Earnings Call Transcript - SRTS Q1 2023

Operator, Operator

Good afternoon and welcome to the Sensus Healthcare First Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Kim Golodetz. Please go ahead.

Kim Golodetz, Investor Relations

Thank you. This is Kim Golodetz with LHA. Thank you all for participating in today's call. Joining me from Sensus Healthcare are Joseph 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, May 3rd, 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 Joseph Sardano. Joe?

Joseph Sardano, CEO

Thank you, Kim, and good afternoon, everyone. Our first quarter financial results are disappointing as potential new customers delayed making SRT purchase decisions due to inflation impacting their business in two ways. First, many dermatologists depend on elective aesthetic procedures as a meaningful source of revenue and profit. Inflation has caused consumers to pull back on these expenditures, either having these procedures done less frequently or foregoing them altogether. Second, inflation is also impacting operating expenses at dermatology offices as overall costs, including salaries, continue to rise which has an adverse effect on cash flow for all dermatology practices. In addition, many of the larger practices have been impacted as their cash was being deployed for acquisitions which have also been affected. While interest in our SRT system is as high as it has ever been, we have run into hesitancy towards making these decisions. We view this as a temporary operating environment as markets adjust. Importantly, we also are taking matters into our own hands and working on programs that will address these hesitancies and put us back on a growth trajectory. We have sufficient confidence we will be able to address customer concerns and have been building inventory and prepaying for components. We expect to ship more than 60 systems during the 2023 year as we have already ordered and paid for all of them. Excellent clinical results in treating non-melanoma skin cancer non-invasively with published studies showing that SRT is as good as or better than Mohs should be reason enough to choose SRT. Add to that, the fact that most procedures can leave scars and increase the risk of infection and even death, SRT makes a clearer choice. Our reimbursement is higher than it was years ago, while Mohs surgery reimbursement has come down making SRT an increasingly attractive option. We've stepped up our marketing and education programs to ensure dermatologists understand these advantages. A recent survey of Medicare reimbursement for skin cancer shows SRT has a compounded annual growth of 27% year over year for the past six years, while Mohs has only grown at 5%. Our fair market value leasing program, which results in a return on investment with only two to two and a half patients treated per month, has been successful and still generates a great deal of interest, especially in this inflationary environment. Our customers are also inquiring about other types of sales programs, and we are actively discussing these options. Given the higher reimbursement and favorable comparison to Mohs, we've increased our presence at smaller regional conferences to get closer to our customers. We have expanded our social media and search engine optimization activities. We are seeing reimbursement cuts in the treatments of mainstream cancers but are optimistic about interest in the radiation oncology segment treating skin cancers to make up for lost revenue due to these cuts. We will be attending the American Society of Therapeutic Radiation Oncology, or ASTRO, later this year in San Diego. We are excited to have recently launched important upgrades to the Vision system, including new state-of-the-art, solid-state, high-frequency ultrasound which provides the industry's best view of the epidermis and a new ergonomically designed probe with single-use disposables. This new high-resolution ultrasound technology provides a 'see and treat' capability, enhancing patient reassurances as the physician can see the lesion has resolved after treatment with SRT. We are broadening our reach into radiation oncology, where SRT systems provide a compelling economic option for treating skin cancer and represent a new revenue source for hospitals. We recently sold and installed an SRT 100 system to Beth Israel Deaconess Hospital in Plymouth, Massachusetts. With over 50 hospitals currently using SRT technology in the US, we are enthusiastic about delivering the most patient-friendly, robust alternative for treating non-melanoma skin cancer. With that overview, I’d like to turn the call over to Michael Sardano. Michael?

Michael Sardano, President and General Counsel

Thanks, Joe. In addition to the priorities Joe just discussed, we have intensified our efforts to open up new international territories, a demanding and analytical process that requires regulatory approvals and engaging the right distributors. Our recently appointed Vice President of Quality and Regulatory Affairs has made terrific progress in initiating dialogue with regulatory authorities, working hand in hand with our Vice President of International Sales and myself. We have had recent success in Asian territories, having shipped our first system to Taiwan and two SRT systems to China during the first quarter. We fully expect that China will take delivery of more than 10 SRT systems throughout 2023. We are also focusing on expanding our target markets in Korea and Japan, and South America is also a priority, with active engagements in Brazil. According to Brazil's National Cancer Institute, non-melanoma skin cancer is the most prevalent cancer in the country, accounting for about 30% of all cancers, representing an exciting market opportunity for our SRT products. We expect to submit an FDA 510(k) application for our aesthetic products to upgrade them to the technological level of our SRT product line, which has seen positive reception from our customers. With that, I’ll turn the call over to Javier Rampolla for a discussion of our financial results.

Javier Rampolla, CFO

Thanks, Michael, and good afternoon, everybody. As Joe mentioned, our revenues for the first quarter of 2023 were $3.4 million, compared with $10.3 million for the first quarter of 2022. The decrease was primarily due to a lower number of SRT units sold due to the impact of inflation on medical practices and lower sales to a large customer. Gross profit for the first quarter of 2023 was $1.6 million or 47.1% of revenues, compared with $7.1 million or 68.9% of revenues a year ago. The decrease was primarily due to the lower number of units sold and higher costs charged by vendors in the 2023 quarter, reflecting the impact of inflation. We anticipate gross margins to return to the mid-60% range going forward. Selling and marketing expense for the first quarter of 2023 was $2.1 million compared with $1.2 million for the first quarter of 2022, an increase attributable to higher threshold and advertising expenses. Note that we have increased our participation in real trade shows that attract our target customers. General and administrative expense for the first quarter of 2023 was $1.4 million compared with $1.3 million for the same quarter last year. The increase was primarily due to a higher proportion of fee and travel expenses offset by a reduction in insurance expenses. Research and development expense for the first quarter of 2023 was $1.1 million compared with $0.7 million for the same quarter last year, primarily due to expenses related to our ongoing aesthetic project in 2023 to develop a drug delivery system. We expect R&D expenses to remain at the same general level for the remaining quarters of 2023. Other income of $0.2 million for the first quarter of 2023 was related to interest income. Other income of $12.8 million for the year-ago quarter was related to a gain on the sale of a non-core asset. We recorded an income tax benefit in the first quarter of 2023 of $0.8 million compared with income tax expense of $0.6 million in the first quarter of 2022. Net loss for the first quarter of 2023 was $1.9 million or $0.12 per share, a decrease compared with net income of $16.1 million or $0.97 per diluted share for the first quarter of 2022. The net income for the 2022 quarter included a $12.8 million gain on the sale of a non-core asset or $0.77 per diluted share. Adjusted EBITDA, defined as earnings excluding interest, taxes, depreciation, amortization, and stock compensation expense, was negative $2.7 million for the 2023 first quarter, compared with a positive $16.9 million a year ago. Turning to our balance sheet, cash and cash equivalents stood at $19.3 million as of March 31, 2023, compared with $25.5 million as of December 31, 2022. The company had no outstanding borrowings under its revolving line of credit as of March 31, 2023, or December 31, 2022. Accounts receivable stood at $12.7 million at quarter end, down from $17.3 million as of December 31, 2022, reflecting the decline in first quarter sales. Despite a tough quarter, we continue to prepare for future growth. We have continued building finished goods inventory and prepaying for materials to get ahead of expected inflationary price increases. Inventory stood at $6.3 million at the end of Q1, a significant increase from $3.5 million as of December 31, 2022. Prepaid and other current assets increased to $10.7 million as of March 31, 2023, compared with $6.9 million as of December 31, 2022. Our attention to expense management remains a key priority, ensuring our cash spend supports our long-term goals. Our balance sheet positions us well to capitalize on growth opportunities. Please refer to the table in the news release issued earlier today for a reconciliation of GAAP to non-GAAP financial measures. With that, I'll turn the call back over to Joe.

Joseph Sardano, CEO

Thanks, Javier. Thanks, Michael. We believe that Sensus Healthcare is well-positioned technologically, much of which is based on our Sentinel IT solutions software, which is HIPAA-compliant. It allows physicians to easily and accurately document and store patient data for clinical billing and asset management purposes. This technology has been transformative for our SRT customers and for Sensus, as it clearly demonstrates and documents the attractive ROI for the SRT-100 Vision and the SRT-100+. In recent weeks, we launched expanded capabilities and indications for our Sentinel technology by introducing Sensus Cloud at last month's AAD Annual Meeting, which was well received. This new feature of Sentinel is a cloud-based asset management, remote monitoring, and diagnostic platform available on all our products. The platform includes continuous remote monitoring to track the status of the system from any web browser or iOS device. Continuous backups ensure that valuable information is stored securely in the cloud and enable providers with multiple locations or group practices to monitor their equipment remotely. The Sensus Cloud system facilitates the monitoring of service issues without needing to send an engineer to the field for calibration or monitoring voltage and temperature. All our products come equipped with Sentinel IT solution capabilities, including all future products set for FDA submission in the coming months. We are still in the early stages of leveraging the significant market opportunity for SRT. Our systems are well-positioned in a large, largely untapped market comprising around 14,000 dermatologists, 1,000 Mohs surgeons in the US, alongside 8,500 offices, and an additional 6,500 plastic surgeons and 5,500 radiation oncologists. Our systems offer a compelling alternative to surgery for millions of patients, necessary to prevent the recurrence of keloids following surgical excision. Skin cancer is a significant and growing concern, with estimates suggesting that one in five Americans will develop skin cancer in their lifetime. This indicates that nearly 70 million will have non-melanoma skin cancer. Clearly, there is an urgent need for our SRT systems now and in the future. We are confident that Sensus is positioned for success despite the challenges of the first quarter. We have a great team to drive growth and implement these strategies. This is why we have built inventory in anticipation of meeting expected demand. We will continue to invest in our Sentinel IT capabilities while selectively increasing our sales and marketing headcount and capabilities. Thank you for your time and attention and now operator, we're ready to take questions.

Operator, Operator

We will now begin the question-and-answer session. First question comes from Scott Henry of ROTH Capital. Please go ahead.

Scott Henry, Analyst

Thank you. Good afternoon. Certainly, capital equipment has some volatility, and I guess we're seeing the downside of that. But that happens, you've got a good product, so we'll figure it out. But I had some specific questions. I'll start on the big picture, then I'll go to the small picture. When you're citing inflation for the problems, are you really talking about a more challenging economic environment and potentially a more challenging environment for financing the products? I'm just trying to connect the dots between inflation and business without economic challenges.

Joseph Sardano, CEO

Yes. Scott, thanks for being on, and I want to thank you again for hosting a marvelous meeting last quarter; it was, as usual, great. The inflation piece that we're seeing isn't primarily about prices or challenges of inflation overall, but rather about each individual physician we’re talking to or the groups that are privately owned and backed by private equity that are being impacted. When you think of the patients going to their offices looking for their quarterly Botox treatments or their hair treatments, those are the folks that inflation is impacting as they have less discretionary income to spend on these things because the costs of essentials have risen significantly. So instead of going once a quarter for treatments, they may be going once every six months or deciding to skip altogether. I've spent four to six weeks this past quarter alone sitting face-to-face with our doctors, both single practitioners and operating groups, as well as the national operators. They're seeing similar downturns in their businesses. When I ask them how much their business is down, their heads hang even lower, they feel it’s more than that. Overall, this inflationary pressure impacts their cash flow which makes them reconsider where they spend their money. It’s tough to convince them to spend money on us, even though it is a good investment. Everyone is tightening their belts due to rising costs across the board—whether it's food or gas—and this general atmosphere is impacting our dermatology customers as well. We don’t expect this to last forever; I doubt it will extend into the second half of the year, but it's certainly impacting the first half. Many are surprised as the media and markets haven't fully addressed the inflation levels publicly.

Scott Henry, Analyst

Okay, great Joe. Thanks for that context. I'll hit you with a speed round of a couple of questions. First, could you talk about what service revenues were in the quarter just approximately?

Javier Rampolla, CFO

The service revenue was a little bit under 28% of total revenue in the quarter.

Scott Henry, Analyst

Okay, that's helpful. And then did you mention how many transdermal units you sold in the quarter or booked in the quarter as revenue?

Joseph Sardano, CEO

We're reengineering the transdermal device, which will be one of the new units that will go through the FDA process, including the Sentinel package. Rather than flooding the market with products that don't include new enhancements, we want to ensure we deliver the best product available. We're very close to introducing the new product through the FDA process; I would prefer to hold off until it's finalized.

Scott Henry, Analyst

Okay. So, I'm going to interpret that as no revenue for Q1, and we should delay that product line for the time being?

Joseph Sardano, CEO

Yes, I think it will accelerate once it comes into the market. We've received tremendous interest from those in the pharmaceutical industry for dermatology. They are looking for ways to implement their drugs without the use of needles, and this drug-device system aligns well with that objective.

Scott Henry, Analyst

Okay. And then when I do the math for total revenues, it seems the revenue per SRT unit declined in Q1, is that correct? And should that rebound?

Javier Rampolla, CFO

The average selling price remains the same; it's just a product mix affecting that overall value.

Scott Henry, Analyst

Okay. So the price is the same, but the mix went in a direction, I guess, that resulted in an effective price decline. So, as the mix changes, it should rebound. Okay, that's helpful. Thank you, Javier. And then final question, you've given us some guidance for the year in terms of units. We know you did 10 in the first quarter; how should we think about the second quarter?

Javier Rampolla, CFO

As I stated in the remarks, we're on track to do more than 60 units this year. So, whatever number above 60, whether it's 70 or 100, we'll meet or exceed it in a short period of time.

Scott Henry, Analyst

Okay. But I guess what I'm trying to understand is we should think about Q2 as another challenging quarter with more of a rebound in the second half? Is that?

Javier Rampolla, CFO

Yes, I see Q2 as another challenge. Hopefully, it won't be as bad as Q1, but it will be a challenge as we navigate out of it. We believe our customers are learning to adapt to the new economic reality, and they'll reassess their business plans. Life goes on, and business will continue.

Scott Henry, Analyst

Okay, all right. Thank you for taking all the questions.

Javier Rampolla, CFO

Thanks, Scott. Appreciate it.

Operator, Operator

Next question comes from Chaitanya Gollakota of H.C. Wainwright. Please go ahead.