase patient awareness of SRT. Our Facebook page remains very active as we work to engage the public. We will continue to increase our SEO activity, which is resulting in many more patients visiting our website to learn about SRT treatment. Our SRT systems are well positioned in a large and largely untapped market consisting of some 14,000 dermatologists and 1,000 Mohs surgeons in the U.S., representing more than 8,500 offices, not to mention a further 6,500 plastic surgeons and 5,500 radiation oncologists. Our 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. In addition, skin cancer is a large and growing condition with estimates that 1 in 5 Americans will develop skin cancer during their lifetime. This tells us that nearly 70 million people will contract non-melanoma skin cancer in this country. So clearly, there is a need for our SRT systems both now and even more so in the future. In summary, we have our strongest team ever in place to support our growth with thoughtful programs, efficiency, and leadership. We are deploying capital to invest in Sensus, deploying and bringing in new technologies, and adding to our sales force. As evidence of our enthusiasm for our future, we repurchased $3 million of our common stock through a share buyback program. With those comments, I thank you for your time and attention. And now operator, we are ready to take questions.

Operator Instructions. And our first question here will come from Ben Haynor with Alliance Global Partners.

First off for me, on the 510(k) submissions that are going in this year for our aesthetic products, should we think about those all as lasers? Or are there other 510(k)s that will be going in? And any color on conditions that those might treat outside of the laser submissions?

Ben, thanks for being on. Good to hear your voice, and I appreciate the question. It's going to be a variety of aesthetic products that are going to be submitted to the FDA, products that we've been able to acquire technology for, and we're excited about that offering. But I would tell you that it's going to be a variety of various aesthetic products that will be unique to the market that is going to have a very, very nice niche in the marketplace.

Okay. And do you plan to let investors know about those upon submission? Or do you wait till approval or launch?

I think that we want to try to wait until we get to the launch period. And it’s going to make sense because as we go through this process of getting the equipment ready, as it passes through all of its testing with the various regulatory bodies and assembling all that data, we have to get that to the FDA, which could take a bit of time. But we're expecting to submit either by the end of the first quarter or the middle of the second quarter, and since they're 510(k)s, they usually result in a 90-day approval process. But as we get closer to that, I'd say that we would be able to announce it to the world as it works with progress sometime around the American Academy of Dermatology meeting.

Okay. So stay tuned. Got it. And then on the -- congrats on the luminary on the Northeast radiation oncology. What are your thoughts on the kind of the sales cycle that these radiation oncology departments will require and kind of initial level of interest? Any color you could provide there?

Yes. The hospital market is a very difficult market, and I describe it as when everybody at the hospital says, 'Yes, we want to buy,' it could take up to 12 to 14 to 16 months, or even 18 months before you get a purchase order. So it's a very long selling cycle. This -- but we're starting to see some hospitals that are requesting quotes for our system because there's a lot more interest in the hospital market or in the radiation oncology market to get involved with skin cancer. One of the reasons we’re seeing that is because the Centers for Medicare and Medicaid Services are working hard to reduce reimbursement in other areas of cancer, such as breast cancer and lung cancer. We're starting to see reductions in those reimbursements across the line, and as those reductions happen, hospitals are starting to look at additional sources of revenue. They’re looking outside for additional opportunities, and one of the areas they have not been accessing, whether intentionally or not, is the skin cancer market.

Okay. That makes sense. And then lastly for me on the share repurchases, you've gotten a little bit more aggressive there. Maybe my recollection is wrong, but I think you had $3 million authorized or planned to re-up the authorization and continue with the share repurchase activities.

We went to the Board and the Board was more than happy to provide us with $3 million to repurchase our shares. We did that. To the fullest extent, we spent the $3 million on shares. We think that we are as good as investors as anybody else in getting those shares at a very decent price, and we think the best investment is in our own company. And so is there an opportunity out there in the future? I think the Board is always open to making such things happen, and we'll definitely look at it if that opportunity comes across again.

Our next question will come from Alex Nowak with Craig-Hallum.

The reimbursement increase has been a big boost in the business over the last couple of years. And as investors, we all get it, but I'm curious about physicians. When you go out there in the field and speak with them, do all the physicians get the reimbursement change at this point? Or is it still, call it, a minority of physicians who understand the reimbursement and what that would do for their practice? Just curious where we are in that process of physicians starting to figure this piece out.

Alex, again, thanks for being on. Appreciate the question. It's an ongoing process. You have to remember that these individual business owners are incredibly busy managing many things to keep their practices open. They face a lot of challenges. Every time we touch base with them, every time we're face to face, every time we go to these meetings, they must be reminded of what the reimbursement is. So it's an ongoing effort. We continue to push. The ones who already have understood are recognizing the reimbursement increases because they're the ones benefiting from it. As these references progress, I think that's where we gain additional sales and additional references because it's good for them. It's essential to note that last year was the first year since COVID, two years, that we've been able to connect with these doctors face to face. That's where we make the most significant impact. We're in the field knocking on doors, they're busy, and they sometimes comprehend, but it requires additional conversations. I’d say that we have a 65% increase in our business over last year, so I think that we're making headway.

That's very helpful. I mean -- and it still sounds like it's still building. So it kind of leads into my second question here. You committed to growth this year on the top line and also on the bottom line. But on the top line, how do we think about that growth? You've got ramping on the dermatology side, you've got this radiation oncology piece starting to flow through, and new products coming in the second half. Just how do we start to think about growth for this year?

Well, again, we haven't provided any guidance, and I don't know if we're going to get to that piece because I think sometimes there's misaligned expectations. I’m not sure how they are derived, but I assure you this, and I think that you've been around long enough, Alex, to know what kind of company we are. We're ultra-conservative, but we work very hard and strive to make the right decisions to grow our business. We're always thinking of the future. To think about our future business, I look to my team, and we challenge ourselves to perform better than the previous year. I do believe we'll do better than the previous year, and we will continue adding products that will add revenue. Based on our FDA submissions, we expect this impact to occur around the fourth quarter of this year. So I would say our SRT business will continue to grow organically, and we will continue to grow our top line as well as our bottom line as we continue to pursue these technologies.

That's helpful. And then priorities for capital allocation, obviously, you did the share buyback here, but you reinvested cash back into the business. Is it more towards M&A going forward? Just your current thoughts?

M&A is always on our minds. We’ve had the opportunity to evaluate many companies this year. We've talked to many principles in those companies, and you still have many who believe their company is worth a little more than what we're willing to pay. One of our commitments is that we do not want to go into debt. We don't want to dilute our existing shareholders. Given that, we're looking for opportunities that will complement our portfolio while adding revenue to what we're trying to accomplish with exceptional products. Rather than taking on more than we can handle, we seek technologies that can enhance our portfolio and offer a strong return on investment reasonably quickly. We look for paybacks within 6 to 12 months, which is quite aggressive for our objectives.

And then just real quick, can you maybe comment on the accounts receivable balance? It did spike up here in Q4. The days sales outstanding did increase, so just curious if there's any one-time items in that number there?

No. What we had was exceptional growth with considerable revenues over several months, and customers requested some terms. We provided them with the terms, but we know that everyone is good for it. If you check our cash position, it was something we could afford while encouraging our customers to reach their goals. We'll continue to extend terms where it helps us drive business and aids our customers.

And our next question will come from Yi Chen with H.C. Wainwright.

Congratulations on all the success. This is Jake on behalf of Yi Chen. I think it's fair to understand that the increase in SRT systems sold is primarily related to the increase in SEO or digital marketing efforts that you guys have put in place exceptionally well. So related to that, what are your expectations for this year in terms of advertising, digital marketing, and/or KOL engagement as it relates to the SRT systems? I know you're refraining from providing any guidance, but any expectations on the kind of marketing activity and also the kind of sales that you expect would be very helpful. And the second question I have is on the Silk laser hair removal systems. Any update on the commercialization process so far? How is it going? And any feedback, especially on the international markets, as I understand that there are global hubs where people visit for hair removal treatment. So any color on that would be very helpful.

Thanks for that question regarding SEO. Let me tell you where we're at in just the last 6 to 8 months of aggressively pursuing a digital strategy. We initially had about 2 patient inquiries per week, and now we're getting about 30 to 35 per day. With our SEO efforts, we moved from Page 9 on Google to Page 4. We believe that within the next three months, with sustained efforts, we will reach Page 1. We are excited as we progress and invest in that part of our business. We also expect the number of patient inquiries to increase, and we have our personnel involved with each inquiry to set up meetings with doctors in their areas. These doctors are gaining significant patient flow for the treatment of skin cancer with SRT because these patients demand a noninvasive approach once they learn about it. Regarding hair removal, this product is unique because it offers a variety of wavelengths, which we believe is very special. The real introduction will happen at the AAD, where more people will be exposed to it, and we'll have several units on display and for demonstrations. We are excited for that. We anticipate sales throughout 2023 that will improve our bottom line and our top line. We recently announced the hiring of a professional in the aesthetics field to help elevate this market further. All of these factors indicate that we are heading in the right direction, and we believe this will enhance our revenue.

Congratulations once again.

Our next question will come from Scott Henry with ROTH Capital.

Congratulations, Joe. Really a tremendous 2022. I had some specific questions. I recognize that you're seeing growth on the top line in 2023 and growth on the bottom line. And I know expectations, there's been some disconnect. So I wanted to clarify something with regards to the bottom line. When you say growth in 2023 on the bottom line, are you pulling out one-time events from 2022? Just trying to get a sense of what base you're using for 2022.

Scott, first of all, thanks for being on, and we're looking forward to attending the ROTH Capital Conference in March in Southern California. We're definitely taking out that one event, okay? When we look at the increase in the bottom line, every product we bring on board is going to contribute to that bottom line. Hopefully, it adds to our margin as well because we model everything along those margins. So yes, you're absolutely right, we're considering that one event and still projecting growth in our bottom line.

Great. And another thing, and this might be for Javier. I look forward to seeing you as well, Joe. I want to throw that in. The accounting rules, when you consistently make money at some point, you have to take -- book a tax gain for your deferred tax assets, and you start to calculate earnings on a fully tax basis going forward. I mean you're starting to stack a lot of positive quarters together. Would you expect to report 2023 on a fully tax basis?

Yes, we have to. We have to.

Okay. At what rate would you advise for that time period?

I would say that at least we should forecast a bit maybe like a 20% rate.

And then again, for clarity, it sounds like when we look for growth in 2023 over 2022 on the bottom line, should we be thinking on a fully tax basis to a fully tax basis? Otherwise, you started at a disadvantage.

Correct.

Okay. Great. And then final question just regarding the lease program because it is important to your revenue model. We get higher interest rates. Someone has to pick up the cost of those higher interest rates, not that it's a huge amount, but does that come from the customer? Or do you shrink margins a little to accommodate that? I'm just curious about the nuts and bolts of what you do with the lease program when the rates increase?

Yes, it's coming directly from the customer. Just to give you some idea behind that. The rates have gone up this year. We've always informed the customer that your breakeven with the SRT-100 Vision based on those fair market value leases is approximately two patients a month. While the reality was before all these rate hikes, it was probably around one in a quarter of a patient, but you can't divide a patient into a quarter. So we say on average it requires two patients a month. As the rates have gone up, it’s safe to suggest now that it’s really still two patients a month. It does require additional conversation because of the increase. The ROI remains solid, as we mentioned. Importantly, we find that the majority of physicians buy in cash because they have the volume and confidence to make those purchases.

So you talked about the fair market. Joe, you talked about the fair market value lease program as being a program that's helped with 2022 sales. Interest rates went up, but maybe it's had some impact, but you said, obviously, on the fair market value lease, they may have to see only about another 1, 1.5 patients. I think it's a month to still be able to make that. The program itself profitable. In other words, I think it was like one a month, and then if they see now 2.5 a month, it still comes -- after 2.5, it's still profitable. Could you just -- I might not be getting those numbers exactly right. So if you just go through that with me. And then as best you can say, how much of an impact has rising interest rates you think had on the -- on your sales or the fair market value lease program? And just what's your outlook for that program? I think it was 80% of sales last quarter. What was it approximately this quarter? And do you expect that trend to be the same in '23?

Okay. Thanks, Anthony. Again, I'll emphasize that initially when we introduced fair market value leases, interest rates were low, but we still told the customer that they required two patients a month to breakeven. It was actually about 1.25 to 1.5 patients, yet we conservatively showed it as two, and now with the increase over the last year, it still holds true at two patients a month. We maintain that there are still advantages to this program, which doesn't impact their regular credit line. But most of our customers are still buying in cash. The fair market value lease program has been immensely beneficial to us, and all signs point to a strong outlook for 2023.

Okay. Great. And then last question on the Silk laser hair removal system. I know you've just introduced that. Do you have any feedback in terms of orders? Can you talk about that a little bit?

Yes. The feedback has been very positive from the initial introduction at the Fall Clinical in Las Vegas in October. We're seeing some good volume generated with our prospect base. Now that we've hired what we consider a real specialty guy who's going to drive our aesthetics business, I think we'll be successful with the product because it is unique. It possesses multiple energies that can be used simultaneously. It is portable and cost-effective, which is what physicians request. We believe that as we gain more exposure, we will see sales increase. Several units will be available at the American Academy of Dermatology, and it will also be displayed at the Winter Clinical too. So, we are excited about it.

That's all the time we have for questions today. And this concludes our question-and-answer session. I'd like to turn the conference back over to Joe Sardano for closing remarks.

Okay. Well, listen, thank you, everybody, for the questions. Thank you for being on. And once again, thank you for your time this afternoon and your interest in Sensus Healthcare. Again, I wish to repeat that Sensus Healthcare is in the best position that we've ever been based on our technology, our people, and the growing demand for noninvasive solutions to skin cancer needs. We're looking forward to another great year. I also want to mention that we will be presenting at the 35th Annual ROTH Conference, held March 12 through 14 in Laguna, California, and we hope to see as many of you there as possible. In the meantime, thank you very much. We look forward to speaking with you again at our next results conference in early May. Thank you.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.