Sensus Healthcare, Inc. (SRTS) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Sensus Healthcare Second Quarter 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. 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 Arthur Levine, Chief Financial Officer. As a reminder, some of the matters that will be discussed during today’s call are forward-looking statements within the meaning of the 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 those risk factors described in the company’s Forms 10-K and 10-Q as filed with the SEC. 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 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’m very pleased to report that our second quarter financial results mark a return to double-digit growth, with revenues up 23% over the prior year. This growth was highlighted by sales of our feature-rich SRT-100 Vision system. We shipped 22 systems in total during the quarter, including 17 SRT-100 Visions. When comparing our second quarter results with the first quarter, revenues were up 39%. So clearly, we’re moving in the right direction and recapturing the delayed sales. As many of you know, we had a credit issue with a key customer during Q1 and we withheld some deliveries. Now that this issue has been resolved to our satisfaction, we are in the process of recovering those shipments. We have renewed our sales agreement with that customer who provides physicians with a turnkey solution for the SRT-100 Vision systems. They provide the units, address state regulatory requirements, give access to radiation oncologists for consultation and full-time board-certified radiation therapists to deliver treatments and they also provide billing and collection services. We are very involved with their process of securing both financial resources for equipment procurement as well as private equity investment into their company. Their management team did an excellent job in securing their business growth and expansion for the future. We’re excited to be a part of it. While the majority of our Vision system sales go through this customer, I’m very pleased to tell you that in Q2, we sold two Vision systems directly, including a fourth Vision system in Israel. We are focused in broadening our SRT customer base to large dermatology practices and hospital centers. To that point, we are in the process of installing five SRT-100+ units with the largest dermatology company in the country. These units are being installed under a shared services model with a more conservative approach. This, by no means, changes our current go-to-market strategy. Rather, it identifies another opportunity to address solutions the market may be looking for. We have the flexibility to address our market’s needs, and this is made possible with our Sentinel IP product. Sentinel is a powerful IT platform that provides large multiple-site customers an asset management program. This is an exclusive Sensus product that is not available from anyone else in this market. It also provides users the opportunity to store patient data on the cloud and is HIPAA compliant. The system has been working in the SRT-100 Vision for a few years now, and we have now expanded these capabilities to the SRT-100+. This technology is unique to Sensus and will be part of our platform for all future products. This provides our customers with powerful management tools that will store important patient data while giving them the management tools to become more efficient and productive in their practices. We will provide you with updates as we progress with this initiative. We continue to invest in sales and marketing. In Q2, we exhibited our SRT systems for the treatment of keloids and non-melanoma skin cancer at several regional dermatology trade shows, where our products were well received. In recent weeks, our SRT-100+ was featured on a popular dermatology cable TV program, where a young woman’s keloids were treated successfully. The show airs on the TLC Network and is hosted by Dr. Sandra Lee, who you may know as Dr. Pimple Popper. It is one of the most watched programs on cable TV and should increase patient awareness for the treatment of Keloids and non-melanoma skin cancer. We look forward to continued exposure for SRT to treat this indication, particularly given a recent clinical study showing just a 3% recurrence rate after surgery when followed by SRT. We have said repeatedly that we believe the treatment of keloids could represent an even larger market for SRT, the non-melanoma skin cancer. To that point, we have engaged a well-respected and experienced Madison Avenue PR firm, RooneyPartners. They will help us establish an all-round program and campaign for SRT and Sculptura. We’re looking forward to their involvement and results from their guidance. Also, we – as we previously discussed, on August 1, SRT was added to Premier Healthcare Alliance’s list of approved products under its brachytherapy products category for its members. If you recall that Premier is one of the nation’s largest group purchasing organizations, serving approximately 4,000 hospitals and health systems and about 165,000 other providers and organizations. Our management team worked for several months on the project with Premier to have SRT included in their lineup of leading-edge technologies. This agreement will support our efforts to penetrate the hospital market. We believe this inclusion of SRT products with Premier could spur additional purchasing groups to add SRT as well. Turning now to Sculptura. In June, we exhibited our Sculptura Modulated Robotic Brachytherapy system at the 2019 American Brachytherapy Society’s Annual Meeting. Recall that Sculptura has Beam Sculpting capabilities, Robotic Respiratory Tracking and other unique and proprietary features. We are pleased with the work by our oncology sales team and the interest being generated in this recently FDA-cleared product. Our Sculptura collaboration with the Perelman School of Medicine at the University of Pennsylvania began during the second quarter. And the collaboration is moving ahead, with patient studies expected to begin shortly. These studies will provide important support for marketing Sculptura for various oncological indications. We anticipate starting several more Sculptura collaborations with prominent medical schools and cancer centers later this year. We are also preparing for the September Annual Meeting of ASTRO or the American Society of Therapeutic Radiation and Oncology. We’re looking forward to showcasing Sculptura’s capabilities there at its debut. We are anticipating many scheduled demonstrations of Sculptura as our sales team adds the growing list of interested parties. We have decided to add a second Sculptura system to our booth configuration due to the demo scheduling. Reimbursement has been a topic of discussion with Sensus for quite a while, and we believe we are poised to benefit from recent developments. I’ve said repeatedly that the Centers for Medicare & Medicaid Services has identified that 2021 is when our main code 77401 for SRT is scheduled for revaluation. They have remained consistent with that timetable. There are also some proposals that if adopted bode well for Sculptura reimbursement and our position in the marketplace. CMS has proposed new radiation oncology codes with a bundled payment model that will benefit single-procedure cost-effective care versus multiple treatments. This new quality-based health care model bodes well for all Sensus technologies. For example, external beam radiation requires patients to be treated multiple times over several weeks. Sculptura is one-time treatment modality. Given our pricing relative to linear accelerators, we believe Sculptura is well positioned in the market especially as we target community hospitals. The new payment model is expected to go into effect 2020 following a comment period. I’ll now turn the call over to Arthur Levine, our Chief Financial Officer, who will go over our financial results in more detail. Arthur?

Thanks, Joe. It’s a pleasure to be speaking with all of you today. As Joe mentioned, revenues for the second quarter of 2019 were $7.5 million, up 23% from the second quarter of 2018. This was mainly due to increased unit sales of the higher-priced SRT-100 vision system. Importantly, revenues were significantly above first quarter 2019 revenues of $5.4 million, when we held back some Vision unit deliveries to an important customer. Gross profit for the second quarter of 2019 was $4.9 million or 66.1% of revenues, and this compares with $3.9 million or 65.1% of revenue for the second quarter of 2018. The overall increase in gross margin percentage was mainly due to a shift in product mix favoring SRT-100 Vision units. The 2019 Q2 gross margin is slightly better than our previous guidance for margin to be in the low to mid-60s, but we continue to view that range as an appropriate way to model our business for the second half of the year. Selling and marketing expense for the second quarter of 2019 was $2 million, unchanged from the second quarter of 2018. If you are comparing our selling and marketing expenses to the first quarter, note that Q1 included expenses associated with two large trade shows. We expect sales and marketing expenses to increase in the third quarter primarily due to costs associated with the ASTRO trade show as well as the Sculptura launch, and also the hiring of a few more sales reps. Overall, we expect sales and marketing expenses to be somewhat higher for the full year 2019 compared to 2018. General and administrative expense for the second quarter of 2019 was $0.96 million, about $50,000 more than the second quarter of 2018. We expect G&A expenses to trend relatively flat for the remainder of the year. Research and development expense for the second quarter of 2019 was $1.9 million compared with $1.6 million for the second quarter of 2018 and $2 million for the first quarter of 2019. The increase over 2018 was mainly due to expenses related to the ramp-up in production of the Sculptura. We expect a modest decrease in R&D spending during the second half of the year. However, please note that as we receive feedback from luminaries on the Sculptura, we may invest R&D resources in some product enhancements. We reported net income for the second quarter of 2019 of $0.1 million or $0.01 per diluted share. This compares with a net loss of $0.5 million or $0.04 per share for the second quarter of 2018. Adjusted EBITDA for the second quarter of 2019 was a positive $0.4 million compared with a negative $0.2 million for the second quarter of 2018. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and stock compensation expense. We achieved positive adjusted EBITDA and net income in Q2. Going forward, our main areas of discretionary spending will be R&D, marketing and clinical studies. We will be managing these areas closely going forward, with an eye on our short-term quarterly results. However, we will invest in these areas as appropriate in order to address the longer-term objectives as we roll out the Sculptura first to luminaries and then to other customers. This could result in some variability in spending and in short-term results. Cash and investments were $16.8 million as of June 30, 2019, compared with $15.4 million as of December 31, 2018. The company had no outstanding borrowings on its $5 million revolving line of credit and no long-term debt as of quarter end. During Q2, we collected $5.5 million in accounts receivable that had been overdue on March 31, 2019. Turning briefly to our year-to-date financial results. Revenue for the first half of 2019 increased 7.5% to $12.9 million compared with $12 million for the first half of 2018. Gross profit for the first half of 2019 was $8.3 million or 63.9% of revenue compared with $7.9 million or 65.6% of revenue for the first half of 2018. Selling and marketing expense was $4.5 million for the first half of 2019 compared with $4.2 million for the first half of 2018. G&A expense was $2 million year-to-date compared with $2.3 million for the prior year period. R&D expense for the first half of 2019 was $3.9 million compared with $3.1 million for the first half of 2018. The net loss for the first half of 2019 was $2 million or a loss of $0.12 per share compared with a net loss of $1.7 million or $0.12 per share for the first half of 2018. With that, I will turn the call back over to Joe.

Thanks, Arthur. I mentioned on last quarter’s conference call that we believe the second half of the year will be strong, aided by a number of items, including a resumption of sales to a very important customer. I think the results we’re reporting today bear this out. We are back on track and time for continued and sustainable growth. We continue to explore ways to work with existing multisite customers to help them purchase multiple units, and we’re making progress. We believe our SRT systems are well positioned in a large market consisting of some 14,000 dermatologists and 1,000 Mohs surgeons in the U.S., representing 7,500-plus offices and growing, not to mention a further 6,500 plastic surgeons and 5,500 radiation oncologists. As we work to ensure that physicians are aware of the recent positive data comparing SRT in non-melanoma skin cancer to Mohs surgery, physicians who care about their patients will offer SRT as an option, thus providing their patient base a total solutions to treating skin cancer with the valued feature of treating keloids. Adding Sentinel to this program will provide our customers with the efficiencies and productivity needed to sustain the organic growth of this patient population as well as the marketing reach the treatment options will provide. Just to remind you, a five-year retrospective study with SRT showed a cure rate of 98.9%, which exceeds the Mohs’ cure rate for non-melanoma skin cancer. Combine this with the recent keloid study showing 3% recurrence rates, you can see just how powerful the story can be for a community. We are very pleased with our position in our target markets, providing efficacious and price-attractive solutions to physicians and patients. Thank you for your time and attention. And now, operator, we’re ready to take questions.

Thank you. The floor is now open for questions. [Operator Instructions] And we will go with Andrew D’Silva with B. Riley FBR for our first question. Andrew D’Silva: Hey, good afternoon. Thanks for taking my questions, and really, congrats on the rebound. And sorry, if you highlighted any of this. I was moving between calls. So just let me know if you did and I’ll check out the transcript tonight. But just for starters, as it relates to your large turnkey partner, could you just kind of elaborate a little bit on some of the changes that went on there? I know you were in contract renegotiations as far as they were up for renewal in July. Obviously, you renewed it. Were there any changes maybe with the payment terms or anything like that?

First of all, thanks, Andy, for being on the call, and thank you for your question. Yes, we did renew the contract with SkinCure. We still have the opportunity to work out some details on terms and conditions, which we will do. The talks keep on going. But we’ll definitely have some additional information for you in the near future, but that continues to move on. Andrew D’Silva: Okay. Great. And then just one more kind of quick set of questions. And it’s around reimbursement but not specifically the bundled package or the E/M codes that we were talking about before. Specifically, I just received a couple inquiries from clients related to the CID from a few years back. And I was wondering if that was resolved yet and if there’s just any subsequent customer that may have had any of those billing issues. Obviously, I understand you don’t actually bill payers for anything, but there’s been issues with others in the broader space in the past. So any color on that would be very useful as well.

Okay. We’ve been working very closely with CMS. And in the last comment period, there was – out of the 1,700-page document that they provided to the public, there was actually zero comments made on SRT. So I think that they’re holding true to maintaining the status quo for now, which our customers, to date, seem to be satisfied with. And they are receiving reimbursement. We’re getting more and more responses regarding E/M codes that seems to be being paid in the areas where customers are requesting payment. And CMS has remained true to the fact that they want to wait for the 77401 code to be revalued in 2021. Now we tried our best working hard in conjunction with them to try to get them to move that up. But it was very, very difficult for them to change that process. And therefore, they’re sticking to their process. So our customers are happy with the status quo. And I think that with the event recognizing that our main code has not been revalued for a long time, that it’s expected to go up, it’s very difficult to go down. This is what we’ll continue to anticipate, but we’re going to work with CMS’ time frame, and it will happen in 2021. So we can say that for at least the next 12 months, it’s going to be status quo, which is not a bad position for us. Andrew D’Silva: Got it. I’m sorry. I meant a little bit of color just on the DOJ CID that took place a few years back. That was actually what I was referencing.

Okay. Okay. From that DOJ thing, there’s been absolutely zero follow-up news. Nothing to report on that. Andrew D’Silva: Okay. Great. And sorry, one more quick question. Just – as far as Sculptura goes, really positive out of your prepared remarks. Just curious what it’s going to take from working with institutions to get some data out so you can attack the broader market? Do you have any sort of idea from a time line? Or have you had any of those kind of discussions yet?

Yes. I mean we’re very – we’re working very, very closely with our friends at UPenn. They’re obviously very interested in developing a lot of protocols for the product. And although I can’t really talk about the time frame, I can tell you that we’re working diligently to try to get as many things done as possible particularly considering that ASTRO is going to be coming up next month. I’m not sure if we’re going to be able to identify any procedures that were done by then. But I can assure you that everybody is working diligently to try to make that happen because ASTRO is ASTRO. It’s the biggest show that there is for the therapeutic industry. So we’re trying to make things happen. But overall, with the new facility in Israel, that is going to be up and running. So I think we’re going to see a very aggressive program there as well. And I think that this quarter, we should be able to announce in Q3 a couple of more opportunities that are going to help us along the way as well. And I think everybody will be impressed with the names that we mention then. Andrew D’Silva: Great. I mean it’d be amazing too if you could get it in time for ASTRO. So congrats again on the rebound. And thank you very much for taking my questions. And good luck going forward this year.

Appreciate it very much. Thanks, Andy, for your support.

And our next question comes from Anthony Vendetti with Maxim Group. Please go ahead.

Thanks. Good afternoon, guys. How are you?

We’re good, Andy. How are you?

Good. Good. Good. So Joe and Arthur, so just to follow up a little bit because I’m also bouncing between like four calls. But I noted you mentioned Israel and I know you’re building your aesthetic products there. You said something maybe here in this quarter that we’re in now the third quarter. What’s sort of your expectation for products, whether it’s this quarter or by the end of the year and in terms of announcing and then commercializing them? And then I’ll have a little more of a follow-up on some of the reimbursement stuff.

Sure. We keep pushing to try to make sure that things can move into the fiscal year 2019. But as sometimes you’re going to have disappointments, and sometimes things are going to move back. I could tell you this, right now, we’re on track to have the aesthetic products available. We have an FDA position where it has to go through the FDA. We don’t know how we’re going to be able to control that process once it’s delivered, but it should take 90 days. But we’ll see where it goes. And we want the product and our products to be pristine. They have to be different than anything else that’s available on the market. And we’re adding to that product base as we continue. So a lot of those things are being developed as we speak. We’re excited for it. The manufacturing facility is ready, able and capable. We’ve also got alternatives with other manufacturing opportunities. So we’re excited for where we’re going, and we’re still going there. I just can’t tell you at this time, yes, I’m going to have 10 products, three products, four products available in the fourth quarter that’s FDA approved. I can tell you that we’re pushing as hard as heck to get those products delivered to the FDA so that they can approve them before the end of the year. That’s the best that I can give you at this time.

Okay. Sure. Not a problem. Thanks, Joe, for that update. And then just a little bit – I know you mentioned some of the reimbursement is being evaluated and you expect some new codes in 2020. And then one of the codes is not going to be reviewed until 2021. So just remind everyone what you get reimbursed per procedure right now with the way the codes are. And I know it depends on the person and the treatment. But it’s generally – I think it’s 10 to 14 treatments. What is it per treatment? And what do you think it will be in 2020 if things go according to plan? And then what could it be in 2021 if that review comes out positive?

Okay. Well, we have two sides. On 2020, we were talking about the Sculptura product. And it was a couple of months ago, CMS announced some opportunities that they’re looking at perhaps in a one-payment type of thing that would really help – or help us with Sculptura. Either way, right now, we’re looking at healthy reimbursement codes that exist for the brachytherapy product. So we’re looking at healthy codes from that standpoint. On the SRT side is what we’ve been pushing real hard on to try to get 77401, our main code revalue. Now for the episode of care, which is about 10 to 12 codes that are available for the treatment of SRT for skin cancer, you’re looking at, like you said, between 10 and 14 or 15 treatments in that episode of care. That episode of care, on average, reimburses the physicians about $2,000, $2,000 to $2,100, somewhere around that line. And so the least amount of money that they get in that whole episode of care is for that one code, 77401. And so everybody recognizes it’s undervalued. Everybody recognizes the fact that it has not been met by the statute which requires it to be revalued every five years. Has not been revalued since 2002. And so when you look at where CMS is today, I think we have to say and we have to agree that CMS is in no hurry to increase reimbursement codes. They’re looking at decreasing reimbursement codes. They’re looking at trying to develop models that will help them better – get more money for their value that they’re paying for from CMS – from Medicare or Medicaid. So the fact that we are being identified as an undervalued code that will be revalued by 2021, I think it bodes well for the episode of care for skin cancer and SRT. And for me, I would love – and this – I don’t know if this would ever happen, but I would love to see SRT involved in an episode of care or in a bundled model payment that says, here you have your three modalities to treat skin cancer. You have a linear accelerator, you have SRT or you have Mohs surgery. And if they said, we’ll give you X thousands of dollars to pay for the treatment of that skin cancer. Pick your poison. Pick whatever product you want, I would think that our product would be chosen more often than not because it’s safe, it’s efficacious. There’s no side effects. There’s no scarring. And I think that’s where everybody would want to go. I would relish that opportunity to be put in that kind of a model. But we’ll see where they go. I think that we’re seeing a lot of changes with CMS. And I think we’re looking at a lot of opportunities. What they mentioned with Sculptura, that opportunity with that bundled payment, they were looking at a four-year period to start that in 2020. They haven’t announced it yet and have it run through 2024. So they’re definitely looking at bundled payments.

Okay. And the bundle payment, like you said, if that came out, certainly, SRT is the least expensive option definitely compared to Mohs surgery and also compared to a linear accelerator, right, in terms of total cost for the treatment?

Yes. Again, right now, that’s the way it is. But again, the bundled payment is – CMS is going to establish a payment for that treatment. And you can use whatever device you want. And then if there’s any damage to the patient or if there’s any work that needs to be done after the treatment to the patient, if they have excessive bleeding or if they have an infection or if they have dermatitis from overexposure, all of those things are going to have to be taken on by the provider at their cost. And it’s going to affect their quality scores as well.

Right. Because there’s no additional reimbursement? It’s just one bundled payment?

One payment, exactly.

Payment for the entire episode of care? Exactly.

Yes. So if a provider is looking at a risk factor, I think we have a very quality – quality product that provides least amount of risk.

Okay, great. Thanks, Joe. I’ll hope back in the queue. Appreciate it.

Thank you, Anthony.

[Operator Instructions] And we’ll take our next question from Yi Chen with H.C. Wainwright. Please go ahead.

Hi. This is Boobalan in for Yi Chen from HCW. I have a couple of questions regarding the presentation. So how many under the system were shipped during this quarter?

Well, we said it. It was 22 systems shipped in the quarter.

Okay. Sorry. I’m between a couple of other calls. I might have missed it. So the next question is how many Sculptura systems do you expect to sell within the next 12 months?

I couldn’t tell you that. We’re not providing guidance. But we already have two installations that we’ve shipped. I suspect we’ll have a third one for the third quarter. And we’ve said all along that we have five clinical units that we’re looking for customers to take. And we expect to have those five units delivered and installed before the end of the year.

Okay. And last one, what would be the trend of operating expenses going forward?

Arthur, I’ll let you answer that one.

Yes. I can answer that one. All right. Let me take it line by line, and I covered this in my script as well. The selling and marketing expenses I expect will be higher than in Q2 for the balance of the year. General and administrative I expect will be flat. And research and development should be modestly lower in Q3 and Q4 compared to Q2.

Okay. That’s it from me. Thank you.

Thank you very much.

And there appear to be no further questions at this time. So I’ll turn it back over to management for any closing remarks.

Okay. Thank you. So in closing, I want to thank you all for your time this afternoon and for your interest in Sensus. For those of you visiting ASTRO next week in Chicago, I’d like to invite you to come by our booth, number 4219. We look forward to seeing you there for an up-and-close look at Sculptura. And we want to thank everybody and have a great day. Thank you so much.

That does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.