10-Q 1 f10q0919_sensushealthcareinc.htm QUARTERLY REPORT

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2019

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number: 001-37714

 

Sensus Healthcare, Inc. 

(Exact name of registrant as specified in its charter)

 

Delaware   27-1647271
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
851 Broken Sound Pkwy., NW #215, Boca Raton,
Florida
  33487
(Address of principal executive office)   Zip Code)

 

(561) 922-5808

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01 per share   SRTS   Nasdaq Stock Market, LLC
Warrants to Purchase Common Stock   SRTSW   Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an “emerging growth company”. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒
      Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of October 31, 2019, 16,497,030 shares of the Registrant’s Common Stock, $0.01 par value, were outstanding.

 

 

 

 

 

 

SENSUS HEALTHCARE, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

    Page
PART I – Financial Information  
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
     
  Balance Sheets as of September 30, 2019 and December 31, 2018 1
     
  Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 2
     
  Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 3
     
  Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 4
     
  Notes to the Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
     
Item 4. Controls and Procedures 19
     
PART II – Other Information  
     
Item 1. Legal Proceedings 20
     
Item 1A. Risk Factors 20
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3. Defaults Upon Senior Securities 20
     
Item 4. Mine Safety Disclosure 20
     
Item 5. Other Information 20
     
Item 6. Exhibits 21
     
Signatures 22

 

i

 

 

INTRODUCTORY NOTE

 

Caution Concerning Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

 

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements.

 

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, as well as:

  

our ability to achieve and sustain profitability;
market acceptance of our products;
our ability to successfully commercialize our products;
our ability to compete effectively in selling our products and services, including responding to technological change and cost containment efforts of our customers;
the regulatory requirements applicable to us and our competitors, including any adverse regulatory action taken against us;
our need and ability to obtain additional financing in the future, as well as complying with the restrictions our existing revolving credit facility imposes;
our ability to expand, manage and maintain our direct sales and marketing organizations;
our actual financial results may vary significantly from forecasts and from period to period;
our ability to successfully develop new products, improve or enhance existing products or acquire complementary products, technologies, services or businesses;

our ability to obtain and maintain intellectual property of sufficient scope to adequately protect our products and our ability to avoid infringing or otherwise violating the intellectual property rights of third parties;

market risks regarding consolidation in the healthcare industry;
the willingness of healthcare providers to purchase our products if coverage, reimbursement and pricing from third party payors for procedures using our products declines;
the level and availability of government and third-party payor reimbursement for clinical procedures using our products;
our ability to effectively manage our anticipated growth, including hiring and retaining qualified personnel;
our ability to manufacture our products to meet demand;
our reliance on third party manufacturers and sole- or single-source suppliers;
our ability to reduce the per unit manufacturing cost of our products;
our ability to efficiently manage our manufacturing processes;
the regulatory and legal risks, and certain operating risks, that our international operations subject us to;
off label use of our products;
information technology risks including the risk from cyberattack;
the fact that product quality issues or product defects may harm our business;
the accuracy of our financial statements and accounting estimates, including allowances for accounts receivable and inventory obsolescence;
any product liability claims;
limited trading in our shares and the concentration of ownership of our shares;
cyberattacks and other data breaches and the adverse effect on our reputation;
new legislation, administrative rules, or executive orders, including those that impact taxes and international trade regulation;
the provisions in our certificate of incorporation, bylaws, or Delaware law that discourage takeovers or that limit certain disputes to be brought exclusively in the Delaware Court of Chancery;

the concentration of sales in a significant customer in the U.S.; and

our ability to manage the risk of the foregoing.

 

However, other factors besides those listed in Item 1A Risk Factors in our Annual Report on Form 10-K or discussed in this Form 10-Q also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

 

ii

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SENSUS HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of
September 30,
  As of 
December 31,
   2019  2018
   (unaudited)   
Assets      
Current Assets      
Cash and cash equivalents  $6,905,547   $12,484,256 
Investment in debt securities   7,982,327    2,892,190 
Accounts receivable, net   13,497,891    13,145,934 
Inventories   2,257,365    1,628,817 
Prepaid and other current assets   2,087,497    1,750,994 
Total Current Assets   32,730,627    31,902,191 
Property and Equipment, Net   1,142,100    891,029 
Patent Rights, Net   361,447    433,737 
Deposits   100,957    24,272 
Operating Lease Right-of-Use Assets, Net   1,482,304    -   
Total Assets  $35,817,435   $33,251,229 
Liabilities and Stockholders’ Equity          
Current Liabilities          
Accounts payable and accrued expenses  $4,889,793   $5,166,239 
Deferred revenue, current portion   1,168,521    722,025 
Operating lease liabilities, current portion   312,815    -   
Product warranties   163,455    136,217 
Total Current Liabilities   6,534,584    6,024,481 
Operating Lease Liabilities   1,205,193    -   
Deferred Revenue, Net of Current Portion   1,265,437    766,732 
Total Liabilities   9,005,214    6,791,213 
Commitments and Contingencies          
Stockholders’ Equity          
Preferred stock, 5,000,000 shares authorized and none issued and outstanding   -      -   
Common stock, $0.01 par value – 50,000,000 authorized; 16,551,728 issued and 16,497,030 outstanding at September 30, 2019; 16,145,915 issued and 16,112,461 outstanding at December 31, 2018   165,517    161,459 
Additional paid-in capital   43,163,910    39,957,905 
Treasury stock, 54,698 and 33,454 shares at cost, at September 30, 2019 and December 31, 2018, respectively   (252,570)   (133,816)
Accumulated deficit   (16,264,636)   (13,525,532)
Total Stockholders’ Equity   26,812,221    26,460,016 
Total Liabilities and Stockholders’ Equity  $35,817,435   $33,251,229 

  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1

 

 

SENSUS HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
                 
Revenues  $5,840,945   $6,333,996   $18,753,839   $18,346,193 
Cost of Sales   1,997,111    2,165,345    6,654,835    6,296,653 
Gross Profit   3,843,834    4,168,651    12,099,004    12,049,540 
Operating Expenses                    
Selling and marketing   2,124,146    1,971,539    6,649,754    6,146,759 
General and administrative   957,184    907,746    2,933,985    3,163,621 
Research and development   1,567,634    1,712,725    5,467,947    4,775,767 
Total Operating Expenses   4,648,964    4,592,010    15,051,686    14,086,147 
Loss From Operations   (805,130)   (423,359)   (2,952,682)   (2,036,607)
Other Income (Expense)                    
Interest income   74,736    23,010    213,578    68,620 
Interest expense       (57,759)       (156,685)
Other Income (Expense), net   74,736    (34,749)   213,578    (88,065)
Net Loss  $(730,394)  $(458,108)  $(2,739,104)  $(2,124,672)
Net Loss per share – basic and diluted  $(0.04)  $(0.03)  $(0.17)  $(0.16)
Weighted average number of shares used in computing net loss per share – basic and diluted   16,397,863    13,781,506    16,296,272    13,498,760 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2

 

 

SENSUS HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2019

 

   Common Stock   Additional
Paid-In
   Treasury Stock   Accumulated     
   Shares   Amount   Capital   Shares   Amount   Deficit   Total 
December 31, 2017   13,522,168   $135,221   $23,181,641    (33,454)  $(133,816)  $(11,502,771)  $11,680,275 
Stock based compensation   50,000    500    541,108                541,608 
Exercise of warrants   29,288    293    90,574                90,867 
Net loss                       (1,125,913)   (1,125,913)
March 31, 2018 (unaudited)   13,601,456   $136,014   $23,813,323    (33,454)  $(133,816)  $(12,628,684)  $11,186,837 
Stock based compensation           142,416                142,416 
Surrender of Shares for tax withholding on stock compensation   (19,305)   (193)   (122,026)               (122,219)
Net loss                       (540,650)   (540,650)
June 30, 2018 (unaudited)   13,582,151   $135,821   $23,833,713    (33,454)  $(133,816)  $(13,169,334)  $10,666,384 
Issuance of common stock for cash, net of offering cost   2,536,764    25,368    15,822,291                15,847,659 
Stock based compensation             139,470                   139,470 
Surrender of Shares for tax withholding on stock compensation             3,571                   3,571 
Net loss                            (458,109)   (458,109)
September 30, 2018 (unaudited)   16,118,915   $161,189   $39,799,045    (33,454)  $(133,816)  $(13,627,443)  $26,198,975 
                                    
December 31, 2018   16,145,915   $161,459   $39,957,905    (33,454)  $(133,816)  $(13,525,532)  $26,460,016 
Stock based compensation           154,535                154,535 
Exercise of warrants   400,281    4,002    2,697,895                2,701,897 
Net loss                       (2,121,018)   (2,121,018)
March 31, 2019 (unaudited)   16,546,196   $165,461   $42,810,335    (33,454)  $(133,816)  $(15,646,550)  $27,195,430 
Stock based compensation           158,145                158,145 
Surrender of Shares for tax withholding on stock compensation               (21,244)   (118,754)       (118,754)
Exercise of warrants   5,532    56    37,285                37,341 
Net income                       112,308    112,308 
June 30, 2019 (unaudited)   16,551,728   $165,517   $43,005,765    (54,698)  $(252,570)  $(15,534,242)  $27,384,470 
Stock based compensation             158,145                   158,145 
Net loss                            (730,394)   (730,394)
September 30, 2019 (unaudited)   16,551,728   $165,517   $43,163,910    (54,698)  $(252,570)  $(16,264,636)  $26,812,221 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

 

 

SENSUS HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Nine Months Ended 
September 30,
   2019  2018
Cash Flows From Operating Activities      
Net loss  $(2,739,104)  $(2,124,672)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:          
Bad debt expense (recoveries)   (7,253)   (13,280)
Depreciation and amortization   415,126    427,426 
Provision for product warranties   205,037    72,494 
Stock based compensation   470,825    823,494 
Decrease (increase) in:          
Accounts receivable   (344,703)   (5,687,126)
Inventories   (679,972)   (958,677)
Prepaid and other current assets   (180,678)   (782,664)
Increase (decrease) in:          
Accounts payable and accrued expenses   (473,252)   821,979 
Deferred revenue   945,201    617,009 
Product warranties   (177,799)   (107,300)
Total Adjustments   172,532    (4,786,645)
Net Cash Used In Operating Activities   (2,566,572)   (6,911,317)
Cash Flows from Investing Activities          
Acquisition of property and equipment   (542,484)   (762,375)
Investment in debt securities - held to maturity   (8,390,137)   -   
Investments matured   3,300,000    1,104,635 
Net Cash Provided By (Used) In Investing Activities   (5,632,621)   342,260 
Cash Flows from Financing Activities          
Offering of common stock   -      17,249,995 
Offering cost   -      (1,402,336)
Revolving credit facility, net   -      (2,214,970)
Withholding taxes on stock compensation   (118,754)   (118,648)
Exercise of warrants   2,739,238    90,867 
Net Cash Provided By Financing Activities   2,620,484    13,604,908 
Net Increase (Decrease) in Cash and Cash Equivalents   (5,578,709)   7,035,851 
Cash and Cash Equivalents – Beginning   12,484,256    10,085,468 
Cash and Cash Equivalents – Ending  $6,905,547   $17,121,319 
Supplemental Disclosure of Cash Flow Information          
Interest Paid  $-     $143,901 
Non-Cash Investing and Financing Activities          
Transfer of inventory to property and equipment  $51,423   $158,016 
Lease liabilities arising from obtaining right-of-use-assets  $1,714,814   $-   

  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4

 

 

SENSUS HEALTHCARE, INC.
NOTES TO THE FINANCIAL STATEMENTS

 

(unaudited)

 

Note 1 — Organization and Summary of Significant Accounting Policies

 

Description of the Business

 

Sensus Healthcare, Inc. (the “Company”) is a manufacturer of radiation therapy devices and has established a distribution and marketing network to sell the devices to healthcare providers globally. The Company was organized on May 7, 2010 as a limited liability corporation. On January 1, 2016, the Company completed a corporate conversion pursuant to which Sensus Healthcare, Inc. succeeded to the business of Sensus Healthcare, LLC. In February 2018, the Company opened a subsidiary in Israel. The Company operates as one segment from its corporate headquarters located in Boca Raton, Florida.

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial statements. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2018 included in the Company’s Form 10-K, filed with the SEC. The results for the nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period.

 

Principles of consolidation

 

The accompanying condensed consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary in Israel. All inter-company balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates to which it is reasonably possible that a change could occur in the near term include, inventory reserves, receivable allowances, recoverability of long-lived assets and estimation of the Company’s product warranties. Actual results could differ from those estimates.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” using the modified retrospective method for all contracts as of the date of adoption. The adoption of this standard did not result in a significant change to the Company’s historical revenue recognition policies and there were no necessary adjustments required to retained earnings upon adoption.

 

Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised goods or services, which is generally upon shipment of the goods and performance of the service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under the standard, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a customer; (ii) identifies the performance obligations within the contract, including whether they are distinct and capable of being distinct in the context of the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when, or as, the Company satisfies each performance obligation. 

 

5

 

 

The Company’s revenue consists of sales of the Company’s devices and services related to maintaining and repairing the devices. The agreement for the sale of the devices and the service contract are usually signed at the same time and in some instances a service contract is signed on a stand-alone basis. Revenue for service contracts is recognized over the service contract period on a straight-line basis. The Company determined that in practice no significant discount is given on the service contract when it is offered with the device purchase as compared to when it is sold on a stand-alone basis, by comparing the median selling price of the service contract as stand-alone and the median selling price of the service contract when sold together with the device. The service level provided is identical when the service contract is purchased stand-alone or together with the device. There is no termination provision in the service contract nor any penalties in practice for cancellation of the service contract. The service contract is not considered a performance obligation until it is paid, and it does not provide a material right for a significant discount when purchased with the device. The service portion of a sales contract or a stand-alone service contract is accounted for over the period of time of the service contract only when the customer exercises the option by paying for the service contract.

 

Disaggregated revenue for the three and nine months ended September 30, 2019 and 2018 was as follows:

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Product Revenue  $5,301,892   $5,961,245   $17,202,342   $17,001,025 
Service Revenue   539,053    372,751    1,551,497    1,345,167 
Total Revenue  $5,840,945   $6,333,996   $18,753,839   $18,346,193 

 

The Company operates in a highly regulated environment in which state regulatory approval is sometimes required prior to the customer being able to use the product, primarily in the U.S. dermatology market. In these cases, where regulatory approval is pending, revenue is deferred until such time as regulatory approval is obtained.

 

Deferred revenue as of September 30, 2019 was as follows:

 

   Service   Product   Total Deferred Revenue 
Balance, beginning of period  $1,455,757   $33,000   $1,488,757 
Revenue recognized   (1,227,846)   (33,000)   (1,260,846)
Amounts invoiced   2,206,047        2,206,047 
Balance, end of period  $2,433,958   $   $2,433,958 

 

6

 

 

The Company does not disclose information about remaining performance obligations of deposits for products that have original expected durations of one year or less. Estimated service revenue to be recognized in the future related to the performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2019 is as follows:

 

Year  Service Revenue 
2019 (October 1 – December 31, 2019)  $342,858 
2020   1,039,470 
2021   745,394 
2022   246,736 
2023   39,667 
Thereafter   19,833 
Total  $2,433,958 

 

The Company provides warranties in conjunction with the sale of its products. These warranties entitle the customer to repair, replacement, or modification of the defective product subject to the terms of the respective warranty. The Company records an estimate of future warranty claims at the time the Company recognizes revenue from the sale of the product based upon management’s estimate of the future claims rate.

 

Shipping and handling costs are expensed as incurred and are included in cost of sales.

 

Segment and Geographical Information

 

The Company’s revenue is generated primarily from customers in the United States, which represented approximately 100% and 93% for the three months ended September 30, 2019 and 2018, respectively, and approximately 91% and 95% for the nine months ended September 30, 2019 and 2018, respectively. A single customer in the U.S. accounted for approximately 83% and 78% of revenues for the three months ended September 30, 2019 and 2018, respectively, and approximately 70% and 74% for the nine months ended September 30, 2019 and 2018, respectively, and approximately 82% and 92% of the accounts receivable as of September 30, 2019 and December 31, 2018, respectively.

 

Cash and Cash Equivalents

 

The Company maintains its cash and cash equivalents with financial institutions which balances exceed the federally insured limits. Federally insured limits are $250,000 for deposits. As of September 30, 2019 and December 31, 2018, the Company had approximately $6,788,000 and $11,726,000, respectively in excess of federally insured limits.

 

For purposes of the statement of cash flows, the Company considers all highly liquid financial instruments with a maturity of three months or less when purchased to be a cash equivalent.

 

7

 

 

Investments

 

Short-term investments consist of investments which the Company expects to convert into cash within one year and long-term investments after one year. The Company classifies its investments in debt securities at the time of purchase as held-to-maturity and reevaluates such classification on a quarterly basis. Held-to-maturity investments consist of securities that the Company has the intent and ability to retain until maturity. These securities are carried at amortized cost plus accrued interest and consist of the following:

 

   Amortized
Cost
   Gross
Unrealized
Gain
   Gross
Unrealized
Loss
   Fair
Value
 
Short-Term:                
Corporate bonds  $2,892,190   $   $623   $2,891,567 
Total Short Term:   2,892,190        623    2,891,567 
                     
Total Investments December 31, 2018  $2,892,190   $   $623   $2,891,567 
                     
Short-Term:                    
Corporate bonds  $7,982,327   $6,394   $   $7,988,721 
Total Short Term:   7,982,327    6,394        7,988,721 
                     
Total Investments September 30, 2019  $7,982,327   $6,394   $   $7,988,721 

 

Accounts Receivable

 

The Company does business and extends credit based on an evaluation of each customer’s financial condition, generally without requiring collateral. Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. The allowance for doubtful accounts was $0 as of September 30, 2019 and December 31, 2018.

 

Inventories

 

Inventories consist of finished product and components and are stated at the lower of cost or net realizable value, determined using the first-in-first-out method.

 

Earnings Per Share

 

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. The diluted net income per share is computed by giving effect to all potential dilutive common share equivalents outstanding for the period, using the treasury stock method for options and warrants, as well as unvested restricted shares. In periods when the Company has incurred a net loss, options, warrants and unvested shares are considered common share equivalents but have been excluded from the calculation of diluted net loss per share as their effect is antidilutive. Shares were excluded as follows:

 

   For the Three Months Ended 
September 30,
   For the Nine Months Ended 
September 30,
 
   2019   2018   2019   2018 
Shares   17,671    46,036    8,499    13,328 
Warrants       165,003         
Stock options   10,639    53,532    32,000    32,610 

 

Advertising Costs

 

Advertising and promotion expenses are charged to expense as incurred. Advertising and promotion expense included in selling expense in the accompanying statements of operations amounted to approximately $307,000 and $195,000 for the three months ended September 30, 2019 and 2018, respectively, and $1,035,000 and $1,028,000 for the nine months ended September 30, 2019 and 2018, respectively. 

 

8

 

 

Leases

 

The Company evaluates arrangements at inception to determine if an arrangement is or contains a lease. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses an incremental borrowing rate that the Company would expect to incur for a fully collateralized loan over a similar term under similar economic conditions to determine the present value of the lease payments.

  

The lease payments used to determine the Company’s operating lease assets may include lease incentives and stated rent increases and are recognized in the Company’s operating lease assets in the Company’s condensed consolidated balance sheets. Operating lease assets are amortized to rent expense over the lease term and included in operating expenses in the condensed consolidated statements of operations.

 

Recently issued and Adopted accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 1, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption of the amendments in the update is permitted. The Company adopted this standard in the first quarter of 2019 using the modified retrospective approach. The adoption of this standard resulted in the recognition of operating lease right-of-use assets and associated lease liabilities on our balance sheet of approximately $805,000 and $805,000, respectively, as of January 1, 2019. Additional required disclosures have been included within Note 6 - Leases. Such adoption did not have a material impact on our liquidity, results of operations or our compliance with the revolving credit facility covenants.

  

Note 2 — Property and Equipment

 

   As of
September 30,
2019
   As of
December 31,
2018
   Estimated
Useful Lives
   (unaudited)        
Operations equipment  $1,293,076   $852,273   3 years
Tradeshow and demo equipment   905,623    784,244   3 years
Computer equipment   120,464    112,521   3 years
    2,319,163    1,749,038    
Less accumulated depreciation   (1,177,063)   (858,009)   
Property and Equipment, Net  $1,142,100   $891,029    

 

Depreciation expense was approximately $110,000 and $170,000, for the three months ended September 30, 2019 and 2018, respectively, and approximately $343,000 and $355,000, for the nine months ended September 30, 2019 and 2018, respectively.

 

9

 

 

Note 3 — Patent Rights 

 

   As of
September 30,
   As of
December 31,
 
   2019   2018 
   (unaudited)     
Gross carrying amount  $1,253,018   $1,253,018 
Less accumulated amortization   (891,571)   (819,281)
Patent Rights, Net  $361,447   $433,737 

 

Amortization expense was approximately $24,000 for the three months ended September 30, 2019 and 2018, and approximately $72,000 for the nine months ended September 30, 2019 and 2018. As of September 30, 2019, future remaining amortization expense is as follows:

 

Year    
2019 (October 1 – December 31, 2019)  $24,096 
2020   96,386 
2021   96,386 
2022   96,386 
2023   48,193 
Total  $361,447 

 

Note 4 — Revolving Credit Facility

 

On October 31, 2017, the Company amended its revolving credit facility to extend the maturity to October 31, 2019 and to amend the financial covenants. The availability under the amended facility equals the lesser of the $5 million commitment amount or the borrowing base plus the $2.5 million non-formula sublimit. The borrowing base consists of 80% of eligible accounts receivable, as defined in the agreement. On October 28, 2019, the Company signed an amendment to extend the maturity date of the credit facility term through January 29, 2020.

 

Interest, at Prime plus 0.75% (5.75% at September 30, 2019) and Prime plus 1.50% on non-formula borrowings (6.50% at September 30, 2019), is payable monthly, and the outstanding principal and interest are due on the maturity date. The facility is secured by all of the Company’s assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of assets of the Company and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. The Company was in compliance with its financial covenants as of September 30, 2019 and December 31, 2018. There were no borrowings outstanding under the revolving credit facility at September 30, 2019 and December 31, 2018. The Company pays commitment fees of 0.25% per annum on the average unused portion of the line of credit. 

 

Note 5 — Product Warranties

 

Changes in product warranty liability were as follows for the nine months ended September 30, 2019:

 

Balance, beginning of period  $136,217 
Warranties accrued during the period   205,037 
Payments on warranty claims   (177,799)
Balance, end of period  $163,455 

 

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Note 6 — Leases

 

Operating Lease Agreements

 

In July 2016, the Company renewed its lease with an unrelated third party for its headquarters office. The renewal was effective September 1, 2016 and expanded the office space being occupied. The lease expires in September 2022 and lease payments increase by 3% annually. In February 2017 and January 2018, the Company signed amendments to expand further the leased office space. The Company’s Israeli subsidiary entered into a two-year lease for office space starting in September 2018. The leases include an option to extend with prior notice and with terms to be negotiated. The Company currently does not have any lease with a term under 12 months.

 

On March 19, 2019, the Company’s Israeli subsidiary signed a 10-year lease for a manufacturing facility, effective April 1, 2019, for approximately 5,800 square feet. The landlord has provided a four-month grace period rent free from April to July 2019, after which the 10 year lease will begin. The monthly rental payment starts at approximately $5,300 and will be subject to periodic escalations at amounts specified in the lease plus the consumer price index. In addition, the Company is responsible for maintenance fees covering its portion of the expenses of common areas. After 2, 4, 6 and 8 years, and with 180 days prior notice, the Company has the right to terminate the lease at its sole discretion without penalty.

 

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of September 30, 2019.

 

Maturity of Operating Lease Liabilities  Amount 
2019 (October 1 – December 31, 2019)  $91,378 
2020   358,787 
2021   348,122 
2022   284,578 
2023   104,343 
Thereafter   600,574 
Total undiscounted operating leases payments  $1,787,782 
Less: Imputed interest   (269,774)
Present Value of Operating Lease Liabilities  $1,518,008 
      
Other Information     
Weighted-average remaining lease term   6.5 years 
Weighted-average discount rate   5.0%

 

An initial ROU asset of approximately $805,000 was recognized as a non-cash assets addition with the adoption of the new lease accounting standard. The ROU asset was reduced by approximately $248,000 during the nine months ended September 30, 2019. Cash paid for amounts included in the present value of operating lease liabilities was approximately $219,000 for the nine months ended September 30, 2019 and is included in operating cash flows. Operating lease cost was approximately $255,000 for the nine months ended September 30, 2019. 

 

Note 7 — Commitments and Contingencies

 

Manufacturing Agreement

 

In July 2010, the Company entered into a three-year contract manufacturing agreement with an unrelated third party for the production and manufacture of the SRT-100 (and subsequently the SRT-100 Vision and the SRT-100 Plus), in accordance with the Company’s product specifications. The agreement renews for successive one-year periods unless either party notifies the other party in writing, at least 60 days prior to the anniversary date of this agreement that it will not renew the agreement. The Company or the manufacturer has the option to terminate the agreement upon 90 days written notice.

 

Purchases from this manufacturer totaled approximately $1,521,000 and $1,302,000 for the three months ended September 30, 2019 and 2018, respectively, and approximately $5,250,000 and $3,127,000 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, and December 31, 2018 approximately $1,056,000 and $1,041,000, respectively, was due to this manufacturer, which is presented in accounts payable and accrued expenses in the accompanying balance sheets.

 

11

 

 

Legal contingencies

 

The Company is party to certain legal proceedings in the ordinary course of business. The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and related contingencies.

 

In November 2015, the Company learned that the Department of Justice (the “Department”) had commenced an investigation of the billing to Medicare by a physician who had treated patients with the Company’s SRT-100. The Company received a Civil Investigative Demand from the Department seeking documents and written responses in connection with that investigation. The Company has fully cooperated with the investigation. The Department has advised the Company that it was considering expanding the investigation to determine whether the Company had any involvement in the physician’s use of certain reimbursement codes. The Company disputes that it has engaged in any wrongdoing with respect to such reimbursement claims; among other things, the Company does not submit claims for reimbursement or provide coding or billing advice to physicians. To the Company’s knowledge, the Department has made no determination as to whether the Company engaged in any wrongdoing, or whether to pursue any legal action against the Company. Should the Department decide to pursue legal action, the Company believes it has strong and meritorious defenses and will vigorously defend itself. At this time, the Company is unable to estimate the cost associated with this matter.

 

Note 8 — Employee Benefit Plans

 

We sponsor a 401(k) defined contribution retirement plan that allows eligible employees to contribute a portion of their compensation through payroll deductions in accordance with specified plan guidelines. We make contributions to the plans that include matching a percentage of the employees’ contributions up to certain limits. Expenses related to this plan totaled approximately $28,000 and $24,000 for the three months ended September 30, 2019 and 2018, respectively, and approximately $83,000 and $72,000 for the nine months ended September 30, 2019 and 2018, respectively. 

 

Note 9 — Stockholders’ Equity

 

The Company has authorized 50,000,000 shares of common stock, of which 16,551,728 were issued and 16,497,030 outstanding at September 30, 2019; 16,145,915 shares were issued and 16,112,461 were outstanding as of December 31, 2018.

 

Warrants

 

In April 2013, the closing date of the Company’s second common offering, the Company’s placement agent received five year warrants to purchase 86,376 common shares of the Company at an exercise price of $4.55 per unit, in each case adjusted to give effect to the Company’s corporate conversion in 2016, which was equal to 110% of the offering price. During the first quarter of 2018, 73,309 of the warrants were exercised, and 13,067 warrants expired.

 

In June 2016, from the Company’s IPO, the investors received three-year warrants to purchase 2,300,000 shares of common stock at an exercise price of $6.75 per share; the warrants were exercisable through June 8, 2019. Following the first anniversary of the date of issuance, if certain conditions are met, the Company may redeem any and all of the outstanding warrants at a price equal to $0.01 per warrant. On June 4, 2019, the Company entered into an amendment to the Warrant Agreement to extend the expiration date of the investor warrants from June 8, 2019 until June 8, 2020. During the first three quarters of 2019, warrants for 405,813 shares were exercised.

 

In addition, the underwriters’ representatives for the IPO received four-year warrants to purchase up to 138,000 units, consisting of one share of common stock and one warrant to purchase one share of common stock. The warrants for the units are exercisable between June 2, 2017 and June 2, 2021 at an exercise price of $6.75 per unit. As of September 30, 2019, none of the unit warrants have been exercised.

 

12

 

 

The following table summarizes the Company’s warrant activity:

 

   Warrants 
   Number of
Warrants
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
(In Years)
 
Outstanding – December 31, 2018   2,438,000   $6.75    0.55 
Granted            
Exercised   (405,813)   6.75     
Expired            
Outstanding – September 30, 2019   2,032,187   $6.75    0.76 
Exercisable – September 30, 2019   2,032,187   $6.75    0.76 

 

The intrinsic value of the common stock warrants was approximately $0 and $1,609,000 as of September 30, 2019, and December 31, 2018, respectively.

 

2016 and 2017 Equity Incentive Plans

 

The Company has limited the aggregate number of shares of common stock to be awarded under the 2016 Equity Incentive Plan to 397,473 shares and no more than 397,473 shares of common stock in the aggregate may be granted in connection with incentive stock options. The Company has limited the aggregate number of shares of common stock to be awarded under the 2017 Equity Incentive Plan to 500,000 shares and no more than 500,000 shares of common stock in the aggregate may be granted in connection with incentive stock options. In addition, unless the Compensation Committee specifically determines otherwise, the maximum number of shares available under the 2016 and 2017 Plans and the awards granted under those plans will be subject to appropriate adjustment in the case of any stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, exchanges or other changes in capitalization affecting our common stock.

 

On June 2, 2016, 307,666 shares of restricted stock were issued to employees and were recorded at the fair value of $5.25 as per the initial offering price. In addition, on January 20, 2017, 10,000 shares of restricted stock were issued to one employee and were recorded at the fair value of $4.99 per share and on October 1, 2018, 30,000 shares of restricted stock were issued to employees and were recorded at the fair value of $8.58 per share. The restricted shares vest 25% per year over a four-year vesting period and are being recognized as expense on a straight-line basis over the vesting period of the awards. 

 

On January 25, 2018, 80,000 fully vested shares were granted to the nonemployee directors, and 229,334 stock options with a four-year vesting period were granted to certain employees. The shares were recorded at the fair value of $5.55 per share for a total of $444,000 and the stock options were valued using a Black Scholes model at $3.52 per option using the assumptions noted in the following table:

 

Expected volatility     67.8 %
Risk-free interest rate     2.5 %
Expected life     6.25 years  
Dividend yield     0.0 %

 

Expected Volatility. Expected volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate. Expected volatility is based on the historical daily volatility of the price of our common shares. The Company estimated the expected volatility of the stock options at grant date.

 

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Risk-Free Interest Rate. The risk-free interest rate is based on the implied yield on U.S. Treasury zero-coupon issues with remaining terms equivalent to the expected term of our stock-based awards.

 

Expected Term or Life. The expected term or life of stock options granted represents the expected weighted average period of time from the date of grant to the estimated date that the stock option would be fully exercised. The weighted average expected option term was determined using the “simplified method” for plain vanilla options as allowed by the accounting guidance. The “simplified method” calculates the expected term as the average of the vesting term and original contractual term of the options.

 

The stock options had an intrinsic value of approximately $103,000 and $427,000 as of September 30, 2019 and December 31, 2018, respectively.

 

The Company recognizes forfeitures as they occur rather than estimating a forfeiture rate. The reduction of stock compensation expense related to the forfeitures was approximately $0 and $39,000 for the nine months ended September 30, 2019 and 2018, respectively.

 

Unrecognized stock compensation expense was approximately $917,000 as of September 30, 2019, which will be recognized over the remaining vesting period.

 

A summary of the restricted stock activity is presented as follows:

 

   Shares   Weighted 
Average
Grant Date Fair
Value
 
Unvested balance at December 31, 2018   165,834   $5.84 
Granted        
Vested   (66,667)   5.24 
Forfeited        
Unvested balance at September 30, 2019   99,167   $6.24 

  

The following table summarizes the Company’s stock option activity:

 

   Number of
Options
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term 
(In Years)
 
Outstanding – December 31, 2018   229,334   $5.55    9.08 
Granted            
Exercised            
Expired            
Outstanding – September 30, 2019   229,334   $5.55    8.33 
Exercisable – September 30, 2019   57,334   $5.55    8.33 

 

Treasury Stock

 

The Company accounts for purchases of treasury stock under the cost method with the cost of such share purchases reflected in treasury stock in the accompanying condensed balance sheet. As of September 30, 2019 and December 31, 2018, the Company had 54,698 and 33,454 treasury shares, respectively.

 

14

 

 

Note 10 — Income Taxes

 

Book income before taxes was negative for the nine months ended September 30, 2019. Tax expense for the nine months ended September 30, 2019 and 2018 was $0.

 

There are no uncertain tax positions that would require recognition in the financial statements. If the Company incurs an income tax liability in the future, interest on any income tax liability would be reported as interest expense and penalties on any income tax liability would be reported as income taxes. The Company’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition.

 

As of September 30, 2019, the Company has U.S. federal and certain state tax returns subject to examination, beginning with those filed for the year 2015.

 

Note 11 — Subsequent Events

 

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued for potential recognition or disclosure. On October 28, 2019, the Company signed an amendment to extend the maturity date of the credit facility term through January 29, 2020.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with the information set forth within the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and with our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018 (“Annual Report”). The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, our plans, estimates, beliefs and expectations that involve risks and uncertainties, and other non-historical statements in this discussion, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our Annual Report, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

 

Overview

 

We are a medical device company that is committed to providing highly effective, non-invasive and cost-effective treatments for both oncological and non-oncological skin conditions. We use a proprietary low-energy X-ray technology known as superficial radiation therapy (“SRT”), which is a result of over a decade of dedicated research and development. We have successfully incorporated SRT into our portfolio of treatment devices: the SRT-100TM, SRT-100+TM and SRT-100 VisionTM. In February 2019, we received FDA clearance of our Sculptura™, a robotic radiation oncology system that provides targeted intraoperative triple-modulated radiotherapy and Brachytherapy utilizing our proprietary, state-of-the-art 3D Beam Sculpting™ to treat patients undergoing cancer treatment during surgery, or at the tumor site, with a single dose.

 

Components of our results of operations

 

We manage our business globally within one reportable segment, which is consistent with how our management reviews our business, prioritizes investment and resource allocation decisions and assesses operating performance.

 

Results of Operations

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
                 
Revenues  $5,840,945   $6,333,996   $18,753,839   $18,346,193 
Cost of Sales   1,997,111    2,165,345    6,654,835    6,296,653 
Gross Profit   3,843,834    4,168,651    12,099,004    12,049,540 
Operating Expenses                    
Selling and marketing   2,124,146    1,971,539    6,649,754    6,146,759 
General and administrative   957,184    907,746    2,933,985    3,163,621 
Research and development   1,567,634    1,712,725    5,467,947    4,775,767 
Total Operating Expenses   4,648,964    4,592,010    15,051,686    14,086,147 
Income (Loss) From Operations   (805,130)   (423,359)   (2,952,682)   (2,036,607)
Other Income (Expense)                    
Interest income   74,736    23,010    213,578    68,620 
Interest expense       (57,759)       (156,685)
Other Income (Expense), net   74,736    (34,749)   213,578    (88,065)
Net Loss  $(730,394)  $(458,108)  $(2,739,104)  $(2,124,672)

 

Three months ended September 30, 2019 compared to the three months ended September 30, 2018

 

Revenue. Revenue was $5,840,945 for the three months ended September 30, 2019 compared to $6,333,996 for the three months ended September 30, 2018, a decrease of $493,051, or 7.8%. The decrease in revenue was primarily attributable to fewer units sold in the current quarter.

 

Cost of sales. Cost of sales was $1,997,111 for the three months ended September 30, 2019 compared to $2,165,345 for the three months ended September 30, 2018, a decrease of $168,234, or 7.8%. The decrease in cost of sales was due to a decrease in sales.

 

Gross profit. Gross profit was $3,843,834 for the three months ended September 30, 2019 compared to $4,168,651 for the three months ended September 30, 2018, a decrease of $324,817, or 7.8%. Our overall gross profit percentage was 65.8% in the three months ended September 30, 2019 as well as the corresponding period in 2018.

 

Selling and marketing. Selling and marketing expense was $2,124,146 for the three months ended September 30, 2019 compared to $1,971,539 for the three months ended September 30, 2018, an increase of $152,607, or 7.7%. The increase was primarily attributable to an increase in headcount and spending on marketing activities for SculpturaTM.

 

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General and administrative. General and administrative expense was $957,184 for the three months ended September 30, 2019 compared to $907,746 for the three months ended September 30, 2018, an increase of $49,438, or 5.4%. The net increase in general and administrative expense was primarily due to professional services, partially offset by other decreases.

 

Research and development. Research and development expense was $1,567,634 for the three months ended September 30, 2019 compared to $1,712,725 for the three months ended September 30, 2018, an decrease of $145,091, or 8.5%. The decrease in research and development spending was primarily attributable to the SculpturaTM as production begins.

 

Other income (expense). We incur interest expense in connection with our secured credit facility with Silicon Valley Bank and interest income from our cash and investments. Interest expense decreased in 2019 with the decrease in borrowings on the line of credit. Interest income increased due to the increase of our investment in debt securities.

 

Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018

 

Revenue. Revenue was $18,753,839 for the nine months ended September 30, 2019 compared to $18,346,193 for the nine months ended September 30, 2018, an increase of $407,646, or 2.2%. The growth in revenue was primarily attributable to an increase in the average selling price of our products.

 

Cost of sales. Cost of sales was $6,654,835 for the nine months ended September 30, 2019 compared to $6,296,653 for the nine months ended September 30, 2018, an increase of $358,182, or 5.7%. The increase in cost of sales was due to the increase in sales.

 

Gross profit. Gross profit was $12,099,004 for the nine months ended September 30, 2019 compared to $12,049,540 for the nine months ended September 30, 2018, an increase of $49,464, or 0.4%. Our overall gross profit percentage was 64.5% in the nine months ended September 30, 2019 compared to 65.7% in the corresponding period in 2018. The decrease in gross margin percentage was primarily due to changes in the mix of products sold.

 

Selling and marketing. Selling and marketing expense was $6,649,754 for the nine months ended September 30, 2019 compared to $6,146,759 for the nine months ended September 30, 2018, an increase of $502,995, or 8.2%. The increase was primarily attributable to the increase in headcount.

 

General and administrative. General and administrative expense was $2,933,985 for the nine months ended September 30, 2019 compared to $3,163,621 for the nine months ended September 30, 2018, a decrease of $229,636, or 7.3%. The net decrease was due primarily to a non-recurring stock compensation expense of $444,000 in the first quarter of 2018, partially offset by an increase in professional fees.

 

Research and development. Research and development expense was $5,467,947 for the nine months ended September 30, 2019 compared to $4,775,767 for the nine months ended September 30, 2018, an increase of $692,180, or 14.5%. The increase in research and development spending was primarily attributable to the FDA clearance of SculpturaTM as well as our ramp to production.

 

Other income (expense). We incur interest expense in connection with our secured credit facility with Silicon Valley Bank and interest income from our cash and investments. Interest expense decreased in 2019 with the decrease in borrowings on the line of credit. Interest income increased due to an increase in investment in debt securities.

 

Financial Condition

 

Our cash, cash equivalent and investment balance decreased to $14.9 million at September 30, 2019 from $15.4 million at December 31, 2018, primarily due to cash used in operating activities of $2.6 million offset by proceeds from exercised warrants for $2.7 million during the nine months ended in September 30, 2019.

 

There were no borrowings under the revolving line of credit at September 30, 2019 or December 31, 2018.

 

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Liquidity and Capital Resources

 

Overview

 

Our liquidity position and capital requirements may be impacted by a number of factors, including the following:

 

  our ability to generate and increase revenue;
  fluctuations in gross margins, operating expenses and net results; and
  fluctuations in working capital.

 

Our primary short-term capital needs, which are subject to change, include expenditures related to:

 

  expansion of our sales, marketing and distribution activities; and
  expansion of our research and development activities.

 

We regularly evaluate our cash requirements for current operations, commitments, capital requirements and business development transactions, and we may elect to raise additional funds for these purposes in the future.

 

Cash flows

 

The following table provides a summary of our cash flows for the periods indicated:

 

   For the Nine Months Ended
September 30,
 
   (unaudited) 
   2019   2018 
Net Cash Provided by (Used In):        
Operating Activities  $(2,566,572)  $(6,911,317)
Investing Activities   (5,632,621)   342,260 
Financing Activities   2,620,484    13,604,908 
Total  $(5,578,709)  $7,035,851 

 

Cash flows from operating activities

 

Net cash used in operating activities was $2,566,572 for the nine months ended September 30, 2019, consisting of a net loss of $2,739,104 partially offset by an increase in net operating assets of $911,203 and by non-cash charges of $1,083,734. The increase in net operating assets was primarily due to an increase in inventory, accounts receivables and prepaids and other current assets, offset by a decrease in accounts payables and accrued expenses and warranties net of an increase in deferred revenue. Non-cash charges consisted of stock compensation expense, depreciation and amortizations and warranty provision. Net cash used in operating activities was $6,911,317 for the nine months ended September 30, 2018, primarily due to the operating loss and the increase in accounts receivable.

 

Cash flows from investing activities

 

Net cash used by investing activities was $5,632,621 mostly due to net investments in debt securities held-to-maturity for $5,090,137 during the nine months ended September 30, 2019. Net cash provided by investing activities was $342,260 for the nine months ended September 30, 2018 due to the maturity of debt securities held-to-maturity of $1,104,635, partially offset by $762,375 for acquisition of property and equipment.

 

Cash flows from financing activities

 

Net cash provided by financing activities was $2,620,484 during the nine months ended September 30, 2019 mostly from the exercise of 405,813 investor warrants. Net cash provided by financing activities was $13,604,908 during the nine months ended September 30, 2018, mainly from the net proceeds of $15,847,659 from offering of common stock offset by $2,214,970 repayment of our revolving credit facility.

 

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Capital resources

 

On November 6, 2017, we filed a universal shelf registration statement to offer up to $20 million of our securities. In September 2018, we issued and sold 2,536,764 shares of our common stock in a follow-on public offering at a price of $6.80 per share, for aggregate offering proceeds of $17.25 million. We were previously limited in the amount of securities we were able to offer under a shelf registration statement pursuant to the SEC’s “baby shelf” rules. These rules previously restricted our issuance of securities under a shelf registration statement to one-third of our public float within a 12-month period. Because our public float exceeded $75 million within 60 days prior to the filing of our 2018 annual report on Form 10-K, we are not presently subject to this limitation with regard to our existing shelf registration statement. However, we must re-determine the applicability of the limitation at the time of filing another shelf registration statement and at the time of filing an annual report on Form 10-K (with respect to any shelf registration on file with the SEC at the time of filing). Depending on our public float in the future, we may again become subject to this limitation.

 

Indebtedness

 

Please see Note 4 to the financial statements.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and do not currently have, any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S., or GAAP. We have identified certain accounting policies as critical to understanding our financial condition and results of our operations. For a detailed discussion on the application of these and other accounting policies, see the notes to our financial statements and our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, for the year ended December 31, 2018.

 

JOBS Act

 

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, reduced disclosure obligations relating to the presentation of financial statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We have availed ourselves of the reduced reporting obligations in this Quarterly Report on Form 10-Q, and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

 

In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Control and Procedures

 

As of September 30, 2019, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of September 30, 2019, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

There have been no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is party to certain legal proceedings in the ordinary course of business. The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and related contingencies. See Note 7, Commitments and Contingencies.

 

Item 1A. Risk Factors

 

An investment in our securities involves risks. You should carefully consider the risk factors as previously disclosed in our Form 10-K filed with the SEC for the year ended December 31, 2018, as updated in our subsequent quarterly reports, together with the other information in this Quarterly Report on Form 10-Q, including the financial statements and related notes, before deciding whether to purchase, hold, or sell our securities. The occurrence of any of these risks could harm our business, financial condition, or results of operations or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. There have been no material changes to the risk factors as previously disclosed in our Form 10-K filed with the SEC for the year ended December 31, 2018, the discussion of which is specifically incorporated by reference into this Quarterly Report on Form 10-Q.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Sales of Unregistered Securities

 

There were no unregistered sales of securities during the three months ended September 30, 2019.

 

(b) Use of Proceeds from the Sale of Registered Securities

 

None.

 

(c) Purchases of Equity Securities by the Registrant and Affiliated Purchases.

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit No.   Description
10.1   Fourth Amendment to Second Amended and Restated Loan and Security Agreement, dated October 28, 2019. 
     
31.1   Certification of Joseph C. Sardano, Chairman and Chief Executive Officer of Sensus Healthcare, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
     
31.2   Certification of Arthur Levine, Chief Financial Officer of Sensus Healthcare, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
     
32.1   Certification of Joseph C. Sardano, Chairman and Chief Executive Officer of Sensus Healthcare, Inc., Pursuant to 18 U.S.C. Section 1350.
     
32.2   Certification of Arthur Levine, Chief Financial Officer of Sensus Healthcare, Inc., Pursuant to 18 U.S.C. Section 1350.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SENSUS HEALTHCARE, INC.
   
Date: November 8, 2019 /s/ Joseph C. Sardano
  Joseph C. Sardano
  Chief Executive Officer
  (Principal Executive Officer)
   
Date: November 8, 2019 /s/ Arthur Levine
  Arthur Levine
  Chief Financial Officer
  (Principal Financial Officer and
Principal Accounting Officer)

 

 

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