Good afternoon and welcome to the Sensus Healthcare Third Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Kim Sutton Golodetz, 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 law. 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, November 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 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. Good afternoon, everyone. Our third quarter financial results reflected typical summer seasonality and macroeconomic conditions with economic challenges continuing to affect many dermatologists. During Q3, we shipped 11 systems, including three SRT systems outside the U.S. and five SRT-100 Visions to a very large customer. Total unit sales now stand at almost 720 units, and we expect the seasonally strong fourth quarter to help us advance towards our yearly and long-term goal. For Q3, revenues were $3.9 million, compared with $9.0 million a year ago. As discussed last quarter's conference call, many of our customers depend on elective aesthetic procedures as a meaningful source of practice and revenue profit and despite hearing encouraging feedback that patient volumes and procedures mix are improving macroeconomic conditions along with our usual seasonal summer lull made for a soft quarter. However, please note that our main focus has always been on the second half of 2023. We continue to believe in a strong Q4 with five weeks in. We used our strong cash position to continue to build inventory so that we will be able to quickly address demand as our customers adjust to inflation and interest rates. Utilization of SRT to treat non-melanoma skin cancer continues to increase, driven by favorable reimbursement, an aging population, and clinical results that are at least as good if not better than most surgery. I'll remind you that last quarter we told you that our review of Medicare's shows that SRT experienced a 27% year-over-year treatment growth rate for the past six years. If this growth rate continues at its current pace, SRT will soon become the treatment of choice for non-melanoma skin cancer. Our confidence remains high and we continue to work concurrently on programs that will address any remaining hesitancy for our…

Thanks, Joe. Last quarter I spoke about our efforts to open up new international territories, a demanding process that requires regulatory approvals and engaging the right distributors. Earlier this year, we were thrilled to sell our first SRT system to Beacon Hospital in Dublin, Ireland, which came just before we announced a new distribution partner in the United Kingdom, MIS Healthcare. We are delighted with this partnership, and MIS has a good backlog of potential hospitals interested in our SRT systems. Our focus on international opportunities continues, and during the quarter, we sold three systems outside the United States for a total of 10 systems sold internationally so far this year. Our goal is to enter three to four new territories over the coming years, building upon our recently added opportunities in the UK, Ireland, and Latin America, where we sold the first unit into Guatemala during the second quarter. With regard to the near future, as we discussed previously, our plan is to expand our Latin American and Asian footprint as quickly as possible, with Brazil and Japan being longer-term goals as they are highly regulated. With that, I'll turn the call over to Javier for a discussion of our financial results.

Thanks Michael, and good afternoon, everyone. As Joe mentioned, our revenues for the third quarter of 2023 were $3.9 million as compared with revenues of $9 million a year ago and $4.5 million in the second quarter of 2023. The decreases versus the prior year was primarily due to a lower number of SRT units sold as customers continued to defer purchases as well as lower sales to a large customer. Note that the third quarter is typically slower. Gross profit for the third quarter of 2023 was $2 million, or 51% of revenues, compared with $5.9 million, or 65.6% of revenues for the third quarter of 2022. The decrease was primarily due to the lower number of units sold in the 2023 quarter. Going forward, we anticipated that gross margins will remain to the mid-60s% range as our sales continue to improve. Selling and marketing expense for the third quarter of 2023 was $1.3 million, compared with $1.8 million for the third quarter of 2022. The decrease was primarily attributable to a decrease in marketing activity as well as lower threshold cost and commission expense. General and administrative expense for the third quarter of 2023 was $1.5 million, compared with $1.2 million for the third quarter of 2022. The increase was mostly due to higher professionals and bank fees, including costs associated with entering into a new credit facility. Research and development expense for the third quarter of 2023 was $1.1 million, compared with $0.7 million in the same quarter last year. The increase was primarily due to expenses related to a project to develop a drug delivery system for the aesthetic market. We recently submitted a 510(k) application to the U.S. Food and Drug Administration and we expect the completion of work on this project by the end…

Thanks, Javier. Thank you, Michael. As I mentioned, last quarter SRT treatment surpassed 480,000 in the last two years alone, and the ROI for a premium SRT system under our fair market value leasing program continues to be compelling. Interest in SRT remains high, especially as it relates to our premium product, the SRT-100 Vision. We do expect to ship significantly more SRT systems in the fourth quarter of this year, a statement I make based on historical trends as well as the high interest in SRT and the booth traffic and recent important trade conferences and current prospect activities. Clinical results in treating non-melanoma skin cancer non-invasively are excellent. With published studies showing that SRT is as good or better than Mohs surgery. This should be reason enough to choose SRT. Add to that fact that Mohs procedures can leave scars and raise the risk of infection and even death, and the fact that our reimbursement is so much higher than it was two years ago, while Mohs surgery reimbursement has come down and SRT becomes the clear choice. We're very excited to be working to make this choice even easier, as treating skin cancer and keloids with SRT becomes a meaningful way of supporting one's practice considering the current state of aesthetics. As a final topic, before we take your questions, I want to provide you some color on our transdermal drug delivery system known as TDI. As Javier mentioned, we recently submitted our 510(k) application to the FDA and expect to receive clearance in early 2024. This system will, for example, allow PRP to be applied to the scalp in a pain free hair restoration experience. In addition, posters have already been presented on the application for hyperhidrosis, or overactive sweat glands. Our transdermal system includes Sentinel IT solutions capabilities, as do all six of our Sensus branded aesthetic smart lasers and SRT devices. We are still in the early stages of tapping the enormous market opportunity for SRT. Our systems are well-positioned in a large and largely untapped market. They provide a compelling alternative to surgery for millions of patients and arguably the only solution to prevent the recurrence of keloids following surgical excision. As an overlay to all this, an estimated one in five Americans will develop skin cancer during their lifetime. This tells us that nearly 70 million people will have non-melanoma skin cancer. So clearly, there's a need for our SRT systems both now and even more so in the future. We are confident that Sensus is positioned for success despite the challenges we've faced since February. We have great staff to drive growth and implement our strategies, which is why we have built inventory to meet the expected demand. With those comments, I thank you for your time and attention. And now, operator, we're ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Yi Chen of H.C. Wainwright.

Hi, this is Boobalan dialing in for Yi Chen. Thanks for taking our questions. A couple from us. So maybe firstly, so the cost of sales remained the same despite a drop in revenue. So is there anything to take note of? And also, how should we think about gross margin for the next quarter, and maybe in 2024?

So for the next quarter, think about the low-60s in concerning the gross margin.

Okay. All right. And then do you expect the macroeconomic challenges to remain in place through 2024 that could impact your business?

We're expecting Q4 to give us a nice rebound and hopefully launch us into a successful 2024 to what point that success will be is going to be determined. We'll see how Q4 lays out, but we're very confident that Q4 will be a good fourth quarter, as it usually is. And I think it'll launch us into a better 2024 than of course what we're experiencing for 2023.

Okay. Maybe one final from us. So I was wondering if you could provide some color on the current trend of device utilization rate in the office of dermatologists.

Say that again. I need to understand it better.

So we would like some extra color on the current trends of device utilization rate in the office of dermatologist.

Particularly for SRT?

Yes.

Yes. I think that the SRT utilization rate is starting to move up as we've done a review of Medicare, Medicaid over the last six years, which shows a 27% compounded increase year-over-year for the last six years. So we're seeing the volumes in our offices picking up. That doesn't seem to be a deterrent in any way shape or form. A lot more people are choosing SRT versus Mohs surgery, which is more invasive as we know. So we see that trend continuing for the foreseeable future, and we fully expect that at some point in the very near future to have SRT possibly overtake Mohs surgery as the treatment of choice.

And the next question will come from Alex Nowak of Craig-Hallum Capital Group.

Okay. Great. Good afternoon, everyone. The Q4 bounce back, last Q4 in 2022, I think you did about 36 systems. Based on the trends, the macro environment, everything has changed. I can't imagine you could do 36, but what's kind of a ballpark number that you would be guiding towards?

Well, I think it's one of those questions where right from day one, I think we talked about 60 units for the year. I think that we'll reach our 60 unit goal. After this quarter, we're at 33 systems, I believe. So I think that we'll get to that 60 unit goal by the end of the fourth quarter.

That's -- I mean that's great to hear. Can you speak to your big partner skincare? Just what are they seeing out there? Because obviously the capital environment is tough. We all know that going through the earning season. We've been hearing about other aesthetic names, seeing the impact in the dermatology office, but it sounds like procedures for SRT are continuing very well. Is that the same with your partner skincare?

Skincare is seeing that increase as well, so that's encouraging. But the hesitation for signing on the dotted line to add new installations is we've had the same problem as they've had. So we're seeing the same -- we can compare notes and see the same results there. But we're also seeing, together with them, a much better fourth quarter. I think that we consistently said that the doctors will learn, or patients will come back as they learn how to live with the inflationary numbers. That's on the aesthetic side. The fact of the matter is that skin cancer is something that's not going to go away unless it's treated, and there's more skin cancers being discovered each and every day. And so the doctors are finding a very good way of treating that with SRT. And I think that it's also a nice complement to the fact that if they're seeing lower numbers on the aesthetic side, this is certainly a way of gaining back some of the revenue that they're losing on the aesthetic side, so that they're more balanced as far as their offerings between medical dermatology versus aesthetic dermatology. So I think you're going to see a lot of the practices starting to even out on those things. I think over the last several years, the whole industry migrated towards the aesthetic side, which was a cash business. It's an easy path to fall into, and I think this is a big awakening. I remember four or five years ago, going to all the Trade Shows and all of the speakers were talking about having a balanced offering to their customers. So they're not too heavily weighted, one versus the other. I think this is a reset, if you will, and it's going to help people get back onto the equilibrium, if you will. And of course, SRT is going to be one of the main players in that.

Got it. Thank you. That's really helpful. And, this is a company, Joe, you and the team; you've taken the company now through two different environments. One, call up the lower interest rate environment where maybe the fair value lease could come a lot cheaper. There was more access to capital by these clinics. So they could place an SRT for a little bit of a lower risk. And now we've gone through this higher interest rate environment where now it's becoming a little bit more difficult for a clinic to sign on the dotted line, as you mentioned. Does it at all make you question or look towards sharing in the economics on the procedures, where if a clinic is going to do X number of procedures, you can actually get a piece of that economic benefit versus just the capital sale up front, and then the service contract?

It's always been on our minds as far as the ability for us to do that. It's always available to our customers if they want to bring that up with us. But we have a very good partner that is right now fulfilling that. They have a very successful model. I think it's a proven model. The fair market value lease that we offer is not so much laden by the interest rate because the fact that it's an off balance sheet vehicle that provides with no personal guarantees for the customer, and it allows them to get into something where literally there's a huge residual based on the system that they're not having to pay for. So it's a much less costly way of doing it. And it's still an opportunity for them to keep 100% of their revenues. If they have high patient population, which we're seeing it grow. It's difficult for a customer to want to give up a certain percentage of that revenue when they can keep it all. So I think we provide them with a very, very good alternative to what our biggest customer is doing. And I think that that's one way of supporting our market. And until we start seeing a greater demand from our market for us to be involved with that, it's always being considered, I can assure you that. And maybe one day it'll happen, but it's not going to be this day.

Okay. Makes sense. And then, just lastly on the expenses, the team has done a great job keeping the expenses at I think a reasonable run rate, even during this challenging macro time. So going into Q4 and I guess more 2024, do you expect to hold the expenses largely flat or would you need to do some a little bit of increasing, but profitability comes back in store in Q4 in 2024?

Well, first of all, I appreciate you bringing that up because I think the team -- the financial team in particular, led by Javier has really kept us on track and very disciplined on what we do with our dollars. And if you notice, we have more cash in the bank at the end of this quarter than we did after the second quarter. So we're very cognizant of it. We're strict on it. It's part of our DNA and the way we manage our business. I think that it will remain flat for the balance of the year. We're not looking at increasing expenses. We've had increase in some of the R&D expenses due to the TDI product that we've put through the FDA and all of the fixes that it has to go through, as well as the testing, which is extremely expensive. Even before you get to the FDA, it's done by a third-party group. All of those things are very, very important for us, but it's something that we live with every day. So I don't think that we're going to increase any of the expenses. If one of the notes that you had from Javier, that was increases in some expenses due to sales and Trade Shows. We had the American Academy of Dermatology Trade Show was in a very expensive state. And then most recently, ASTRO was in San Diego. If you know anything about the Trade Shows, everything in the Trade Shows that have already been scheduled, we've got the upcoming American Academy of Dermatology in March also in San Diego. The actual costs to us, to any manufacturer to exhibit in California is almost 3x what it was two years ago. I mean, they've increased the cost tremendously. I'm not sure if we're going to continue to see a lot of these big societies continue to have their meetings in California because of those costs. But I mean we were as shocked as everybody else was when we showed up and we learned of the extra costs that were involved. So that's pretty much the difference in the expense that we've had in 2022 versus 2023 was just that one very show. But I would tell you, we do it again only because the show was very valuable to us. We had as much activity at our booth at ASTRO, the American Society for Therapeutic Radiation, as we did several months earlier at the American Academy of Dermatology.

That's good to hear. Appreciate the update. Thank you.

No, thank you.

And our next question comes from Ben Haynor of Alliance Global Partners.

Good afternoon, gentlemen. Thanks for taking the questions. Just kind of following-up on that Trade Show commentary you just made. Can you share a little bit more on that front? Just kind of the leads that you've seen maybe relative to past years. I know COVID kind of messes with that a little bit, but quite a lot, I guess. But just any trends you've seen over time and the level of interest for SRT.

Yes, Ben, thanks for being on the call. First and foremost, we've started to see this trend since COVID. If everybody understands the American or the Radiological Society and Radiation Oncology, but CMS, Centers for Medicare/Medicaid Services is putting an awful lot of pressure on treatments for cancer and reducing a lot of the reimbursement for the treatment of cancer. When I'm saying the treatment of cancer, I'm talking about the regular cancers, lung cancer, breast cancer, prostate, all of those cancers. There's a huge reduction and a huge push by Centers for Medicare and Medicaid Services to cut those reimbursements because of the high volumes that are occurring in those areas and those treatments of cancer. With that being said, a lot of these hospital administrators are saying, okay, we're losing revenue on our treatment of cancer with our cancer centers. What are we not doing? Where can we go and find more revenue to make up for those losses? And of course, as they're looking over the fence into somebody else's backyard, what aren't they treating? They're not treating skin cancer. And skin cancer is the low hanging fruit. They can certainly attract a lot of the patients and they certainly can attract treatment for that, but they have to have the right equipment. And so they've identified, which they've identified a long time ago, that SRT is a very low cost system that would get them back into the game for treating skin cancer and to make up for the losses that they're seeing in the reimbursement for all of their other cancers. So at this meeting, we had dozens of hospitals that were pre-scheduled, coming to our booth for demonstrations on the SRT. They were physicians, they were physicists, they were administrators, they were all coming…

Okay. That's very helpful commentary. And then, just kind of recapping, it sounds like you got a lot of interest from non-dermatology sort of institution. On the dermatology side, you mentioned that a lot of these folks, there may be a reset, getting back to more of a balanced practice. What's your thoughts on some of these folks sticking kind of with the unbalanced or hoping for the unbalanced aesthetics versus traditional medical treatments that they've gone to? Do they -- are they hoping against hope that a lot of the aesthetic stuff comes back soon and maybe sitting on their hands when it comes to getting an SRT or any additional thoughts there?

Well, an interesting fact, Ben, we have a bunch of groups out there that are going through rollups that are supping -- being supported by private equity money. And they have anywhere from 100 to close to 300 centers depending on these groups. And I would say that there's about 15 that participates in that area with the private equity money, and they are closing in on representing about 20% of the total market. And how they go about evaluating to buy a practice? They buy a practice, and the highest evaluation that they get for a practice is based on their medical dermatology, not their aesthetic dermatology. On the aesthetic side, they're looking at anywhere between 0.5% and 0.75% of their value whereas on the medical dermatology side, the medical dermatology meaning there are CPT codes, CMS supports it, reimburses it, there's existing coding that pays for it. They're valued at somewhere between 1.25% and 1.75%. So if a dermatology practice is looking for an exit, the best way to get the most money out of it is to have everything leaning towards the medical dermatology space. They get less money based on the aesthetic space. And for the specific reason that it's controlled by how the markets are, how the economy is going, how the middle class is going, who's going to go to get their Botox remove their wrinkles, add this, remove that, all of those things become skeptical and reliant on inflation and the economy. So this is a perfect period for a lot of these places to get a reset. And so I think that we're seeing that happen, and I have to give credit to our team overall and the flexibility that we show and how we manage our business in being able to…

Okay. That's also very helpful commentary. Lastly, for me, and maybe this is more of my own curiosity than anything, utilization for international systems versus what you see in the U.S. I mean, do the international folks keep these things plumbing at a greater rate, or what’s the way -- is there any way that you kind of characterize how these things get used internationally versus in the U.S. and what that might do for future purchases?

Yes. Internationally everything relates to the radiation oncology world. It's very seldom that dermatologists are allowed to use this technology in their practices. There's a couple of places in the world, Germany is one of those places. There's a couple of states in Latin America, Brazil is one. But it's very difficult for us to break into, which we will break into. It just costs us a lot of money and a lot of time to get there, but we will get there. But the rest of the world is pretty much a socialized healthcare system, so everything has to go to the radiation oncology department. Acquiring technology and medical devices is not something that they want to do. So a physician who does surgery, only in the United States do they consider Mohs surgery a practice. Everywhere else in the world, it's just surgery. And so all of these surgeons that exist are walking around the hospitals, mostly 99% of them are employees of the state. They're part of the social welfare state. And so they don't have to buy equipment, they just throw the surgeon on it to cut it out. It's just the way it is. And so it's a much more difficult sale. But it also relates to the fact that if you look at a hospital like Beacon Hospital, Beacon Hospital is a private hospital. It helps pay. They have much more sophisticated people. The wealthier people who can afford separate insurance go to those hospitals and they get treated better. I know in Canada, they started now a practice where you can buy insurance if you are above the poverty line, or if you're in the middle, moderate area of the middle class, and you can get treated faster, you don't have to wait for a year-and-a-half to have a CT scan. You might get it in six weeks if you're on one of these things. So all of these things are taking place. There's always a group of people that can afford it, and it's always going to go to those people first. But that's what we're seeing in the rest of the world.

Additionally, Ben, just to add to Joe's comments, they use it in China, Vietnam, Taiwan, and other places in Asia, kind of experimentally sometimes because of the low dose of radiation. So there's all sorts of future potential for indications for uses based on some clinical studies we know of going over there.

Okay. Got it. Well, thanks for taking the questions and all the color, Joe, and Michael.

Thank you, Ben.

Thanks, Ben.

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

Thank you, Laura. Thank you once again for your time this afternoon and for your interest in Sensus Healthcare. I'd like to mention that we'll be holding virtual one-on-one meetings during the J.P. Morgan Healthcare Conference the week of January the 8. Please contact LHA if you'd like to get on the schedule. We'll speak with you again when we report fourth quarter financial results in early February. In the meantime, thanks again for joining us today. Happy Thanksgiving. Happy holiday to all.

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