Sensus Healthcare, Inc. Q2 FY2024 Earnings Call

Good day and welcome to the Sensus Healthcare Second Quarter 2024 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kim Golodetz for opening remarks. 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 what 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, August 8, 2024. 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 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. Our sales momentum continued in the second quarter of 2024 with very strong year-over-year revenue growth, along with positive net income and positive adjusted EBITDA. We continue to drive sales as our customers appear to have adjusted to the current macroeconomic environment. We shipped 23 systems during the quarter, with three going to international markets. This compares with 13 systems shipped in the year-ago quarter. We were pleased that many of the shipments were for our SRT Vision systems with image-guided SRT, with a higher number of such systems sold to a very large customer. We appreciate the dedication of this customer in choosing a far more patient-friendly and equally efficacious option versus most surgeries. Our Fair Deal Agreement, which reflects our new recurring revenue model, is off to a fantastic start. We launched this option in March at the American Academy of Dermatology Annual Meeting, and it augments our leasing programs as well as outright sales. As I speak with you today, we have 15 signed contracts under this program, and I wouldn't be surprised if the total number reaches up to 50 by the end of the year based on our current activity levels. Our Fair Deal Agreement addresses customer needs to deploy capital to other areas of their businesses, especially under challenging macroeconomic conditions. Given the growing utilization of SRT to treat non-melanoma skin cancer and keloids and the interest we've generated to date, we expect this option to contribute to our growth for years to come. All these agreements will begin to provide recurring revenues to Sensus beginning in 2025, with significant volumes projected for the second half. During the second quarter, I was honored to be asked to join the Industry Advisory Council of the American Society of Dermatologic Surgery. In that role, I participated in a small but select seminar with important KOLs. At the event, there was a keen interest in our Fair Deal program, and we generated a number of leads. That response, along with the signed agreements to date, underscores my optimism about our prospects. Turning now to TransDermal Infusion, or TDI, recall that we filed our 510(k) application with the U.S. FDA in the fourth quarter of 2023. The response times have been impacted by the agency due to the overwhelming number of submissions by the healthcare industry since COVID. Our engineers have continued to develop this product with feedback from our KOLs and the many pharma companies interested in this technology. As a result, we've decided to add these many new features, which were considered to be Phase II development, to the current product. Therefore, we will resubmit our application with a more robust features-rich technology. We feel that we will submit this application in Q3, which is pretty much past the peak bottleneck period at the FDA. With those remarks, I'll turn the call over to Michael Sardano for a brief update on our international business.

Thanks, Joe. As I stated on our last call, over the past couple of years, we have been pushing to open up new international territories. During that span, we have opened with sales to Ireland, Guatemala, and Turkey. And now I am proud to announce that Sensus has sold the first-ever image-guided SRT-100 Vision system into Asia at Far Eastern Memorial Hospital in Taipei, Taiwan. Far Eastern is one of the largest private hospitals in the region, and we are optimistic this sale will lead to future sales of Sensus' image-guided SRT-100 Vision system into the Asian market. I had the privilege of visiting with our distributor and physician customers at Far Eastern in Taipei in June, and they are very proud to be offering their patients with the best technology possible to treat skin cancer and keloids. We are also thrilled that Far Eastern is planning to conduct research on new indications utilizing the Vision, in addition to publishing their patient data and cure rates with skin cancer and keloids. We also shipped another two SRT-100 systems to China as they continue to be our largest market outside of the United States. While in Asia, I also visited with distributors in South Korea and Japan as we continue our work to expand into international markets. Our goal remains to open two to three new territories per year, which we achieved over the past two years. With that, I'll turn the call over to our CFO, Javier Rampolla, for a discussion of our financial results.

Thank you, Michael, and good afternoon, everyone. Revenues for the second quarter of 2024 more than doubled to $9.2 million, up 104% from $4.5 million in the second quarter of 2023 as we achieved 23 SRT units versus 13 a year ago. The increase was primarily driven by a higher number of SRT systems sold to a large customer. Gross profit for the second quarter of 2024 was $5.4 million or 58.7% of revenues compared with $2.6 million or 57.9% of revenue for the second quarter of 2023. The increase was primarily due to the higher number of units sold in the 2024 fourth quarter. Selling and marketing expense for the second quarter of 2024 was $1 million compared with $1.6 million for the second quarter of 2023. The decrease was primarily attributable to a decline in marketing agencies' expenses, lower headcount, and a decrease in actuation costs. As I mentioned during our conference call this past May, this year, we shifted our focus to emphasize products and sales options versus hosting key opinion leader events. General and administrative expense for the second quarter of 2024 was $1.6 million compared with $1.3 million a year ago. The increase was primarily due to higher professional fees and compensation. Research and development expense for the second quarter of 2024 was $0.9 million compared with $0.8 million in the same quarter of last year. The increase was primarily due to expenses related to a project to develop a drug delivery system for aesthetic use. Other income of $0.2 million for the second quarter of 2024 was mostly related to interest income and was unchanged from the prior year. Net income for the second quarter of 2024 was $1.6 million or $0.10 per diluted share, and this compares with a net loss of $0.4 million or $0.02 per share for the second quarter of 2023. Adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, and stock compensation expense, was $2.1 million for the second quarter of 2024 compared with negative $1 million for the second quarter of 2023. Turning now to our financial results for the first half of 2024. Revenues for the first half of 2024 were $20 million compared with $8 million for the first half of 2023, an increase of $12 million or 152%. The increase was primarily driven by a higher number of units sold to a large customer. Cost of sales was $7.8 million for the first half of 2024 compared with $3.7 million for the first half of 2023. The increase was primarily related to higher sales in the 2024 period. Gross profit was $12.1 million or 60.7% of revenues compared with $4.2 million or 53.4% of revenue for the first half of 2023. The increase was primarily driven by a higher number of units sold in the 2024 period. We expect gross margin to be in the 60% level for the remainder of the year. Selling and marketing expense was $2.3 million for the first half of 2024 compared with $3.7 million for the first half of 2023. The decrease was primarily attributable to a decline in marketing agency expense, lower headcount, and a decrease in tradeshow costs. General and administrative expense was $3.2 million for the first half of 2024 compared with $2.7 million for the first half of 2023. The increase was primarily due to higher professional fees and compensation. Research and development expense was $1.8 million for the first half of 2024 compared with $1.9 million in the prior year period. The decrease was primarily due to expenses related to our project to develop our drug delivery system for aesthetic use. Other income of $0.4 million and $0.5 million for the first half of 2024 and '23 respectively relates primarily to interest income. Net income for the first half of 2024 was $3.9 million or $0.24 per diluted share compared with a net loss of $2.3 million or a loss of $0.14 per share for the first half of 2023. Adjusted EBITDA for the first half of 2024 was $5.1 million compared with negative $3.7 million for the first half of 2023. Turning now to our balance sheet. Cash and cash equivalents were $19 million as of June 30, 2024, compared with $23.1 million as of December 31, 2023, and we had no outstanding borrowings under our revolving credit line. Accounts receivable was $18.3 million as of June 30, 2024, compared with $10.6 million as of December 31, 2023. At this time, approximately $8 million of those receivables have been collected. For the past several quarters, we have been building inventory in anticipation of growing unit placements. As a result, prepaid inventory was $3.3 million compared with $3 million, and inventories were $12.8 million compared with $11.9 million as of December 31, 2023. Our cash spend continues to be very focused and highly disciplined. We maintain a strong balance sheet to position us to take advantage of the company's growth opportunities we may come across or create. As a final comment, please see the table in the news release we issued earlier today for our consideration of GAAP to non-GAAP financial measures. With that, I'll turn the call back to Joe.

Thanks, Michael and Javier. Our excitement for the future of Sensus Healthcare is supported by our financial results for the first half of the year. Our products offer excellent solutions for treating non-melanoma skin cancer and keloids, and I applaud our talented staff for doing the hard work to get us to this point. We never rest on our laurels, and with state-of-the-art, consistently upgraded technology along with three different purchase options, we believe we have a compelling offering for all types of practices. SRT offers a patient-friendly alternative to most surgery with cure rates that are as good or better. These cure rates have not gone unnoticed by hospital radiation oncology departments. And although this channel has a longer selling cycle, it continues to be an area of focus as interest and inquiries continue to increase. Our Fair Deal Agreement program continues to draw attention with 15 contracts already in-house. Since our introduction at the American Academy of Dermatology Conference this past March, our prospect base is growing. We should have as many as 50 contracts by year-end. Although we are very tight on inventory, ensuring that we are able to meet the demands of all of our customers, we will have inventory delivered and available in Q4 to accommodate this demand. This will ensure a significant volume at the beginning of 2025, encompassing an entire year of recurring revenues, building up to significant revenues for the second half of 2025. Recall that our survey of six years of Medicare claims documented a 27% annual growth rate for SRT. As we continue to survey our customer base, we are seeing continued and consistent growth in this area. With this rate continuing, SRT will soon become the treatment of choice for non-melanoma skin cancer. Further, an estimated one in five Americans will develop skin cancer during their lifetime, representing some 70 million people. So whether Medicare or private insurance, we are in the early stages of tapping the enormous opportunity for SRT just in non-melanoma skin cancer and keloids. With those comments, I thank you for your time and attention. And now operator, we're ready to take questions.

The first question comes from Jason Wittes with ROTH.

Congrats on a solid quarter here. Maybe some questions on Fair Deal Agreement; it sounds like you're off to a pretty fast pace here. A couple of things. One, when are these placements for Fair Deal going to be in this year or fall into next year? And secondly, can you characterize the type of customers that are buying into the program?

Yes. These are all going to be installed this year. Most of them will be installed in the fourth quarter due to inventory. So we're going to have most of these, or all of these accounts prepared to provide us with revenue starting from day one when we begin 2025 and a little earlier. So we should have a full year of about 50 units generating net revenue as we continue to add more to the base. The type of customer that is looking at this is a customer who wants to use their cash for other things within their practice, whether it's an additional office that they're opening up or additional equipment they want to buy. It also helps out with the larger private equity-backed groups that want to use their cash for buying more clinics rather than buying medical devices. So we're seeing a big advantage in those areas, and the customers that I think are the onesies and twosies, they continue to buy and use our fair market value lease program. So we provide them now with this Fair Deal Agreement along with the fair market value lease. It's pretty much a great opportunity for them to take advantage of all of the options we have for acquiring equipment. We're just giving them every option that they can to utilize SRT in their practice.

Can you remind us of the total number of agreements signed to date this quarter? Is it 15? I think there were some from last quarter as well.

Yes. We have 15, keeping in mind that we introduced this in March at the AAD. So when you look at it, it's pretty much since that time to now, which is very much the second quarter, so 15 units. Based on the prospects and activity levels that we have, we're anticipating up to 50 before the end of the year.

And then you alluded to this, but are you supply constrained this year because of all these orders? Or is that something you can make up in the fourth quarter?

I think that we have had an ample supply to supply our customers up until now and we placed an order for additional units anticipating the activity levels that we're seeing now, with a lot of those units starting to be delivered towards the end of the third quarter and the start of the fourth quarter. So we anticipate being able to address all of the needs of our customers for this year when they give us an order, whether it's for an outright purchase or lease or the Fair Deal Agreement.

Got it. And maybe one last question. And that is in terms of how we should think about modeling these Fair Deal Agreements? Can you give us some parameters that we should be thinking about, especially going into next year?

Well, I would think that as you look at it, you're going to see more and more customers wanting to go into this area where the Fair Deal Agreement meets their needs. And the reason why we call it the Fair Deal Agreement is because it provides our customers with very reasonable terms and conditions that are amenable to add to their practice. So there's not a lot of high risk involved for them, and it's just a lot easier to implement without any restrictions or anything hanging over their head, both in the short term or the long term. So I think it's a much more user-friendly type of agreement.

The next question is from Anthony Vendetti with Maxim Group.

Just following up on the Fair Deal Agreement. So since March at AAD, you've signed 15 and that's to date. So right up until today, is how we should look at that, correct?

Correct.

Okay. Great. And so that's in addition. So 15 of those, plus you shipped 23 in the quarter, including three to Asia and that compares with 13. So the 23 over 13 is the growth in ship systems. These 15 Fair Deal Agreements are separate and will be installed throughout the remainder of this year, correct?

Exactly.

Excellent. So, to explore this further, I understand each of these may have slight variations, but how should we assess the utilization of these systems? Is there a minimum requirement as part of this agreement, or does it operate based on actual usage? Could you provide some general guidelines on that?

Sure. I'll let Michael talk to that.

The Fair Deal Agreement operates on a model where both parties earn money as the other does. This creates a beneficial situation for both the practice and us, as it alleviates operational challenges for the practice and places those responsibilities on us. We have been managing this for 10 to 15 years and are familiar with it. As the founders of SRT, we reintegrated into the market in 2010, and we've been engaged in this process for the past 15 years.

Okay. So the more they utilize it, obviously, the more money they make and you get a piece of that depending on the...

Yes.

It seems like there's a scale involved, depending on the actual number of procedures performed.

Right. And it allows the practice to have complete maneuverability, and they get to treat the patients the way that they want to. A lot of people out there would like to dictate how the practices treat; we do not do that. The practices love the fact that they can have complete autonomy over the way they treat their patients and utilize great technology. And the support has been overwhelming, and the receptiveness of the dermatology industry has been great so far.

I understand this may be related to Sentinel in terms of utilization. Are these systems more closely connected to your Sentinel system that monitors usage and downtime, and how quickly issues can be resolved? Sometimes it's a software fix, or is Sentinel separate and functions similarly to how it does with the systems you previously delivered?

No, you've got the right idea there. Without Sentinel and without this technology, no company could achieve what we can under the Fair Deal Agreement, but we couldn't offer it. The technology is vital to operationally making this simplified from both a regulatory standpoint and from an operational standpoint with patients and the ease of use for the practice.

That's what I thought. That's great and helpful. Lastly, regarding the TransDermal Infusion product, TDI, I was wondering if you could elaborate on the additional features or the main features that this new product will have or that were requested and are now going to be included in the new application to the FDA.

Yes, the R&D on the TDI product has been progressing as we awaited FDA approvals. Over time, we've accelerated our work on TDI, leading to significant advancements. We've received a lot of input from various pharmaceutical companies and key opinion leaders, who provided suggestions on enhancing the software associated with TDI. This has allowed us to improve how they manage their businesses and the medications they distribute to physicians. Given our rapid progress in R&D, we decided to integrate all these improvements into what we refer to as a Phase II upgrade and resubmit everything to the FDA for approval all at once instead of in separate phases. We appreciate the time the FDA bottlenecks have given us to incorporate these new features, which are partly a result of the increased demand they've faced since COVID.

Okay. Good. Understood. And then lastly, this is the last question for Javier, housekeeping. Javier, you mentioned something about the gross margin as we go forward. I missed that. What was the number you said that we should look at as a go-forward number?

60%.

The next question comes from Eduardo Martinez-Montes with H.C. Wainwright & Co.

I was hoping to get a little bit more color on domestic and international sales for the SRT systems. Do you guys have that available?

Yes.

You saying domestic and international?

Correct.

Okay. So as we announced in the thing, there are 23 total sales with three going to international. So that meant 20 domestic.

And then do you guys have the breakdown for revenue that came directly from? So obviously, nothing yet from the Fair Deal leases you guys have alluded to, expecting that to come in probably beginning of 2025, but do you guys have anything else in the recurring revenue stream versus outright equipment sales, kind of get a feel for the breakdown of how revenue in the second quarter goes either in recurring or through outright equipment sales?

Well, as we stated, we've got 15 units that we just started. Okay? So the revenue for the Fair Deal Agreement is insignificant. There is a little revenue because we have a few units installed, but it's going to be more significant towards the end of the year and as this builds up, as we put more units in, of course, we're going to see an impact, as we've always said in 2025, with the second half of 2025 showing significant revenues at that time.

Got it. So you would say that the bulk of revenue right now is generated from instrument sales outright, correct?

Correct. It's outlined sales, yes. Total revenue.

This concludes the question-and-answer session. I would now like to turn the conference over to Joe Sardano with any closing remarks.

Thank you, Debbie, and thank you once again for your time this afternoon and for your interest in Sensus Healthcare. We plan to conduct virtual one-on-one meetings with the investment community in the coming days and weeks. Please contact LHA, our Investor Relations firm, if you'd like to request a meeting. We'll speak with you again when we report the third quarter financial results in November. In the meantime, thanks again for joining us. Appreciate it. Thank you.

The conference has now concluded. Thank you for attending today's presentation.