UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022
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 | The NASDAQ Stock Market, LLC | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d)15(d) of the Act. Yes ☐ No ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company,” and “smaller reporting“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 ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 numberregistrant has filed a report on and attestation to its management’s assessment of shares outstandingthe effectiveness of eachits internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s classesexecutive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2022, the last business day of the registrant’s most recently completed second quarter, was $113,764,116, based on the closing price of $7.68 per share of common stock ason the Nasdaq Capital Market on that date. For this purpose, all outstanding shares of common stock have been considered held by non-affiliates, other than the shares beneficially owned by directors and officers of the latest practicable date.registrant.
As of March 1, 2023 there were 16,396,766 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the Annual Meeting of Stockholders to be held on June 8, 2018,2, 2023, are incorporated by reference in Part III.
SENSUS HEALTHCARE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements
This Annual Report on Form 10-K containsreport includes statements that are, or may be deemed, “forward-looking statements” withinstatements.” In some cases, these statements can be identified by the meaninguse of the Private Securities Litigation Reform Actforward-looking terminology such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately,” “potential” or negative or other variations of 1995. Thesethose terms or comparable terminology, although not all forward-looking statements include, among others,contain these words.
Forward-looking statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significantinvolve risks and uncertainties because they relate to events, developments, and are subjectcircumstances relating to change basedSensus Healthcare, Inc., our industry, and/or general economic or other conditions that may or may not occur in the future or may occur 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 intendedlonger or shorter timelines or to identifya greater or lesser degree than anticipated. Although we believe that we have a reasonable basis for each forward-looking statements.
Allstatement contained in this report, forward-looking statements by their nature, are subject to risksnot guarantees of future performance, and uncertainties. Ourour actual future results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those set forththe forward looking statements contained in this report, as a result of the following factors, among others: our ability to maintain profitability; our ability to obtain and maintain the intellectual property needed to adequately protect our products, and our ability to avoid infringing or otherwise violating the intellectual property rights of third parties; the level and availability of government and/or third party payor reimbursement for clinical procedures using our products, and the willingness of healthcare providers to purchase our products if the level of reimbursement declines; the regulatory requirements applicable to us and our competitors; our ability to efficiently manage our manufacturing processes and costs; the risks arising from doing business in China and other foreign countries; legislation, regulation, or other governmental action, that affects our products, taxes, international trade regulation, or other aspects of our business; concentration of our customers in the U.S. and China, including the concentration of sales to one particular customer in the U.S.; the availability and terms of financing we may need to finance operations and growth; and other risks described from time to time in our forward-looking statements.filings with the Securities and Exchange Commission.
At the present time, we do not believe that the Russian invasion of Ukraine and global geopolitical uncertainty will have any particular impact on our business, but we continue to monitor developments and will address them in future disclosures, if applicable.
In addition, to those risks discussed in this Annual Report under Item 1A Risk Factors, factors that could cause our actual results to differ materially from those ineven if future events, developments, and circumstances are consistent with the forward-looking statements include, without limitation:
However, other factors besides those listed in Item 1A Risk Factors or discussedcontained in this Form 10-K also could adversely affect ourreport, they may not be predictive of results and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.developments in future periods. Any forward-looking statements made by us or on our behalfthat we make in this report speak only as of the date they are made. We do notof such statement, and we undertake no obligation to update any forward-looking statement,such statements to reflect events or circumstances after the date of this report, except as may be required by applicable law.
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PART I.
Item 1. BUSINESS
Overview
Sensus Healthcare, LLC, a Delaware limited liability company (the “Company”), was formed on May 7, 2010, to design, manufacture and market proprietary medical devices specializing in the treatment of non-melanoma skin cancers and other skin conditions, such as keloids, with superficial radiation therapy. In June 2010, Sensus Healthcare, LLC, a Florida limited liability company (“Sensus (FL)”), acquired all the assets associated with our primary product, the SRT-100, from Topex, Inc. for $1.3 million. Following this acquisition, we relaunched the SRT-100 under the Sensus Healthcare brand. In December 2011, we merged with Sensus (FL), with the Delaware limited liability company surviving the merger for the purpose of changing our domicile from Florida to Delaware. On January 1, 2016, Sensus Healthcare, LLC converted into a Delaware corporation pursuant to a statutory conversion and we changed our name to Sensus Healthcare, Inc. As(together, with its subsidiary, unless the context otherwise indicates, “Sensus,” “we,” “us,” “our,” or the “Company”) is a resultmedical device company committed to providing highly effective, non-invasive, and cost-effective treatments for both oncological and non-oncological skin conditions. The Company uses a proprietary low-energy X-ray technology known as superficial radiation therapy (“SRT”), which is based on over a decade of dedicated research and development, and has successfully incorporated SRT into a portfolio of treatment devices: the SRT-100TM, SRT-100+TM and SRT-100 VisionTM. To date, SRT technology has been used to effectively and safely treat oncological and non-oncological skin conditions in hundreds of thousands of patients around the world.
On February 25, 2022, the Company sold the assets comprising its SculpturaTM product for $15 million in cash. Additional information regarding this transaction can be found in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2022.
Our business was organized in 2010 and the Company, incorporated in Delaware, completed its initial public offering in 2016. The Company operates as one segment from its corporate headquarters located in Boca Raton, Florida. For further information see Note 1, Description of the corporate conversion, all holdersBusiness, in the notes to the consolidated financial statements in Part II, Item 8.
Our Products and Services
SRT is the Company’s core technology. As of December 31, 2022, the Company had installed 686 units of Sensus Healthcare, LLC became holders of common stock of Sensus Healthcare, Inc. Holders of warrants and options to purchase units of Sensus Healthcare, LLC became holders of warrants and options to purchase common stock of Sensus Healthcare, Inc., respectively.in 18 countries, primarily in the United States.
SRT-100
The SRT-100 is a photon x-ray low energy superficial radiotherapySRT system that provides patients an alternative to surgery for treating non-melanoma skin cancers, including basal cell and squamous cell skin cancers and other skin conditions such as keloids. The SRT-100 is especially effective in treating primary lesions that would otherwise be difficult to treat or require extensive surgery involving sensitive areas of the head and neck regions, such as the fold in the nose, eyelids, lips, corner of the mouth, and the lining of the ear, that would otherwise lead to a less than desirable cosmetic outcome. Superficial radiation therapySRT treatment procedures do not require the use of anesthetics and eliminateseliminate the need for skin grafting. We believeThe Company believes that the SRT-100 provides healthcare providers and patients with a safe, virtually painless, and substantially non-scarring treatment option for non-melanoma skin cancer and other skin conditions, such as keloids. It allows dermatologists to retain non-melanoma skin cancer patients, rather than referring them to specialists, while offering radiation oncologists an alternative to costly linear accelerator–based treatments with a process that is less invasive, more time-efficient, and improves practice economics. Our revenueRevenue is primarily derived from sales of our SRT-100 product line.
Initial Public Offering
On June 8, 2016, we completed an IPO of units consisting of one share of common stock and one warrant to purchase one share of common stock. In connection with the IPO, we issued 2,300,000 units of our common stock at a price of $5.50 per unit, including 300,000 units pursuant to the underwriters’ full exercise of their over-allotment option for an aggregate offering price of $12.65 million. The offer and sale of all of the securities in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1, as amended (File No. 333-209451), which was declared effective by the SEC on June 2, 2016. The registration statement registered an aggregate of 2,300,000 units, including 300,000 units to cover the over-allotment option. The offering commenced on June 2, 2016 and did not terminate before all of the units in the IPO that were registered in the registration statement were sold. Northland Securities, Inc. and Neidiger, Tucker, Bruner, Inc. acted as joint book-running managers for the offering.
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Our Products and Services
SRT-100
We offer the SRT-100 product family, which we anticipate will be complemented by additional models and options in the future. Our technology is based on several key needs and requirements, including the need for a dedicated and cost-effective device for the treatment of skin cancer, keloids, and other skin conditions. The SRT-100 provides the following clinical and functional advantages:
Easy touch automatic set-up procedure, including automatic x-ray tube warm-up procedures; |
● | Specially designed control console for medical physicists and service technicians, |
● | Advanced patient record management with integrated enterprise workflow management; |
● | Compact mobile design with a small 30” x 30” footprint and unique scissor x-ray tube arm movements, providing a large range of motion for patient access and treatment; and |
● | High reliability and MTBF |
SRT-100 Vision
The SRT-100 Vision provides customers with additional options compared to the SRT-100 base model. These additional options allow for dedicated treatment planning and full treatment progression documentation in a patient’s record. The SRT-100 Vision provides the user with a unique superficial radiation therapy-tailoredSRT-tailored treatment planning application that integrates thean embedded high frequency ultrasound imaging module, volumetric tumor analysis, beam margins planning, and comprehensive dosimetry parameters. This allows the user to precisely and more accurately plan and prescribe the patient-specific treatment course to maximize patient outcomes and workflow efficiency. The SRT-100 Vision also offers a comprehensive control console and workflow management that provides full record and treatment tracing, operator-level access and functional control, audio-visual patient and treated lesion monitoring, and advanced dosimetry setting and tracing.
SRT-100+
The SRT-100+ offers all the same features as the SRT-100, with the addition of:
● | An expanded energy range for customized, more precise treatment | |
● | Remote diagnostics, including operation tracking | |
● | New X-ray tube with extended functionality and performance | |
● | Advanced console and enhanced system mobility to optimize clinical practice |
Sentinel service program
We offerThe Company offers the Sentinel service program, which provides our customers comprehensive protection for their SRT-100 and SRT-100 Vision systems. The Sentinel service program covers all parts and labor for the period of the contract and one annual preventive maintenance session that includes cooling system maintenance, high voltagehigh-voltage loop maintenance, filters and system cleaning, and system touch-ups, should theythese be required during the preventative maintenance session.
WeSensus also provideprovides, through the program, turnkey pre-and post-sale services that include the following:
Providing a pre-install kit for the contractors to prepare the treatment room; |
● | Room retrofit and shielding; |
● | System shipping coordination and installation; |
● | System commissioning by a medical physicist (through a national physics network); |
● | System registration with the state and daily workflow documentation preparation; |
● | Clinical applications training with the customer’s |
● | Treating the first scheduled patients with our customers (onsite applications training). |
Other products
Transdermal Infusion (TDI)
TransDermal Infusion® is a Class II FDA cleared biophysical alternative used to infuse high weight molecule modalities into the dermis (skin) for medical and aesthetic purposes without the use of needles. The Company began distributing this product, which is manufactured in Italy, in 2022. The Company distributed 23 systems during 2022.
Lasers
Sensus also distributes laser devices, for the aesthetic dermatology market, which includes applications for hair removal, vascular lesions, acne treatment, epidermal pigment removal (including removal of spots, freckles, and tattoos), skin toning, and skin rejuvenation.
Consumables
We sellThe Company sells disposable lead shielding replacements, disposable radiation safety items, such as aprons and eye shields, ultrasound probe film, and disposable applicator tips, which are used to treat various sized lesions and different areas of the body.
Additionally, TDI requires the purchase of disposable tips.
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Competition
The medical device industry is highly competitive and subject to rapid technological change and is significantly affected by new product introductions and market activities of other participants. Our currentlyCurrent marketed products, and any future products we commercialize,that the Company commercializes, will compete against healthcare providers who use traditional surgicalother methods of treatment options, such as Mohs surgery, as well as medical device companies that offer other treatment options for the conditions our products are designedsame disease or condition.
In order to treat. As of December 31, 2017, we had three primary medical device company competitors:
Xstrahl Medical primarily focuses on clinical and research x-ray therapy devices and solutions. We believe most of Xstrahl Medical’s installed base is comprised of higher energy devices located in Europe.
Both Xoft and Elekta offer products that are considered Electronic Brachytherapy (“eBx”) devices. Both eBx products have limited capabilities as to size of lesions that can be treated as well as the energy levels that can be used, and require expensive consumables.
Many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do and maygrow its business, Sensus must be able to devote greater resources to the development, promotion, sale and supportcompete effectively for market acceptance of theirits products. Our competitors may also have more extensive customer bases and broader customer relationships than we do, including relationships with our potential customers. In addition, many of these companies and healthcare providers have longer operating histories and greater brand recognition than we do. Because of the size of theKey competitive factors include improved outcomes for medical conditions, acceptance by doctors treating non-melanoma skin cancer and keloid treatmentkeloids, acceptance by the patient community, ease of use and reliability, product price and qualification for reimbursement, technical leadership and superiority, effective marketing and distribution, speed to market, and the high growth profilequality of the segments in which we compete, other companies may dedicate significant resources to developing competing products. Additionally, we may also face competition from smaller companies that have developed or are developing similar technologies for our addressable markets. We believe that the principal competitive factors in our markets include:client service.
We may be unable to compete effectively against our competitors in regard to any one or all of these factors. Our ability to compete effectively will depend on the acceptance of our products by dermatologists, radiation oncologists, hospitals and patients, and our ability to achieve better clinical outcomes than products developed by our existing or future competitors. In addition, certain of our competitors could use their superior financial resources to develop products that have features or clinical outcomes similar or superior to our products, which would harm our ability to successfully compete.
Sales and Marketing
WeThe Company’s focus is mainly on two primary markets, private dermatology practices and radiation oncologists in both private and hospital settings. WeThe Company currently employemploys a multi-tier sales strategy to optimize geographic coverage and focus on what we perceive to be ourits key markets. This multi-tier sales model uses a direct sales force (currently 21 people) in the U.S., as well as international dealers and distributors.
Our dermatology market sales are directed by Stephen Cohen, our Executive Vice President, Sales. Our direct sales force for radiation oncology is led by Richard Golin, our Executive Vice President of Sales, Oncology. We plan Sensus plans to continue selling and marketing ourthe Company’s products to both the dermatology and radiation oncology markets concurrently.
Dermatology Market
Private dermatology practices in the U.S. represent the point of entry for most non-melanoma skin cancer patients. We believe the SRT-100 offersThe Company believes its SRT products offer dermatologists a competitive advantage by allowing them to retain patients for the treatment of non-melanoma skin cancer, rather than referringhaving to refer them out to specialists for Mohs surgery or other radiation procedures.professionals. In addition to non-melanoma skin cancers, our FDA-approved indications include, among others, keloids, Kaposi’s Sarcoma, Actinic Keratosis, Metatypic Carcinoma, Cutaneous Appendage Carcinoma and other malignant skin tumors. Our SRT-100 is currently beingthe Company has had an FDA clearance to treat keloid scars since 2014. The Company’s SRT has been used by over 70100 U.S. dermatology practices in the treatment of keloids. Since our clearance in China in July 2017, it is also being used to treat Keloidskeloids in China. We are continuing to drive our research and development to expand our indications into new areas of treatment, including psoriasis.
Radiation Oncology Market
For licensed radiation oncologists in the U.S., we believe the SRT-100 offersCompany believes its SRT products offer a simpler, faster method of treatment with a better overall patient experience. Our SRT-100 systemSRT offers oncologists the ability to free up more expensive radiation equipment, such as linear accelerators, for more complex procedures while providing patients with effective, non-invasive treatment options for non-melanoma skin cancer. We are in the process of obtaining FDA clearance for a new device that will treat other cancers.
Other Markets
As of December 31, 2017, we also believeSensus believes that boththe plastic surgery and general surgerylaser aesthetic markets present growth opportunities for our product offerings.opportunities. With FDA clearance to treat keloids through superficial radiation therapy,SRT, plastic surgeons are recognizing the opportunity to be able to provide an effective treatment solution for this benign tumor. Additionally, we believethe Company believes that plastic surgeons view the non-melanoma skin cancer market as a growth opportunity that can supplement their existing services. We believe there is an opportunity to also provide superficial radiation therapy in a prophylactic manner for various surgical procedures to reduce the formation of keloids. Within the new healthcare reform environment, superficial radiation therapy can provide hospitals and surgery centers with a direct measurable impact on clinical outcomes for certain procedures, including joint replacement procedures, bypass surgery, and OBGYN/C-section procedures, among others.
Global Focus
As of December 31, 2017, we had an installed base of 334 units in 17 countries. Our customer list includes leading cancer centers, dermatology practices, hospitals and plastic surgery clinics, which we believe further validates our targeted marketing approach led by our direct sales teams and our global distribution partners.
Manufacturing and Supply
WeThe Company currently use auses third partyparties located in the U.S. to manufacture our products. In July 2010, wethe Company entered into a manufacturing agreement with RbM Services, LLC (“RbM”) pursuant to which RbM agreed to manufacture our SRT-100 products. We payUnder this agreement, the Company pays a fixed price per unit, under the terms of this agreement, subject to annual adjustments due to changes in the cost of materials. The initial term of this agreement was three years withrenews for successive one-year renewals thereafter. We continueperiods unless either party notifies the other party in writing, at least 60 days prior to do business with RbM, although wethe anniversary date of the agreement, that it will not renew the agreement. The Company or RbMmanufacturer may terminate the agreement upon 90 days’ prior written notice or upon at least 60 days’ notice prior to the end of each additional one-year renewal period. We believe our third party manufacturer meets FDA, International Organization for Standardization, or ISO, and other quality standards. We maintainnotice.
The Company maintains internal policies, procedures, and supplier management processes designed to ensure that our third party manufacturer is meetingRbM meets applicable quality standards.standards, including FDA and International Organization for Standardization, or ISO, requirements. To date, we haveSensus has not experienced any difficulty in locating and obtaining the materials necessary to meet the demand for our products, and we believebelieves manufacturing capacity is sufficient to meet global market demand for our products for the foreseeable future.
We believeThe Company believes this third partythird-party manufacturing relationship initially allowedallows us to work with a supplier that has well-developed specific competencies while minimizing our capital investment, controlling costs, and shortening cycle times, all of which we believehas allowed us to compete effectively with our competitors. However, we are exploring the possibility of addingSensus also works with other third party manufacturers or bringing certain manufacturing functions in-house, whichparties that it believes could include the acquisition of equipment and other fixed assets or the acquisition or lease of a manufacturing facility.be relied upon if we needed to change suppliers.
We haveThe Company has a single preferred supplier for the x-ray tubes and other major components used in ourits products. We believe our preferredThe Company believes this supplier has a superior product;products; however, we also believe that the products of alternate suppliers would be adequate for our products. Although we do not have a contractual relationship with our preferred supplier we doSensus’s products and therefore the Company does not anticipate any material disruptions to ourthe supply of x-ray tubes. We believe that adequate supplies of x-ray tubes are readily accessible from alternatemajor components if there were a change in suppliers.
Intellectual Property
WeThe Company actively seekseeks to protect the intellectual property that we believe is important to our business, including seeking and maintaining patents that cover ourSensus’s products. WeThe Company also relyrelies on trademarks to enhance, build, and maintain the integrity of ourthe Sensus brand.
We own twoThe Company possesses seven issued U.S. and Global patents. OurThe patents pertainrelate to technology inthat is pertinent to the specialized field of superficial radiotherapy treatment. Company.
The following patents were issued between August 2007 and September 2008 and were assigned to us when we acquired the technology from Topex: 2008:
U.S. Patent No. 7,372,940: Radiation therapy system with risk mitigation (expires September 30, 2025) |
● | U.S. Patent No. 7,263,170: Radiation therapy system featuring rotatable filter assembly (expires September 30, 2025) |
The following patents were issued to us in 2017:2018:
Russia Patent No. 26333322: Hybrid Ultrasound-Guided Superficial Radiotherapy System and Method | ||
● | China Patent No. ZL201380013491.7: Hybrid Ultrasound-Guided Superficial Radiotherapy System and Method |
A total ofThe following patents were issued to Sensus in 2020:
● | U.S. Patent No. 10,596,392: Dermatology Radiotherapy System with hybrid Imager (expires July 28, 2038) | |
● | China Patent No. ZL201710929838.2 Hybrid Ultrasound-Guided Superficial Radiotherapy System and Method (expires August 14, 2038) |
One patent applications areapplication was pending and additional patent applications are in process.
As ofat December 31, 2017, we2022.
The Company also owned threeowns six U.S. trademark registrations. We currently have other trademark applications that are pending.registrations (expiring from 2025 through 2031).
WeThe Company also relyrelies on trade secrets and other unpatented proprietary rights to develop and maintain oura competitive position. We seekThe Company seeks to protect our unpatented proprietary rights through a variety of methods, including confidentiality agreements with employees, consultants and others who may have access to ourthis proprietary information. We also require ourThe Company requires all employees to execute invention assignment agreements with respect to inventions arising from their employment.
NoThe Company can provide no assurance that any patents or trademarks may everwill be issued or registered as a result of our pending or future applications for such intellectual property. Even if any such patents or trademarks are ultimately issued or registered, they, or any of ourthe Company’s other intellectual property, may not provide us with any meaningful protection or competitive advantage. Our intellectualIntellectual property could be challenged, invalidated, circumvented, infringed upon, or misappropriated. In addition, third parties have claimed, and in the future may claim, that we, ourthe Company or customers, licensees, or other parties indemnified by usthe Company are infringing upon their intellectual property rights.
Government Regulation
OurSensus’s business is subject to extensive federal, state, local, and foreign laws and regulations, including those relating to the protection of the environment, health, and safety. Some of the pertinent laws and regulations have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and regulations and their interpretations are subject to change, orand new laws may be enacted. Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. We believeThe Company believes that we have structured ourits business operations and relationships with our customers and suppliers are structured to comply with all applicable legal requirements. However, it is possible that governmental entities or other third parties could interpret these laws and regulations differently and assert otherwise. We discussDiscussed below theare statutes and regulations that are most relevant to ourthe Company’s business. For the yearstwo-year period ended December 31, 2017 and 2016,2022, we incurred approximately $866,000 and $697,000, respectively,$1.3 million in expenses related to regulatory compliance and quality standards.
U.S. Food and Drug Administration (FDA)FDA Regulation of Medical Devices
The Federal Food, Drug and Cosmetic Act or FDCA,(“FDCA”) and FDA regulations establish a comprehensive system for the regulation of medical devices intended for human use. OurSensus’s medical device products include medical devices that are subject to these regulations, as well as other federal, state, and local laws and regulations. The FDA is also responsible for the overall enforcement of quality, regulatory, and statutory requirements governing medical devices. Our regulated medical devices include our SRT-100 product line.
FDA classifies medical devices into one of three classes — Class I, Class II, or Class III — depending on their level of risk and the types of controls that are necessary to assure device safety and effectiveness. The class assignment determines the type of premarketing submission or application, if any, that will be required before marketing in the U.S. OurThe Company’s medical devices are Class II devices under the FDA’s classification system. Class II devices are deemed to present a moderate risk and are devices for which general controls alone are not sufficient to provide a reasonable assurance of safety and effectiveness. Medical devices in Class II are subject to both general controls and “special controls” — e.g., special labeling, compliance with industry standards, and post market surveillance. Unless exempted, Class II devices typically require FDA clearance before marketing, through the premarket notification (“510(k)”) process, in accordance with 21 CFR, Part 807 requirements.
Unless it is exempt from premarket review requirements, a medical device must receive marketing authorization from the FDA prior to being commercially distributed in the U.S. TheFor Class II devices, 510(k) is the most common pathways for obtaining marketingpathway to obtain market authorization are 510(k) clearance and PMA. With the enactment of the Food and Drug Administration Safety and Innovation Act, or the FDASIA, the availability of a de novo pathway was facilitated for certain low- to moderate-risk devices that do not qualify for the 510(k) pathway due to the absence of a predicate device.
510(k) pathway
As of December 31, 2017, all of our products were subject to the 510(k) requirement or are exempt from the 510(k) requirement. The 510(k) review process compares a new device to an existing legally marketed device. Through the 510(k) process, the FDA determines whether the new medical device is “substantially equivalent” to the existing legally marketed device (i.e., predicate device) that is not subject to PMA requirements. “Substantial equivalence” means that the proposed new device: (a) has the same intended use as the predicate device; (b) has the same or similar technological characteristics as the predicate device; (c) has supporting information submitted in the 510(k) demonstrates that the proposed device is as safe and effective as the predicate device; and (d) does not raise different questions of safety and effectiveness than the predicate device.US.
To obtain 510(k) clearance, we must submit a 510(k) application containing sufficient information and data to demonstrate that our proposed device is substantially equivalent to a legally marketed predicate device. This data generally includes non-clinical performance testing (e.g., software validation, bench testing electrical safety testing), but may also include clinical data. Typically, it takes approximately four months for the FDA to complete its review of a 510(k) submission; however, it can take significantly longer and clearance is never assured. During its review of a 510(k), the FDA may request additional information, including clinical data, which may significantly prolong the review process. After completing its review of a 510(k), the FDA may issue an order, in the form of a letter, that finds the device to be either (1) substantially equivalent to the predicate device and states that the device can be marketed in the U.S., or (2) not substantially equivalent to the predicate device and states that device cannot be marketed in the U.S. Depending upon the reasons that the FDA finds the new device to not be substantially equivalent to the predicate device, the device may need to be approved through the PMA pathway (discussed below) prior to commercialization. A new medical device for which there is no substantially equivalent device is automatically designated a Class III device. Depending on the nature of the new device, the manufacturer may request the FDA to make a risk-based determination of the new device and to reclassify it as a Class I or Class II device. This process is referred to as the de novo process. If the FDA agrees, the new device will be reassigned to the appropriate other class. If the FDA does not agree, the manufacturer must submit a PMA prior to commercialization.
We have previously received FDA 510(k) clearances for our SRT-100, SRT-100 Vision, and SRT-100 Vision.
After a device receives 510(k) clearance, any modification that could significantly affect the safety or effectiveness of the device, or that would constitute a major change in its intended use, including significant modifications to any of ourSRT-100+ (Class II) products requires a new 510(k) clearance. The FDA relies on each manufacturer to make and document this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. We have made and plan to continue to make minor product enhancements that we believe do not require new 510(k) clearances. However, we expect to confer with the FDA on planned changes that may require a special, abbreviated or traditional 510(k) submission. If the FDA disagrees with our determination regarding whether a new 510(k) clearance was required for these modifications, we may need to cease marketing or recall the modified device. The FDA may also subject us to other enforcement actions, including, but not limited to, issuing a warning letter or untitled letter to us, seizing our products, imposing civil penalties, or initiating criminal prosecution.
Premarket approval pathway
As of December 31, 2017, we did not market any devices that were subject to PMA requirements. Unlikethrough the 510(k) pathway the PMA approval process requires an independent demonstration of the safety and effectiveness of a device before the device can be commercialized. PMA is the most stringent type of device marketing application required by FDA. PMA approval is based on a determination by FDA that the PMA contains sufficient valid scientific evidence to assure that the device is safe and effective for its intended use. A PMA application generally includes extensive information about the device including the results of clinical testing conducted with the device and a detailed description of the manufacturing process.
After a PMA application is accepted for review, the FDA begins an in-depth review of the submitted information. FDA regulations provide 180 days to review the PMA and make a determination; however, the review time is typically longer (e.g., 1 – 3 years). During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside of the FDA may be convened to review and evaluate the data supporting the application and provide recommendationsdue to the FDA as to whether the data provide a reasonable assurance that the device is saferequirement for special controls. To date, other available US regulatory pathways have not been appropriate for our developed products and effective for its intended use. In addition, the FDA generally will conduct a preapproval inspection of the manufacturing facility to ensure compliance with the Quality System Regulation, or QSR, which imposes comprehensive development, testing, control, documentation and other quality assurance requirements for the design and manufacturing of a medical device.
Based on itsmay involve extended review the FDA may (1) issue an order approving the PMA, (2) issue a letter stating the PMA is “approvable” (e.g., minor additional information is needed), (3) issue a letter stating the PMA is “not approvable,” or (4) issue an order denying PMA. A device subject to PMA review cannot be marketed until the FDA issues an order approving the PMA. As part of a PMA approval, the FDA may impose post-approval conditions intended to ensure the continued safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution, and requiring the collection of additional clinical data. Failure to comply with the conditions of approval can result in materially adverse enforcement action, including withdrawal of the approval.periods.
Most modifications to a PMA approved device, including changes to the design, labeling, or manufacturing process, require prior approval before being implemented. Prior approval is obtained through submission of a PMA supplement. The type of information required to support a PMA supplement and the FDA’s time for review of a PMA supplement vary depending on the nature of the modification.
Clinical trials
Clinical trials of medical devices in the U.S. are governed by the FDA’s Investigational Device ExemptionOngoing FDA regulation in accordance with 21 CFR, Part 812. This regulation places significant responsibility on the sponsor of the clinical study including, but not limited to, choosing qualified investigators, monitoring the trial, submitting required reports, maintaining required records, and assuring investigators obtain informed consent, comply with the study protocol, control the disposition of the investigational device, submit required reports, etc.
Clinical trials of significant risk devices (e.g., implants, devices used in supporting or sustaining human life, devices of substantial importance in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health) require FDA and Institutional Review Board approval prior to starting the trial. FDA approval is obtained through submission of an Investigational Device Exemption application. Clinical trials of non-significant risk devices (i.e. devices that do not meet the regulatory definition of a significant risk device) only require Institutional Review Board approval before starting. The clinical trial sponsor is responsible for making the initial determination of whether a clinical study is significant risk or non-significant risk; however, a reviewing Institutional Review Board or the FDA may review this decision and disagree with the determination.
An Investigational Device Exemption application must be supported by appropriate data, such as performance data, animal and laboratory testing results, showing that it is safe to evaluate the device in humans and that the clinical study protocol is scientifically sound. There is no assurance that submission of an Investigational Device Exemption will result in the ability to commence clinical trials. Additionally, after a trial begins, the FDA may place it on hold or terminate it if, among other reasons, it concludes that the clinical subjects are exposed to an unacceptable health risk.
As noted above, the FDA may require a company to collect clinical data on a device in the post-market setting. The collection of such data may be required as a condition of PMA approval. FDA also has the authority to order, via a letter, a post-market surveillance study, in accordance with 21 CFR, Part 822, for certain devices at any time after they have been cleared or approved. We do not expect to launch clinical trials subject to the Investigational Device Exemption regulations for future products. Also, our products are not currently subject to any required post-market surveillance studies.
Pervasive and continuing FDA regulation
After a device is entered into commerce in the U.S., regardless of its classification or premarket pathway, numerous additional FDA requirements generally apply. These include:
Establishment registration and device listing requirements, in accordance with 21 CFR, Part 807; |
● | Quality System Regulation requirements, which govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage, installation, and servicing of finished devices, in accordance with 21 CFR, Part 820; |
Labeling requirements, which mandate the inclusion of certain content in device labels and labeling, and which also prohibit the promotion of products for uncleared or unapproved |
● | Medical Device Reporting regulation, which requires that manufacturers and importers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur, in accordance with 21 CFR, Part 803; and |
● | Reports of Corrections and Removals regulation, which requires that manufacturers and importers (a) report to the FDA recalls (i.e., corrections or removals) if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to |
The FDA enforces these requirements by inspection and market surveillance. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include, but is not limited to, the following sanctions:
Issuance of Form 483 observations (also known as “minor non-conformances”) during a facilities inspection; |
Untitled letters or warning letters; |
● | Fines, injunctions, and civil penalties; |
● | Consent |
● | Recall or seizure of |
● | Operating restrictions, partial suspension or total shutdown of production; |
● | Refusing |
● | Withdrawing 510(k) clearance or premarket approvals that are already granted; and |
● | Criminal prosecution. |
We areThe Company is subject to unannounced establishment inspections by the FDA, as well as other regulatory agencies overseeing the implementation of and compliance with applicable state public health regulations. These inspections may include our suppliers’ facilities.
International Regulations
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. In order to market our products in other countries, wethe Company must obtain regulatory approvals and comply with extensive safety and quality regulations in other countries.regulations. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. The European Union/European Economic Area, or EU/EEA, requires a CE conformity mark in order to market medical devices. The UK, due to Brexit, also requires a separate clearance. Many other countries, such as Australia, India, New Zealand, Pakistan, and Sri Lanka, accept CE or FDA clearance or approval, although others, such as China, Brazil, Canada and Japan, require separate regulatory filings.
In the EU/EEA, ourexisting Sensus devices are required to comply with the essential requirements of the EU Medical Devices Directive (93/42/EEC), while any new products placed in the EU/EEA must comply with the EU Medical Device Regulation (2017/745). Compliance with these requirements entitles usthe Company to affix the CE marking of conformity to our medical devices, without which they cannot be commercialized in the EU/EEA. To demonstrate compliance with the essential requirements and obtain the right to affix the CE marking of conformity, wethe Company must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risklow-risk medical devices (Class I), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directive (existing products) or Medical Device Regulation (new products), a conformity assessment procedure requires the intervention of a Notified Body, which is an organization accredited by a Member State of the EU/EEA to conduct conformity assessments. The Notified Body would typically auditaudits and examineexamines the quality system for the manufacture, design, and final inspection of our devices before issuing a certification demonstrating compliance with the essential requirements. Based on this certification, we can draw up an ECEU Declaration of Conformity which allows us to affix the CE mark to our products.
Further, the advertising and promotion of ourSensus’s products in the EU/EEA is subject to the laws of individual EEA Member States implementing the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EU/EEA Member State laws governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.
We haveThe Company has obtained approval to sell our products in Australia, Canada, China, Europe, China, Canada,India, Israel, Mexico, Russia, South Africa, South Korea, and Mexico,Taiwan, and we areis currently seeking approval in several other countries.
Sales and Marketing Commercial Compliance
Federal anti-kickback laws and regulations prohibit, among other things, persons from knowingly and willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in exchange for, or to induce either the referral of an individual, or the purchase, order, or recommendation of, any good or service paid for under federal healthcare programs such as the Medicare and Medicaid programs. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from Medicare and Medicaid programs, and forfeiture of amounts collected in violation of such prohibitions.
In addition, federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Off-label promotion has been pursued as a violation of the federal false claims laws. Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although surgeons are permitted to use medical devices for indications other than those cleared or approved by the FDA based on their medical judgment, we are prohibited from promoting products for such off-label uses. Additionally, the majority of states in which we market our products have similar anti-kickback, false claims, anti-fee splitting, and self-referral laws, which may apply to items or services reimbursed by any third partythird-party payor, including commercial insurers, and violationsinsurers. Violations of these laws may result in substantial civil and criminal penalties.
To enforce compliance with the federal laws, the U.S. Department of Justice, or DOJ, has increased its scrutiny of interactions between healthcare companies and healthcare providers, which has led to an unprecedented level of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming. Additionally, if a healthcare company settles an investigation with the DOJ or other law enforcement agencies, the company may be required to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement.
The U.S. and foreign government regulators have increased regulation, enforcement, inspections, and governmental investigations of the medical device industry, including increased U.S. government oversight and enforcement of the Foreign Corrupt Practices Act. Whenever a governmental authority concludes that we area company is not in compliance with applicable laws or regulations, that authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize ourthe company’s products, issue a recall, impose operating restrictions, enjoin future violations, and assess civil penalties against usthe company, or ourits officers or employees, and can recommend criminal prosecution. Moreover, governmental authorities can ban or request the recall, repair, replacement, or refund of the cost of devices we distribute.the company distributes.
Additionally, the commercial compliance environment is continually evolving in the healthcare industry as some states, including California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation, and other remuneration to physicians. The Affordable Care Act also imposes reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers. Device manufacturers are also required to report and disclose any investment interests held by physicians and their family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply in multiple jurisdictions with different compliance or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.
The Company has implemented policies and procedures related to compliance, including in connection with sales and marketing activities.
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Healthcare Fraud and Abuse
Healthcare fraud and abuse laws apply to ourSensus’s business when a customer submits a claim for an item or service that is reimbursed under Medicare, Medicaid, or most other federally funded healthcare programs. The federal Anti-Kickback Statuteanti-kickback statute (the “Anti-Kickback Statute”) prohibits unlawful inducements for the referral of business reimbursable under federally funded healthcare programs, such as remuneration provided to physicians to induce them to use certain tissue products or medical devices reimbursable by Medicare or Medicaid. The Anti-Kickback Statute is subject to evolving interpretations. For example, the government has enforced the Anti-Kickback Statute to reach large settlements with healthcare companies based on sham consultant arrangements with physicians. The majority of states also have anti-kickback laws which establish similar prohibitions that may apply to items or services reimbursed by any third partythird-party payor, including commercial insurers. Further, recently enacted amendments to the Affordable Care Act, among other things, amend the intent requirement of the federal anti-kickbackAnti-Kickback Statute and criminal healthcare fraud statutes.statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statuteAnti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, we and our officers and employees could be subject to severe criminal and civil penalties including, for example, exclusion from participation as a supplier of product to beneficiaries covered by Medicare or Medicaid. In addition to the Anti-Kickback Statute, the federal physician self-referral statute, commonly known as the Stark Law, prohibits physicians who have a financial relationship with an entity, including an investment, ownership, or compensation relationship, from referring Medicare patients for designated health services, which include clinical pathology services, unless an exception applies. Similarly, entities may not bill Medicare or any other party for services furnished pursuant to a prohibited referral. Many states have their own self-referral laws as well, which in some cases apply to all third partythird-party payors, not just Medicare and Medicaid. If a governmental authority were to conclude that we are not in compliance with the Stark Law or state self-referral laws and regulations, our pathology laboratory business could be subject to severe financial consequences, including the obligation to refund amounts billed to third partythird-party payors in violation of such laws, civil penalties, and potentially also exclusion from participation in government healthcare programs like Medicare and Medicaid. The Stark Law often is enforced through lawsuits brought under the Federal False Claims Act, violations of which trigger significant monetary penalties and treble damages.
Additionally, the civil False Claims Act prohibits knowingly presenting or causing the presentation of a false, fictitious, or fraudulent claim for payment to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the False Claims Act, and the accompanying threat of significant liability, in its investigations of healthcare providers and suppliers throughout the country for a wide variety of Medicare billing practices, and has obtainedobtaining multi-million and multi-billion dollar settlements in addition to individual criminal convictions. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ and suppliers’ compliance with the healthcare reimbursement rules and fraud and abuse laws. The Company has implemented policies and procedures related to compliance with applicable regulations designed to prevent healthcare fraud and abuse.
Health Information Privacy
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses, known as covered entities, as well as their business associates that perform services for them that involve individually identifiable health information. The HIPAA privacy and security regulations, including the expanded requirements under HITECH, establish comprehensive federal standards with respect to the use and disclosure of protected health information by covered entities and their business associates, in addition to setting standards to protect the confidentiality, integrity, and security of protected health information.
We haveThe Company has implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law. The privacy and security regulations establish a “floor” and do not supersede state laws that are more stringent. Therefore, we are required to comply with both federal privacy and security regulations and varying state privacy and security laws. In addition, for healthcare data transfers from other countries relating to citizens of those countries, wethe Company must comply with the laws of those other countries. The federal privacy regulations restrict ourthe ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment, treatment, or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. HIPAA, as amended by HITECH, provides for significant fines and other penalties for wrongful use or disclosure of protected health information in violation of the privacy and security regulations, including potential civil and criminal fines and penalties. If we dothe Company does not comply with existing or new laws and regulations related to protecting the privacy and security of health information, weit could be subject to monetary fines, civil penalties, or criminal sanctions. In addition, other federal and state laws that protect the privacy and security of patient information may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. For example, weThe Company could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of confidential health information or other private personal information. If wethe Company were to experience a breach of protected health information, weit could be subject to significant adverse publicity in addition to possible enforcement sanctions and civil damages lawsuits. Finally, wethe Company may be required to incur additional costs related to ongoing HIPAA compliance as may be necessary to address evolving interpretations and enforcement of HIPAA and other health information privacy and security laws, the enactment of new laws or regulations, emerging cybersecurity threats, and other factors.
Research and Development
Research and development costs relaterelated to our products under development and quality and regulatory costs and are expensed as incurred. DuringFor the years ended December 31, 20172022 and 2016, we2021, the Company incurred research and development expenseexpenses of approximately $5.5$3.5 million and $1.8$3.4 million, respectively. MostThe Company expects research and development expenses in 2023 to be generally consistent with 2022.
Employees and Human Capital
At December 31, 2022, the Company had 42 employees. None of the increase in R&D spending in 2017 was related to the development of a device for intra-operative radiation therapy (IORT) for the treatment of breast and other cancers, for which we filed a 510(k) application with the U.S. Food and Drug Administration (FDA) in December 2017.
Employees
As of December 31, 2017, we had 45 employees, all in the U.S. None of ourCompany’s employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our
The Company believes that its success depends on the ability to attract, develop, and retain key personnel. It also believes that the skills, experience, and industry knowledge of its key employees to be good.significantly benefits its operations and performance. The Company believes that it offers competitive compensation and other means of attracting and retaining key personnel.
Website
Our filingsEmployee levels are managed to align with the pace of business and management believes it has sufficient human capital to operate its business successfully.
Available Information
Sensus files annual, quarterly, and current reports, proxy statements, and all amendments to these reports and other information with the SEC. Sensus makes available free-of-charge, on or through its website at http://www.sensushealthcare.com, Sensus’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC are available free of charge through our website www.sensushealthcare.com. The information on ourSensus’s website is not incorporated by reference intoin this report.Annual Report on Form 10-K. Reports, proxy statements, and other information regarding issuers that file electronically with the SEC, including Sensus’s filings, are also available to the public from the SEC’s website at http://www.sec.gov.
Item 1A.RISK FACTORS
An investment in ourSensus’s common stock contains a high degree of risk. YouInvestors should carefully consider carefully the following risks and uncertainties described below before making an investment decision.decision with respect to our common stock. Our business, including our operating results and financial conditions, could be harmed if any of these risks, as well as other risks not currently known to us or that we currently deem immaterial, were to materialize. The trading price of ourSensus’s common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.risks. In assessing thethese risks, described below, youinvestors should also refer to the other information containedincluded in this Annual Report on Form 10-K,our filings with the SEC, including our consolidated financial statements and the related notes and schedules, and other filings with the SEC. This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those discussed in this Annual Report on Form 10-K. These risks and uncertainties include the following:notes.
Risks Related to our Business
We have a history of net losses. If we do not achieve profitability, our financial condition and the value of our common stock could suffer.
We have a history of net losses. Our historical losses from inception through December 31, 2017 totaled approximately $11.5 million. If our revenue grows more slowly than currently anticipated, or if operating expenses are higher than expected, we may be unable to achieve profitability, our financial condition will suffer and the value of our common stock could decline. Even if we are successful increasing our sales, we may incur losses in the foreseeable future as we continue to research and develop and seek regulatory approvals for our products. If sales revenue from any of our currently cleared products or any additional products that receive marketing clearance from the FDA or approval from other regulatory authorities in the future is insufficient, or if our product development is delayed, we may be unable to achieve profitability. Furthermore, even if we are able to achieve profitability, we may be unable to sustain or increase such profitability on a quarterly or annual basis, which would significantly reduce the value of our common stock.
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If third-party payors do not provide coverage and adequate reimbursement for the use of our products, it is unlikely that our products will be widely used, and our revenue will be negatively impacted.
In the U.S., the commercial success of ourSensus’s existing products and any future products will depend, in part, on the extent to which governmental payors at the federal and state levels, including Medicare and Medicaid, private health insurers, and other third-party payors provide coverage for and establish adequate reimbursement levels for procedures using our products. The existence of coverage and adequate reimbursement for our products and related procedures by government and private payors is critical to market acceptance of our existing and futurethese products. Neither hospitals nor physicians are likely to use ourSensus’s products if they do not receive adequate reimbursement payments for the procedures using ourthese products.
Some private payors in the U.S. may base their reimbursement policies on the coverage decisions determined by the Center offor Medicare and& Medical Services, or CMS, which administers the Medicare program and works in partnership with state governmentgovernments to administer the Medicaid program. Others may adopt different coverage or reimbursement policies for procedures performed using ourSensus’s products, while some governmental programs, such as Medicaid, have reimbursement policies that vary from state to state, some of which may not pay for our products in an amount that supports ourthe selling price of Sensus’s products, if at all. A Medicare national or local coverage decision denying coverage for any of the procedures performed with ourusing the Company’s products could result in private and other third-party payors also denying coverage. Medicare (part(Part B) and a number of private insurers in the U.S. currently cover and pay for both non-melanoma skin cancer and keloid treatments using the SRT-100. A withdrawal, or even contemplation of a withdrawal, by CMS, Medicaid or private payors of reimbursements, or any other unfavorable coverage or reimbursement decisions by government programs or private payors, could have a material adverse effect on ourthe Company’s revenues and business.
Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. In many international markets, a product must be approved for reimbursement before it can be cleared for sale in that country. Further, many international markets have government-managed healthcare systems that control reimbursement for new devices and procedures. In most markets there are private insurance systems as well as government-managed systems. OurSensus’s products may not be considered cost-effective by international third-party payors or governments managing healthcare systems. Furthermore, reimbursement may not be available or, if available, third-party payors’ reimbursement policies may adversely affect ourthe Company’s ability to sell our products profitably. If sufficient coverage and reimbursement are not available for our current or futureSensus’s products, in either the U.S. or internationally, the demand for ourthese products and, consequently, ourthe Company’s revenues and business, will be adversely affected.
The Company’s operations may be impaired if our information technology systems fail to perform adequately or are the subject of a data breach or cyberattack.
The Company’s information technology systems are critically important to operating business efficiently. The Company relies on information technology systems to manage business data, communications, employee information, and other business processes. The Company outsources certain business process functions to third-party providers and similarly relies on these third parties to maintain and store confidential information on their systems. The failure of these information technology systems to perform as the Company anticipates could disrupt business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing business and results of operations to suffer.
The Company has experienced, and expects to continue to experience, cyber security threats and incidents, none of which has been material to the Company to date. Although the Company protects our information technology systems, the Company has experienced varying degrees of cyber-incidents in the normal conduct of business, including viruses, worms, phishing, and other malicious activities. Although there have been no serious consequences to date, such breaches could result in unauthorized access to information, including customer, supplier, employee, or other company confidential data. The Company carries insurance against these risks, performs penetration tests from time to time, and designs business processes to attempt to mitigate the risk of such breaches. However, the Company’s efforts to mitigate these risks may be unsuccessful, and security breaches may occur. Moreover, the development and maintenance of these measures requires continuous monitoring as technologies change and efforts to overcome security measures evolve. However, a successful breach or attack could have a material negative impact on operations and subject the Company to consequences such as direct costs associated with incident response.
Substantially all of ourthe Company’s revenue is generated from the sale of ourthe SRT-100 and related products, and any decline in the sales of these products or failure to gain market acceptance of these products will negatively impact ourthe Company’s business, financial condition, and results of operations.
We haveThe Company is focused heavily on the development and commercialization of a limited number of products for the treatment of non-melanoma skin cancer and other skin conditions with superficial radiotherapy.SRT. From ourthe Company’s inception in 2010 through December 31, 2017, substantially all of our2022, revenue has primarily been derived from sales of ourthe SRT-100 product line and related services and ancillary products. Although we intend to introducethe Company has introduced new products, we expect substantially allthe Company expects most of our 2018 revenue in the near to medium term to be derived from or related to sales of ourthe SRT-100 product line. If we are unable to achieve and maintain significantly greater market acceptanceBecause of superficial radiotherapy for treatmentthis, any decline in the sales of non-melanoma skin cancer and other skin conditions, or if we do not achieve sustained positive cash flow, then wethese products will be severely constrained in our ability to fund our operations. In addition, if we are unable to market our SRT-100 product line and ancillary products as a result of a quality problem, shortage of components required for assembly, failure to maintain or obtain regulatory approvals, unexpected or serious complications or other unforeseen negative effects related tonegatively impact the SRT-100 product line and ancillary products, we would lose our only source of revenue, and ourCompany’s business, financial condition, and results of operations willoperations.
The Company’s technology could be superseded by new products, treatments, or technologies that gain wider acceptance among doctors and patients, which could adversely affected.affect the Company.
We may be unable
The medical device industry is highly competitive and subject to manufacture ourrapid technological change, and is significantly affected by the introduction of new products in quantities sufficient to meet existing demand levels,and treatment options. The Company’s products, some of which would hinder ouruse technologies that have been available for many years, compete for market acceptance against those of healthcare providers who use other methods of treatment for similar diseases and conditions. If new products, treatments, and/or technologies were developed that gain wide acceptance among doctors and patients, it could take market share away from the Company, which could adversely affect the Company’s ability to effectively commercialize our products and increase revenues.
The manufacture of medical devices requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls, from us and our key suppliers, to scale up the production process to manufacture sufficient quantities at high volume and with satisfactory production yields. Manufacturers of medical devices often encounter difficulties in production, particularly when scaling up initial production. These problems include difficulties with production costs and yields, quality control and assurance, and shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations.
In July 2010, we entered into a manufacturing agreement with an unrelated third party for the manufacturing and production of the SRT-100 in accordance with our specifications. We continue to do business with the manufacturer pursuant to this agreement, although we or the manufacturer may terminate the agreement upon 90 days’ written notice or upon at least 60 days’ notice prior to the end of each additional one-year renewal period. As discussed elsewhere in this Annual Report on Form 10-K, we are exploring the possibility of adding another contract manufacturer or bringing certain manufacturing capabilities in-house. However, if eventually implemented, our plan to bring the manufacturing function in-house may not be successful and we may be unable to maintain a relationship with our current manufacturer or establish a relationship with another manufacturer on favorable terms, if at all.
Consequently, we may be able to continue to efficiently manufacture our products in sufficient quantities to meet projected demand or to establish sufficient worldwide inventory to fully support our distribution network. Any of these results could cause us to be unable to effectively commercialize our products or increase revenue adversely affecting our business, financial condition, results of operations andand/or render the value of our common stock.Company’s products obsolete.
We haveThe Company has a single preferred supplier for the x-ray tubes and other major components used in ourthe Company’s products and the loss of this preferred supplier could adversely affect us.the Company.
We haveThe Company has a single preferred supplier for the x-ray tubes and other major components used in ourthe Company’s products. Although other suppliers exist in the market, we believethe Company believes that our preferpreferred supplier’s x-ray tubesproducts are of a superior quality. The loss of thisthe preferred supplier, or theirits inability to supply us or our third party manufacturerthe Company with an adequate x-ray tubessupply of these components, could hinder ourthe Company’s ability to effectively produce ourthe Company’s products to meet existing demand levels, especially if wethe Company were unable to timely procure x-ray tubesthem from another supplierother suppliers in the market, which could adversely affect ourthe Company’s ability to commercialize our products and to maintain or increase our revenues.
We may be unable to retain and develop our U.S. sales force and non-U.S. distributors, which would adversely affect our ability to meet our revenue targets and other goals.
As we launch products, increase current sales efforts and expand into new geographic areas, we will need to retain, grow and develop our direct sales personnel, distributors and agents. There is significant competition for sales personnel experienced in relevant medical device sales. In addition, the training process is lengthy because it requires significant education for new sales representatives to achieve an acceptable level of clinical competency with our products. Upon completion of training, sales representatives typically require lead time in the field to develop or expand their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. If we are unable to attract, motivate, develop, and retain a sufficient number of qualified sales personnel, or if the sales representatives do not achieve the productivity levels expected, our revenue will not grow as expected, and our financial performance will suffer.
In addition, we may not succeed in entering into and maintaining productive arrangements with an adequate number of distributors outside of the U.S. that are sufficiently committed to selling our products in international markets. The establishment and maintenance of a distribution network is expensive and time consuming. Even if we engage and maintain suitable relationships with an adequate number of distributors, they may not generate revenue as quickly as we expect them to, commit the necessary resources to effectively market and sell our products, or ultimately succeed in selling our products. Moreover, if our sales force and distributors are unable to attract and retain new customers, we may be unable to achieve our expected growth, and our business could suffer.
Furthermore, some of our distributors may market or sell the products of our competitors. In these cases, the competitors may have the ability to influence the products that our distributors choose to market and sell, for example, by offering higher commission payments, or by convincing the distributors to terminate their relationships with us, carry fewer of our products or reduce their sales and marketing efforts for our products. Any of the foregoing would hinder our ability to meet our revenue targets and other goals.
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The future worldwide demand for our current products and our future products is uncertain. Our current products and our future products may not be accepted by hospitals, physicians or patients, and may not become commercially successful.
Physicians and hospitals may not perceive the benefits of our products and may be reluctant or unwilling to adopt our products as a treatment option, particularly in light of existing treatment options, such as Mohs surgery or high dose rate brachytherapy. Additionally, physicians and hospitals may not be aware of the significant advances in technology associated with superficial radiation therapy compared to older technology that was previously used with orthovoltage. While we believe that our products are an efficient and less invasive alternative to other treatments of non-melanoma skin cancer and other skin conditions, physicians who are accustomed to using other modalities to treat patients with either non-melanoma skin cancer, keloids or other skin conditions may be reluctant to adopt broad use of our superficial radiotherapy products.
We must grow markets for our products through physician education and awareness programs. Publication in peer-reviewed medical journals of results from studies using our products will be an important consideration in their adoption by physicians and in reimbursement decisions of third-party payors. The process of publication in leading medical journals is subject to a peer-review process. Peer reviewers may not consider the results of studies of our products and any future products sufficiently novel or worthy of publication. Failure to have studies of our products published in peer reviewed journals may adversely affect adoption of our products.
Educating physicians and hospitals on the benefits of our products and advancements in superficial radiation technology requires a significant commitment by our marketing team and sales organization. Our products may not become widely accepted by physicians and hospitals. If we are unable to educate physicians and hospitals about the advantages of our products, do not achieve significantly greater market acceptance of our products, do not gain momentum in our sales activities, or fail to significantly grow our market share, we will be unable to grow our revenue, and our business and financial condition will be adversely affected.
We are in a highly competitive market segment, which is subject to rapid technological change. If our competitors are able to develop and market products that are more effective, less costly, easier to use or otherwise more attractive than any of our products, our business will be adversely impacted.
The medical device industry is highly competitive and subject to technological change. In the arena for technology and products for use in the treatment of non-melanoma skin cancer and other skin conditions, we have three primary competitors, one of which operates in the superficial radiotherapy space largely in the European market, and the other two of which operate in the brachytherapy space in both the U.S. and internationally. While we believe our SRT-100 and related products currently have certain competitive advantages over the products offered by these competitors, our success depends, in part, upon our ability to maintain this competitive position. If these competitors improve their existing products, develop new products, or expand their operations, we may be unable to maintain our competitive advantages over these competitors.
Furthermore, new competitors, including companies larger than us, may enter the market in the future and may offer products with similar or alternative functionalities. These companies may enjoy several advantages relative to us, including:
Hospitals, physicians and investors may not view our products as competitive with other products that are marketed and sold by new competitors, including much larger and more established companies. Our competitors may develop and patent processes or products earlier than we do, obtain regulatory clearance or approvals for competing products more rapidly than us or develop more effective, more convenient or less expensive products or technologies that render our technology or products obsolete or less competitive. If our existing or new competitors are more successful than us in any of these matters, our business may be harmed.
OurCompany’s customers are concentrated in the U.S. and China,(including one U.S. customer accounting for a significant portion of our sales), and economic difficulties or changes in the purchasing policies or patterns of ourthe Company’s customers in these countriesthe U.S. could have a significant impact on our business and operating results.
Substantially allMost of our 2017 and 2016the Company’s sales werehave been made to customers located in the U.S. (94% and China. For95% in the years ended December 31, 20172022 and 2016, approximately 2% and 10%, respectively, of our product sales were to Chinese customers, with substantially the remainder of our sales to customers in the U.S.2021, respectively). Additionally, a single customer in the U.S. accounted for approximately 59%73% and 20%57% of revenues for the years ended December 31, 20172022, and 2016.December 31, 2021, respectively. Because of our geographic and customerthese concentrations, our revenue could fluctuate significantly due to changes in economic conditions, the use of competitive products, or the loss of, reduction of business with, or less favorable terms within, these countries.with, our significant customer or other U.S. customers. A reduction or delay in orders for ourthe Company’s products fromfor these countriesor other reasons could materially harm our business and results of operations.
Our future success depends on our ability to develop, receive regulatory approval for, and introduce new products or product enhancements that will be accepted by the market in a timely manner, and if we do not do so, our results of operations will suffer.
It is important to our business that we continue to build a pipeline of product offerings for the treatment of non-melanoma skin cancer and other skin conditions to remain competitive. Consequently, our success will depend in part on our ability to develop and introduce new products. However, we may be unable to successfully maintain our regulatory clearance for existing products, or develop, obtain and maintain regulatory clearance or approval for product enhancements, or new products, or these products may not be accepted by physicians or the payors who financially support many of the procedures performed with our products.
The success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:
If we do not develop new products or product enhancements in time to meet market demand, if there is insufficient demand for these products or enhancements, or if competitors introduce new products with enhanced functionalities that are superior to those of ours, then our results of operations will suffer.
Our products may become obsolete prior to the end of their anticipated useful lives, and we may be required to dispose of existing inventory or write off the value or accelerate the depreciation of these assets, each which would materially and adversely impact our results of operations.
We focus on continual product innovation and product improvement. While we believe this provides a competitive edge, it also creates a risk that our products will become obsolete prior to the end of their anticipated useful lives. If we introduce new products or next-generation products prior to the end of the useful life of a prior generation, we may be required to dispose of existing inventory, or write off the value of these assets, each of which would materially and adversely impact our results of operations.
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Our success is dependent in large part on our being an early re-entrant into the market for our proprietary superficial radiotherapy systems, and if one or more competitors join us in the market, our marketing efforts and ability to compete would be materially and adversely affected.
Our success is dependent in large part on our being an early re-entrant into the market for our proprietary superficial radiotherapy systems. If one or more competitors join us in the market, the increased competition would require us to devote substantial additional resources to our marketing efforts, and our ability to compete may be severely impaired.
Our international operations subject us to certain operating risks, which could adversely impact our results of operations and financial condition.
The sale and shipment of our products across international borders, as well as the purchase of components from international sources, subjects us to U.S. and foreign governmental trade, import and export, and customs regulations and laws. Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance. Other laws and regulations that can significantly impact us include various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, and anti-boycott laws, as well as export control laws. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities and exclusion or debarment from government contracting. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping and sales activities. Any of the foregoing would adversely impact our results of operations and financial condition.
Our international operations and our international distributors expose us to risks inherent in operating in foreign jurisdictions. These risks include, without limitation:
If any of these events or circumstances were to occur, our sales in foreign countries would be harmed and our results of operations would suffer.
Our U.S. business could be adversely affected by changes in international trade regulation.
Both the Trump Administration and certain members of the U.S. Congress have indicated that they may seek to impose importation tariffs on products from certain countries such as China and Mexico or to impose additional taxes on imported goods generally. Certain countries have publicly stated that they would respond in-kind to any such action by the U.S. The Trump Administration recently imposed tariffs on solar panels and washing machines. Any future escalation of protectionist trade measures could increase the prices of products, components and supplies that we source internationally, as well as adversely affect our ability to sell our products in foreign markets. In addition, the Trump Administration has appointed and employed many new public officials into positions of authority in the U.S. Federal government dealing with the healthcare industries that may potentially have a negative impact on the prices and the regulatory pathways for certain healthcare products such as those developed, marketed and sold by us. Such changes in the regulatory pathways could adversely affect and or delay our ability to market and sell our products in the U.S. and internationally.
Our operating results may vary significantly from quarter to quarter, which may negatively impact the value of our securities.
Our quarterly revenues and results of operations may fluctuate due to the following reasons, among others:
Because of these and other related or similar factors, it is likely that in some future period our operating results will not meet expectations. Failure to meet or exceed analyst expectations could cause a decrease in the trading price of our securities.
We may be unable to attract and retain highly qualified personnel, which could adversely and materially affect our competitive position.
Our future success depends on our ability to attract and retain our executive officers and other key employees. We may be unable to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among companies in the medical device business and related industries, particularly in the South Florida area where we are headquartered. The medical device industry has experienced a high rate of turnover of management personnel in recent years. Consequently, we could have difficulty attracting or retaining experienced personnel and may be required to spend significant time and expend significant financial resources in our employee recruitment and retention efforts. Many of the other medical device companies with which we compete for qualified personnel have greater financial and other resources and risk profiles different from ours. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than that which we may offer. If we are unable to attract and retain the necessary personnel to accomplish our business objectives, we may have difficulty implementing our business strategy and achieving our business objectives.
Product liability claims could damage our reputation and adversely affect our business.
The design, manufacture and marketing of medical devices each carry an inherent risk of product liability claims and other damage claims. In addition to the exposure we may have for defective products, physicians may misuse our products or use improper techniques, regardless of how well trained, potentially leading to injury and an increased risk of product liability. A product liability or other damages claim, product recall or product misuse could require us to spend significant time and money in litigation, regardless of the ultimate outcome, or to pay significant damages and could seriously harm our business.
We maintain liability insurance coverage that management believes to be reasonable based on our business and operations; however, our insurance may not be sufficient to cover all claims made against us. Our insurance policies generally must be renewed on an annual basis. We may be unable to maintain or increase insurance on acceptable terms or at reasonable costs. A successful claim brought against us in excess, or outside of, our insurance coverage could seriously harm our financial condition or results of operations.
WeSensus may be required to obtain additional funds in the future, and these funds may not be available on acceptable terms or at all.
OurSensus’s operations have consumed substantial amounts of cash since its inception, and we anticipate that our expenses will increase as we continue to grow our business. WeSensus may need to seek additional capital in the future. Our growth will depend, in part, on our ability to develop variations of the SRT-100 and other products, and related technology complementary to our products. Our existing financial resources, including our existingWe have maintained a revolving line of credit may not allow us to conduct all of the activities thatwith Silicon Valley Bank (“SVB”) since 2013. Although we believe would be beneficial for our future growth.
We may need to seekhave never borrowed any funds in the future. Our existing revolvingunder this line of credit, restrictswe have maintained it as our abilitysole source of borrowings, should they be needed. On March 10, 2023, SVB was closed by California and federal regulatory agencies. As a result of these actions, the Federal Deposit Insurance Corporation (FDIC) established Silicon Valley Bridge Bank, N.A. (the “Bridge Bank”) as successor to incur certain indebtednessSVB. Based upon information available to us, we believe that the Bridge Bank has assumed all contracts of SVB in effect at the time of its failure (including our line of credit) and, that the Bridge Bank is expected to continue to perform under those contracts. Accordingly, we have not yet determined whether we will seek to replace the current line of credit with the Bridge Bank. Should we do so, we may not be able to enter into new credit facilities, and if we are able to enter into new credit facilities, the maximum borrowings permitted under, or permit certain encumbrancesother terms of, any such facilities may limit the amounts we are able to borrow or may impose greater restrictions on such borrowings or other aspects of our assets withoutoperations. Please see Note 5, Debt, to the prior written consentconsolidated financial statements for additional information regarding current line of credit with the lender.Bridge Bank. If we are unable to raiseborrow funds on favorable terms, or at all, we may not be able to support our commercialization efforts, or increase our research and development activities, compete effectively, or meet our debt and other contractual obligations, and the growth of our business may be negatively impacted. As a result, we may be unable to compete effectively.
Our
The Company’s cash requirements in the future may be significantly different from our current estimates and depend on many factors, including:
the results of commercialization efforts for products; |
● | the need for additional capital to fund development programs; |
● | the costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property; |
● | the establishment of high-volume manufacturing and increased sales, marketing, and distribution capabilities; |
● | success in entering into collaborative relationships with other | |
● | financial market instability or disruptions to the banking system due to bank failures, particularly in light of the recent events that have occurred with respect to SVB. |
We may be unable to raise funds on favorable terms, or at all, and either case would materially and adversely affect our ability to implement our strategy and meet our goals.
To the extent that we raiseSensus raises additional capital through the sale of equity or convertible debt securities, stockholders’the ownership interestinterests of the existing stockholders will be diluted. Moreover, the terms of newly issued securities may include liquidation or other preferences that adversely affect common stockholders’ rights. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures, or declaring distributions or dividends. If we raiseSensus raises additional funds through collaboration and licensing arrangements with third parties, wethe Company may have to relinquish valuable rights to our technologies or products or to grant licenses on terms that are not favorable to us.favorable. Any of these events could adversely affect ourSensus’s ability to declare dividends on ourits common stock and to achieve ourfuture product development and commercialization goals and could have a material adverse effect on our business, financial condition, and results of operations.
Our revolving credit facility imposes substantial restrictions on us, some of which could hinder our ability to conduct our operations effectively or otherwise in accordance with our business plan.
On March 12, 2013, we entered into a two-year $3 million revolving credit facility. The credit facility was amended and extended effective March 12, 2015 through May 12, 2017. The maximum borrowing was reduced to $1.5 million and was limited by our eligible borrowing base of 80% of eligible accounts receivable. On September 21, 2016, a second amendment to the credit facility extended the facility through September 21, 2017, increased the maximum borrowing to $2.0 million and expanded the eligible accounts receivables to include certain international receivables. We were not in compliance in April and May 2017 with one of our financial covenants. On June 27, 2017, the covenant defaults were waived and the agreement was further amended to modify the financial covenants effective June 27, 2017. An amendment signed on September 15, 2017 extended the maturity date of the credit line through November 19, 2017 and on October 31, 2017, we again amended our revolving credit facility to extend the maturity to October 31, 2019. The amount of credit available under the amended facility will equal 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.
Interest, at Prime plus 0.75% (5.25% at December 31, 2017) and Prime plus 1.50% on non-formula borrowings (6.00% at December 31, 2017), is due monthly, and the outstanding principal and interest are due on the maturity date. The facility is secured by all of our assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of our assets and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. Approximately $2,215,000 was outstanding under the revolving credit facility at December 31, 2017 and $0 at December 31, 2016. We pay commitment fees of 0.25% per annum on the average unused portion of the line of credit.
Additionally, the facility agreement contains a number of negative covenants that require us to seek the lender’s prior written consent in order to conduct certain activities. For example, we may not, without the prior written consent of the lender:
In the event we wish to conduct any of the foregoing activities and the lender refuses to provide its prior written consent, our ability to conduct our operations effectively and in accordance with our business plan could be materially and adversely affected.
If we fail to properly manage our anticipated growth, our business could suffer.
Our strategy involves substantial growth. If we experience periods of rapid growth and expansion, our limited personnel, operational infrastructure and other resources could be significantly strained. In particular, the possible internalization of manufacturing, and continued expansion of our direct sales force in the U.S. will require significant management, financial and other supporting resources. In addition, in order to manage expanding operations, we will need to continue to improve our operational and management controls, reporting and information technology systems and financial internal control procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business could suffer. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our goals. To achieve our revenue goals, we must successfully increase production output to meet projected customer demand. We may be unable to increase output on the timeline anticipated, if at all. Also, we may in the future experience difficulties with production yields and quality control, component supply, and shortages of qualified personnel, among other problems. These problems could result in delays in product availability and increases in expenses. Any delay or increased expense could adversely affect our ability to increase revenues.
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Cost-containment efforts of our customers, purchasing groups and governmental organizations could have a material adverse effect on our sales and profitability.
In an effort to reduce costs, many hospitals or physicians within the U.S. and abroad are members of group purchasing organizations and integrated delivery networks. Group purchasing organizations and integrated delivery networks negotiate pricing arrangements with medical device companies and distributors and offer the negotiated prices to affiliated hospitals, physicians and other members. Group purchasing organizations and integrated delivery networks typically award contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple providers with the intention of driving down pricing or reducing the number of vendors. Due to the highly competitive nature of the group purchasing organizations and integrated delivery networks contracting processes, we may be unable to obtain or maintain contract positions with major group purchasing organizations and integrated delivery networks. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our products, thereby reducing our profitability.
While having a contract with a group purchasing organizations or integrated delivery networks for a given product category can facilitate sales to members of that group purchasing organizations or integrated delivery networks, expected sales levels may not be achieved, as sales are typically made pursuant to purchase orders. Even when a provider is the sole contracted supplier of a group purchasing organization or integrated delivery network for a certain product category, members of the group purchasing organization or integrated delivery network generally are free to purchase from other suppliers. Furthermore, group purchasing organizations and integrated delivery networks contracts typically are terminable without cause by the group purchasing organizations or integrated delivery networks upon 60 to 90 days’ notice. Accordingly, even if we obtain contracts with any group purchasing organizations or integrated delivery networks, the members of these groups may choose to purchase from our competitors due to the price or quality offered by competitors, which could result in a decline in our sales and profitability.
We depend on information technology systems to operate our business and a cyber-attack or other breach of these systems could have a material adverse effect on our business.
We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations. Our information technology systems could be vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy or other significant disruption. Any successful attacks could result in the theft of intellectual property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information or disrupt our operations. Cyber-attacks are becoming more sophisticated and frequent, and our systems could be the target of malware and other cyber-attacks. We have invested in our systems and the protection of our data to reduce the risk of an intrusion or interruption, and we monitor our systems on an ongoing basis for any current or potential threats.
However, these measures and efforts may not prevent interruptions or breakdowns, and we may otherwise fail to maintain or protect our information technology systems and data integrity effectively. Furthermore, we may fail to anticipate, plan for or manage significant disruptions to our systems. If any of the foregoing were to occur, our competitive position could be harmed, we could lose existing customers, have difficulty preventing, detecting and controlling fraud, have disputes with customers, specialist physicians and other healthcare professionals, have regulatory sanctions or penalties imposed, incur expenses or lose revenues as a result of a data breach or theft of intellectual property or suffer other adverse consequences, any of which could have a material adverse effect on our business, results of operations, financial condition or cash flows.
Consolidation in the healthcare industry could adversely affect ourthe Company’s future revenues and operating income.
The medical technology industry has experienced a significant amount of consolidation, resulting in companies with greater market presence. Health care systems and other health care companies are also consolidating, resulting in greater purchasing power for thesethe combined companies. Recently, one of the largest healthcare deals was announced with CVS Health vying to purchase Aetna, an unusual vertical merger with a supplier and customer joining forces. As a result, theThe disruption in the healthcare industry caused by consolidation may lead to further competition among medical device suppliers to provide goods and services, which could adversely affect ourthe Company’s future revenues and operating income.
We may engage in acquisitions, mergers, strategic alliances, and joint ventures that could result in final results that are different than expected.
In the normal course ofOur business, we engage in discussions relating to possible acquisitions, equity investments, mergers, strategic alliances, and joint ventures. Such transactions are accompanied by a number of risks, including the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt on potentially unfavorable terms as well as impairment expenses related to goodwill and amortization expenses related to other intangible assets, the possibility that we may pay too much cash or issue too many of our shares as the purchase price for an acquisition relative to the economic benefits that we ultimately derive from such acquisition, and various potential difficulties involved in integrating acquired businesses into our operations.
If we do not realize the expected benefits of such transactions, our financial position, results of operations, cash flows and stock pricefinancial condition could be negatively impacted.materially adversely affected by the effects of widespread public health epidemics, including COVID-19, that are beyond our control.
Outbreaks of contagious diseases, public health epidemics, and other adverse public health developments in countries where we, our customers, or our suppliers operate have had and could have a material and adverse effect on our business, results of operations and financial condition. The COVID-19 pandemic has adversely impacted the global and national economies and certain industries and geographies in which we operate. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business, customers, vendors, and suppliers. The extent of such impact will depend on future developments, which are highly uncertain. Additionally, the responses of various governmental and nongovernmental authorities and consumers to the pandemic may have material long-term effects on us and our customers which are difficult to quantify in the near-term or long-term.
Risks Related to our Regulatory Environment
We areSensus is subject to various federal, state, and foreign healthcare laws and regulations, and a finding of failure to comply with these laws and regulations could have a material adverse effect on ourits business.
OurSensus’s operations are, and will continue to be, directly and indirectly affected by various federal, state, and foreign healthcare laws, including, but not limited to, those described below.
The Federal “Sunshine” |
● | Federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, persons or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim to, or the knowing use of false records or statements to obtain payment from, or approval by, the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, |
● | HIPAA, |
Additionally, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009,HITECH, and applicable implementing regulations, impose certain requirements relating to the privacy, security, and transmission of individually identifiable health information without appropriate authorization on entities subject to the law, such as health plans, clearinghouses, and healthcare providers and their business associates. Internationally, substantially every jurisdiction in which we operate has established its own data security and privacy legal framework with which we must comply, including the Data Protection Directive 95/46/EC and national implementation of the Directive in the member states of the European Union.
Many states have also adopted laws similar to each of the above federal laws, such as anti-kickback and false claims laws, which may be broader in scope and apply to items or services reimbursed by any third-party payor, including commercial insurers, as well as laws that restrict our marketing activities with healthcare professionals and entities, and require usthe Company to track and report payments and other transfers of value, including consulting fees, provided to healthcare professionals and entities. Some states mandate implementation of compliance programs to ensure compliance with these laws. Additionally, certain states require a certificate of need prior to the installation of a radiation device, such as the SRT-100. We areThe Company is also subject to foreign fraud and abuse laws, which vary by country.
If ourthe Company’s operations are found to be in violation of any of the laws or regulations described above or any other governmental laws or regulations that apply to us now or in the future, weit may be subject to penalties, including administrative, civil, and criminal penalties, damages, fines, disgorgement,penalties; damages; fines; disgorgement; individual imprisonment,imprisonment; contractual damages,damages; reputational harm,harm; exclusion from governmental healthcare programs,programs; and the curtailment or restructuring of ourits operations. Any of the foregoing could adversely affect ourthe Company’s ability to operate our business and our financial results.
Our products are subject to extensive governmental regulation that could make it more expensive and time consuming for us to introduce new or improved products.
Our products must comply with regulatory requirements imposed by the U.S. Food and Drug Administration, the U.S. Department of Health and Human Services and other governmental agencies in the U.S., and similar agencies in foreign jurisdictions. These requirements involve lengthy and detailed laboratory and clinical testing procedures, sampling activities, an extensive agency review process, and other costly and time-consuming procedures. It often takes several years to satisfy these requirements, depending on the complexity and novelty of the product. If we execute on our plans to move our manufacturing function in-house, we will also be subject to additional licensing and regulatory requirements relating to safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potential hazardous substances. Some of the most important requirements applicable or potentially applicable to us include:
Additionally, due to the nature of our products as radiation producing medical devices, we are also subject to certain state laws and regulations related to the sale of our products. Although we have taken steps to ensure our compliance with such state laws and regulations, our failure to fully comply with these requirements could result in fines or penalties and could also adversely affect our ability to sell our products.
Government regulation may impede our ability to the manufacture our existing and future products. Government regulation also could delay the marketing of new products for a considerable period of time and impose costly procedures on activities. The U.S. Food and Drug Administration and other regulatory agencies may not clear or approve any future products on a timely basis, if at all. Any delay in obtaining, or failure to obtain, these approvals could negatively impact the marketing of any future products and reduce our product revenues. Regulatory bodies may review products once they are on the market and determine that they do not satisfy applicable regulatory requirements. Failure to comply with requisite requirements may lead to European Economic Area regulatory bodies ordering the suspension or withdrawal of products from the European Economic Area market or, as discussed below, notified bodies withdrawing certificates of conformity for devices or the underlying quality systems.
Further, regulations may change, and any additional regulation could limit or restrict our ability to use any of our technologies, which could harm our business. We could also be subject to new international, federal, state or local regulations that could affect our research and development programs and harm our business in unforeseen ways.
Product deficiencies could result in field actions, recalls, substantial costs or write-downs; which could lead to the delay or termination of ongoing trials, if any, and harm our reputation, business or financial results.
Our products are subject to various regulatory guidelines and involve complex technologies. The U.S. Food and Drug Administration and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. Manufacturers may, under their own initiative, conduct a product notification or recall to inform physicians of changes to instructions for use or if a deficiency in a device is found or suspected.
Identified quality problems, such as failure of critical components, or the failure of third parties to supply us with sufficient conforming quantities of these products or components, could impact the availability of our products in the marketplace or lead to adverse clinical events. In addition, product improvements or product redundancies could result in scrapping or expensive rework of products, and our business, financial condition or results of operations could suffer as a result. Product complaints, quality issues and necessary corrective and preventative actions could result in communications to customers or patients, field actions, require the scrapping, rework, recall or replacement of products, result in substantial costs or write-offs, or harm our business reputation and financial results. Further, these events could adversely affect our relationships with our customers or affect our reputation, which could materially adversely affect our earnings, results and financial viability.
A future field action or recall announcement could harm our reputation with customers, negatively affect our sales, and subject us to U.S. Food and Drug Administration (or similar governmental authority) enforcement actions. Moreover, depending on the corrective action we take to redress a product’s deficiencies or defects, the U.S. Food and Drug Administration (or similar governmental authority) may require, or we may decide, that we will need to obtain new approvals or clearances for the product before we market or distribute the corrected product. Seeking these approvals or clearances may delay our ability to replace the recalled products in a timely manner. If we do not adequately address problems associated with our products, we may face additional regulatory enforcement action, including U.S. Food and Drug Administration (or similar governmental authority) warning letters, product seizures, injunctions, administrative penalties, or civil or criminal fines.
Any identified quality issue can both harm our business reputation and result in substantial costs and write-offs, which in either case could materially harm ourits business and financial results.
The off-label use or misuse of our products may harm our reputation in the marketplace, result in injuries that lead to costly product liability suits, or result in costly investigations and regulatory agency sanctions under certain circumstances.
The products we currently market in the U.S. have been cleared by the U.S. Food and Drug Administration for specific indications. Our clinical support staff and marketing and sales force have been trained not to promote our products for uses outside of the cleared indications for use, known as “off-label uses.” However, if a physician uses our products outside the scope of the cleared indications, there may be increased risk of injury to patients. Furthermore, the use of our products for indications other than those cleared by the U.S. Food and Drug Administration may not effectively treat the conditions associated with the off-label use, which could harm our reputation in the marketplace among physicians and patients, adversely affecting our operations.
If the U.S. Food and Drug Administration determines that our promotional materials or training constitute promotion of an off-label or other improper use, it could request that we modify our training or promotional materials, or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and the curtailment of our operations. Any of these events could significantly harm our business and results of operations.
The advertising and promotion of our productsSensus is subject to European Economic Area Member States governing the advertising and promotion of medical devices. In addition, voluntary European Union and national Codes of Conduct provide guidelines on the advertising and promotion of our products to the general public and may impose limitations on promotional activities with healthcare professionals. These regulations or codes may limit our ability to affectively market our products, or we could run afoul of the requirements imposed by these regulations, causing reputational harm, imposing potentially substantial costs, and adversely affecting our operations as a result.
We are required to comply with medical device reporting requirements and must report certain malfunctions, deaths, and serious injuries associated with ourits products, which can result in voluntary corrective actions or agency enforcement actions.
Under the U.S. Food and Drug AdministrationFDA’s medical device reporting regulations (21 CFR 803), medical device manufacturers are required to submit information to the U.S. Food and Drug Administration when they receive a report or become aware that a device has or may have caused or contributed to a death or serious injury or has or may have a malfunction that would likely cause or contribute to death or serious injury if the malfunction were to recur. All manufacturers placing medical devices on the market in the European Economic Area are legally bound to report any serious or potentially serious incidents involving devices they produce or sell (MEDDEV 2.12-1) to the Competent Authoritycompetent authority in whose jurisdiction the incident occurred through the European Vigilance“European Vigilance” process.
If an event subject to medical device reporting requirements occurs, weSensus will need to comply with the reporting requirements, which would adversely affect ourits reputation and subject usSensus to actions by regulatory authorities, such as ordering recalls, imposing fines, or seizing the affected products. Furthermore, any corrective action, whether voluntary or involuntary, will require the dedication of time and capital and will distract management from operating our business.business operations. Any of the foregoing would further harm ournegatively impact Sensus’s reputation, business, and financial results.
Healthcare policy changes may have a material adverse effect on ourSensus’s business.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, included, among other things, a deductible 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the U.S., with limited exceptions, effective January 1, 2013. This excise tax imposes a significant increase in the tax burden on the medical device industry, and if our efforts to offset the excise tax are unsuccessful, the increased tax burden could have an adverse effect on our results of operations and cash flows. Although this excise tax has been suspended for 2016, 2017, 2018 and 2019 the tax remains uncertain for future years. Other elements of this law, including comparative effectiveness research, an independent payment advisory board, payment system reforms including(including shared savings pilotspilots), and other provisions, one or more of which may significantly affect the payment for, and the availability of, healthcare services and may result in fundamental changes to federal healthcare reimbursement programs, any of which may materially affect numerous aspects of our business.
Other healthcare reform measures may result in more rigorous coverage criteria and in additional downward pressure on the reimbursement received for procedures utilizing our products. In addition, other legislative changes have been proposed and adopted since the law discussed above was enacted that may adversely affect ourSensus’s revenues. Changes to existing laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on ourSensus’s business and financial operations. Any reduction in reimbursement from Medicare or other government programs may result in a reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent usSensus from being able to increase revenue, attain profitability, or commercialize ourits devices. In addition, other legislative changes may be enacted or existing regulations, guidance, or interpretations may be changed, each of which may adversely affect our operations.
Risks Related to our Intellectual Property
If ourSensus’s patents and other intellectual property rights do not adequately protect ourits products, weit may lose market share to competitors and be unable to operate our business profitably.
OurSensus’s success significantly depends on ourits ability to protect our proprietary rights to the technologies used in ourits products. We relySensus relies on the patent protection of two U.S. patents and two foreign patents, which we have acquired, as well as a combination of copyright, trade secret, and trademark laws, and nondisclosure, confidentiality, and other contractual restrictions, to protect ourits proprietary technology. WeSensus also havehas patent applications currently pending and in the process of being submitted. However, these legal means afford only limited protection and may not adequately protect ourits rights or permit usSensus to gain or keep any competitive advantage. For example, some or all of ourthe pending patent applications or any future pending applications may be unsuccessful. The U.S. Patent and Trademark Office may deny or require significant narrowing of claims in ourthe pending patent applications or future patent applications, and patents issued as a result of these patent applications, if any, may not provide usSensus with significant commercial protection or be issued in a form that is advantageous to us. Weadvantageous. Sensus could also incur substantial costs in proceedings before the U.S. Patent and Trademark Office. These proceedings could result in adverse decisions as to the priority of ourits inventions and the narrowing or invalidation of claims in ourits issued patents. Third parties may successfully challenge our issued patents and those that may be issued in the future, which would render these patents invalidatedinvalid or unenforceable, and which in turn could limit ourSensus’s ability to stop competitors from marketing and selling related products. In addition, our pending patent applications include claims to aspects of ourSensus’s products and procedures that are not currently protected by issued patents, and third parties may successfully patent those aspects before us or otherwise challenge our rights to these aspects.
Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may be able to design around ourSensus’s patents or develop products that provide outcomes that are comparable to ourSensus’s products. Although we haveSensus has entered into confidentiality agreements and intellectual property assignment agreements with certain of ourits employees, consultants, and advisors in order to protect our intellectual property and other proprietary technology, these agreements may not be enforceable or may not provide meaningful protection for trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. In addition, we haveSensus has not sought patent protection in all countries where we sell ourit sells products. If we failSensus fails to timely file a patent application in any such country or major market, weSensus may be precluded from doing so at a later date. Competitors may use ourSensus’s technologies in jurisdictions where we haveSensus has not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories in which we haveSensus has patent protection that may not be sufficient to terminate infringing activities. Furthermore, the laws of some foreign countries may not protect intellectual property rights to the same extent as the laws of the U.S., if at all.
In the event a competitor infringes upon one of ourSensus’s patents or other intellectual property rights, enforcing those patents and rights may be difficult and time consuming. Even if successful, litigation to defend ourthese patents against challenges or to enforce ourSensus’s intellectual property rights could be expensive and time consuming and could divert management’s attention from managing our business.attention. Moreover, weSensus may not have sufficient resources to defend our patents against challenges or to enforce our intellectual property rights, any of which would adversely affect ourits ability to compete and ourcompete. Any of the foregoing would negatively impact Sensus’s business, operations, as a result.and financial results.
If ourSensus’s trademarks or trade names are not adequately protected, then weSensus may be unable to build name recognition in our markets of interest and ourits business may be adversely affected.
OurSensus’s registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, or declared generic, or determined to infringe other marks. WeSensus may be unable to protect ourthe rights to these trademarks and trade names, which we needit needs to build name recognition by potential partners or customers in markets of interest. If ourthese trademarks are challenged, infringed upon, circumvented, or declared generic or infringing, or if we areSensus is unable to establish name recognition based on ourthese trademarks and trade names, then weit may be unable to compete effectively and ourSensus’s business may be adversely affected.
The medical device industry is characterized by extensive patent litigation, and if we becomeSensus becomes subject to litigation, it could be costly, result in the diversion of management’s attention, require us to pay significant damages or royalty payments, or prevent us from marketing and selling our existing or future products.
The medical device industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Determining whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Our competitors may assert that their products, the components of those products, the methods of using those products, or the methods we employ in processing those products are covered by U.S. or foreign patents held by them. In addition, they may claim that their patents have priority over us because their patents were issued first. Because patent applications can take many years to issue, our products that currently do not infringe on existing issued patents may later infringe on patents that are pending now or in the future. Our products might also inadvertently infringe on currently issued patents.issues. As the number of participants in the market for skin cancer and general oncology devices and treatments increases, the possibility of patent infringement claims against usSensus increases. Any infringement claims, litigation or other proceedings would place a significant strain on ourSensus’s financial resources, divert the attention of management from the core business and harm ourSensus’s reputation.
A larger more established company could allege that we infringed its patent, and that we owe royalty payments on sales of certain products as a result. Any claim against us, even without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from the core business and harm our reputation. If the appropriate authority upholds the company’s patent as valid and enforceable and finds that we infringed on the patent, we could be required to pay substantial damages, including treble, or triple, damages and royalties if an infringement is found to be willful, and we could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. A license may not be available on reasonable terms, if at all, and we may be unable to redesign products in a way that would not infringe those patents. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our products, either of which could have a significant adverse effect on our business, financial condition and results of operations.
Any potential intellectual property litigation also could force us to do one or more of the following:
Any of the foregoing could have a material adverse effect on ournegatively impact Sensus’s business, results of operations, and financial condition.results.
We may indemnify our customers and international distributors with respect to infringement by our products of the proprietary rights of third parties. Third parties may assert infringement claims against customers or distributors. These claims may require us to initiate or defend protracted and costly litigation on behalf of customers or distributors, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of customers or distributors or may be required to obtain licenses for the products they use, each which would adversely affect our operations. If we cannot obtain all necessary licenses on commercially reasonable terms, customers may be forced to stop using our products, which would materially and adversely affect our business.
We may be subject to damages resulting from claims that we, our employees or independent distributors have wrongfully used or disclosed alleged trade secrets of competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including our competitors or potential competitors. Many of our independent distributors sell, or in the past have sold, products of competitors. We may be subject to claims that we, our employees or independent distributors have inadvertently or otherwise used or disclosed the trade secrets or other proprietary information of our competitors. In addition, we have been and may in the future be subject to claims that we caused an employee or independent distributor to break the terms of his or her non-competition agreement or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending these claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize products, which could have an adverse effect on our business, financial condition and results of operations.
Adverse outcomes in litigation or similar proceedings could adversely impact our business.
WeSensus may in the future be named as a party to litigation or other similar legal proceedings. Adverse outcomes in any or all of these proceedings could result in monetary damages or injunctive relief that could adversely affect ourits ability to continue conducting our business. If an unfavorable final outcome in any such matter becomes probable and reasonably estimable, ourthe Company’s financial condition could be materially and adversely affected.
Risks Related to the Ownership of ourSensus’s Securities
We have a history of net losses prior to 2021. If we do not maintain profitability, our financial condition and the value of our common stock could suffer.
The Company has a history of net losses. The historical losses from inception through December 31, 2020 totaled approximately $21.9 million. The Company reported net income of $24.2 million and $4.1 million, respectively, during the years ended December 31, 2022 and 2021. The Company has significantly reduced its research and development expenses and is planning to continue to control these expenses. However, there can be no assurances that this and other actions will result in the Company’s continued profitability.
Limited trading activity for shares of ourSensus’s common stock and warrants may contribute to price volatility.
While ourSensus’s common stock and warrants areis listed and traded on the Nasdaq Capital Market, there has been limited trading activity in our securities. The average daily trading volume of our common stock since the shares began trading on July 26, 2016 through December 31, 2017 was approximately 9,000 shares per day.Company’s shares. Due to the limited trading activity of our securities,Sensus’s common stock, relativity small trades may have a significant impact on the price of our securities.common stock.
With two exceptions, we have never declared or paid cash dividends on our common stock and doThe Company does not anticipate paying dividends infor the foreseeable future. As a result, youinvestors must rely on price appreciation of ourthe Company’s common stock for a return on yourits investment in the foreseeable future.
Except for a required tax distribution in 2014 in the aggregate amount of $45,421, and a one-time payment in the aggregate amount of approximately $2.6 million paid to former holders of our units with a preferred return in 2016, we have never declared or paid cash dividends on our common stock. We currently expectThe Company expects to retain ourany funds and future earnings to support the operation, growth, and development of our business. We doits business and does not anticipate paying any cash dividends on ourits common stock in the foreseeable future. As a result, a return on youran investor’s investment in the near future will occur only if ourthe Company’s share price appreciates. Our securities pricesThe Company’s common stock price may not appreciate in value or maintain the pricesprice at which youan investor purchased ourthese securities, and in either case, you may not realize a return on investment or could lose all or part of youran investment in ourthe Company’s securities.
Furthermore, anyAny future determination to declare cash dividends will be made at the discretion of our boardthe Company’s Board of directorsDirectors (the “Board of Directors”) and will be subject to compliance with applicable laws and covenants under any future credit facilities, which may restrict or limit ourthe Company’s ability to pay dividends. For example, our currentthe Company’s revolving line of credit restricts ourwith SVB (now with the Bridge Bank) has restricted the ability to pay dividends or make any distributions or payments or redeem, retire, or purchase any capital stock without the prior written consent of the lender, provided that wethe Company may pay dividends solely in common stock. Should the Company enter into a new credit facility or facilities following the closing of SVB, any such facility may contain similar or additional restrictions on the payment of dividends or may prohibit the payment of dividends altogether (see “Risk Factors -- Sensus may be required to obtain additional funds in the future, and these funds may not be available on acceptable terms or at all” for additional information). Also, the form, frequency, and amount of dividends will depend upon ourthe Company’s future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions, and other factors that the boardBoard of directorsDirectors may deem relevant. WeSensus may not pay dividends as a result of any of the foregoing, and in these cases, you willan investor would need to rely on price appreciation of ourthe Company’s common stock for a return on your investment.
General stock market volatility could result in significant declines in the trading price of our securities, and you could lose all or a substantial part of your investment.
Stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our securities. In addition, limited trading volume of our securities may contribute to its future volatility. Price declines in our securities could result from general market and economic conditions, some of which are beyond our control, and a variety of other factors, including any of the risk factors described in this Annual Report on Form 10-K. These broad market and industry factors may harm the market price of our securities, regardless of our operating performance, and could cause you to lose all or part of your investment in our securities since you might be unable to sell your securities at or above the price you paid. Factors that could cause fluctuations in the market price of our securities include the following:
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
We are both an “emerging growth company” andSensus is a “smaller reporting company”company,” and the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies may make ourSensus’s common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies but not to “emerging growth companies,” including, but not limited to:
We will remain an emerging growth company until the earlier of (1) December 31, 2021, (2) the last day of the year in which (a) we have total annual gross revenue of at least $1 billion, or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (3) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period. Investors may find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.
Under the Jumpstart Our Business Startups Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We are a “smaller reporting company,” meaning that our outstanding common stock held by nonaffiliates had a value of less than$75 million at the end of our most recently completed second fiscal quarter. Thus, even if we are no longer an emerging growth company, asAs a smaller reporting company, we couldSensus can take advantage of certain reduced governance and disclosure requirements, including not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting. As a result, investors and others may be less comfortable with the effectiveness of ourSensus’s internal controls and the risk that material weaknesses or other deficiencies in internal controls go undetected may increase. In addition, as a smaller reporting company, we takeSensus takes advantage of ourthe ability to provide certain other less comprehensive disclosures in our SEC filings, including, among other things, providing only two years of audited financial statements in annual reports and simplified executive compensation disclosures. Consequently, it may be more challenging for investors to analyze ourSensus’s results of operations and financial prospects, as the information we provideprovided to stockholders may be different from what one might receive from other public companies in which one holds shares.
OurSensus’s executive officers directors and principal stockholdersdirectors may exert control over usthe Company and may exercise influence over matters subject to stockholder approval.
OurSensus’s executive officers and directors, together with their respective affiliates, beneficially owned approximately 40%11% of our outstanding common stock as of December 31, 2017.February 21, 2023. Accordingly, these stockholders, if they act together, may exercise substantial influence over matters requiring stockholder approval, including the election of directors and approval of corporate transactions, such as a merger. This concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discourage a potential acquirer from attempting to obtain control over us,Sensus, which in turn could have a material adverse effect on the market value of ourSensus’s common stock.
If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business,Sensus, the price of ourSensus’s securities and trading volume could decline.
The trading market for ourSensus’s securities will depend,depends, in part, on the research and reports that securities or industry analysts publish about us or our business. Weus. Sensus may be unable to attract or sustain coverage by well-regarded securities and industry analysts. If either none or only a limited number of securities or industry analysts cover us or our business,Sensus, or if these securities or industry analysts are not widely respected within the general investment community, the trading price for ourSensus’s securities would be materially and negatively impacted. In the event we obtainSensus obtains securities or industry analyst coverage, if one or more of the analysts who cover us or our business downgrade ourSensus downgrades the securities or publishpublishes inaccurate or unfavorable research about us or our business,the Company, the price of ourSensus’s securities would likely decline. If one or more of these analysts cease coverage of us or our business,Sensus, or fail to publish reports on us or our businessSensus regularly, demand for ourthe Sensus’s securities could decrease, which might cause the price of ourits securities and trading volume to decline.
OurThe Company’s certificate of incorporation ourand bylaws, and Delaware law contain provisions that could discourage another company from acquiring usthe Company and may prevent attempts by ourthe Company’s stockholders to replace or remove ourthe current directors and management.
Provisions of the Delaware law (where we are incorporated), ourGeneral Corporation Law (“DGCL”) and the Company’s certificate of incorporation and bylaws may discourage, delay, or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which youan investor might otherwise receive a premium for yourits stock. In addition, these provisions may frustrate or prevent any attempts by ourthe Company’s stockholders to replace or remove ourthe current management by making it more difficult for stockholders to replace or remove our boarddirectors from the Board of directors.Directors. These provisions include:
authorizing the issuance of “blank check” preferred stock without any need for action by stockholders; |
requiring supermajority stockholder voting to effect any merger or sale of all or substantially all of |
● | eliminating the ability of stockholders to call and bring business before special meetings of stockholders; |
● | prohibiting stockholder action by written consent; |
● | establishing advance notice requirements for nominations for election to the |
● | dividing |
● | providing that |
In addition, we arethe Company is subject to Section 203 of the Delaware General Corporation Law,DGCL, which may have an anti-takeover effect with respect to transactions not approved in advance by our boardthe Board of directors,Directors, including discouraging takeover attempts that could have resultedresult in a premium over the market price for shares of ourthe Company’s common stock.
These provisions will apply even if a takeover offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our boardthe Board of directorsDirectors determines is not in ourthe best interests of the Company and our stockholders’ best interestsits stockholders and could also affect the price that some investors are willing to pay for ourthe Company’s common stock.
OurThe Company’s certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between usthe Company and ourits stockholders, which could limit our stockholders’a stockholder’s ability to obtain a favorable judicial forum for disputes with usthe Company or ourits directors, officers, or employees.
OurThe Company’s certificate of incorporation provides that, unless we consentthe Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the exclusive forum forfor: any derivative action or proceeding brought on our behalf;behalf of the Company; any action asserting a breach of fiduciary duty; any action asserting a claim against usthe Company arising pursuant to the Delaware General Corporation Law, ourDGCL, the Company’s certificate of incorporation, or our bylaws; or any action asserting a claim against usthe Company that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with usthe Company or ourits directors, officers, or other employees, which may discourage these lawsuits against usthe Company and ourits directors, officers, and other employees. If a court were to find the choice of forum provision contained in ourthe Company’s certificate of incorporation to be inapplicable or unenforceable in an action, wethe Company may incur additional costs associated with resolving the action in other jurisdictions, which could harm our business and financial condition.
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If we failthe Company fails to maintain proper and effective internal controls, ourthe Company’s ability to produce accurate and timely financial statements could be impaired and investors’ views of usthe Company or ourits business could be harmed, resulting in a decrease in value of ourthe Company’s common stock.
As a public company, we arethe Company is required to maintain internal control over financial reporting and to report any material weaknesses in ourthe Company’s internal controls. In addition, beginning with this annual report on Form 10-K for our year ended December 31, 2017, we arethe Company is required to furnish a report by management on the effectiveness of ourthe internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. In addition, ourthe Company’s independent registered public accounting firm will be required to attest to the effectiveness of ourthe internal control over financial reporting beginning with ourthe Company’s annual report on Form 10-K following the date on which we arethe Company no longer an emerging growth company, which may be up to five full years following the date of our IPO, or we are no longerqualifies as a smaller reporting company. Our complianceCompliance with Section 404 of the Sarbanes-Oxley Act will require usthe Company to incur substantial accounting expense and expend significant management efforts. If we arethe Company is unable to comply with the requirements of Section 404 in a timely manner, or we or ourthe Company and the independent registered public accounting firm identify deficiencies in ourthe internal control over financial reporting that are deemed to be material weaknesses, the market price of ourthe Company’s common stock could decline and wethe Company could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities, which would require additional financial and management resources.
Our ability to implement our business plan successfully and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors when required under Section 404 of the Sarbanes-Oxley Act. Moreover, we may not implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and, when required, our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of our inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements or omissions.
Item 1B. UNRESOLVED STAFF COMMENTS
None.The Company has no unresolved comments from the SEC staff relating to the Company’s periodic or current reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended.
Item 2. PROPERTIES
OurThe Company’s corporate headquarters and principal office is located in Boca Raton, Florida. Our corporate headquartersFlorida and principal office occupies approximately 8,926 square feet of leased space.space under a lease that currently expires in September 2027. The lease was last extended in January 2018 and will expire in September 2022. Our lease contains escalating rent clauses. Our rental expense in 2017 was approximately $178,000. We believeCompany believes that ourthe current facilities are suitable and adequate to meet ourthe Company’s current needs and that suitable additional space will be available as and when needed on acceptable terms. Ourneeded. The Company’s main manufacturing function is physically located at our third partythird-party manufacturer’s facility in Oak Ridge, Tennessee. Additional disclosures have been included within Note 8, Commitments and Contingencies, of the consolidated financial statements.
Item 3. LEGAL PROCEEDINGS
We areFrom time to time, Sensus is party to certain legal proceedings in the ordinary course of business. We assess, in conjunctionManagement, after consultation with our legal counsel, currently does not anticipate that the aggregate liability arising out of certain legal proceedings will have a material effect on Sensus’s results of operations, financial position, or cash flows and have assessed that there is no need to record a liability for litigationthese legal proceedings and related contingencies. Additional disclosures have been included within Note 8, Commitments and Contingencies of the consolidated financial statements.
Item 4. MINE SAFETY DISCLOSURE
Not applicable.
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PART II.
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Market PricesInformation
OurThe Company’s Class A common stock tradesis publicly traded on the NasdaqNASDAQ Capital Market under the symbol “SRTS.” We had a total
Holders
At the close of 42business on March 1, 2023, there were 20 common stockholders of record. This does not include “street name” or beneficial owners, whose shares are held of record as of February 1, 2018. The following table presents the range of highby banks, brokers, and low closing sales prices reported on the Nasdaq Capital Market.other financial institutions.
2017 | 2016 | |||||||||||||||||||||||||||||||
Fourth Quarter | Third Quarter | Second Quarter | First Quarter | Fourth Quarter | Third Quarter(1) | Second Quarter | First Quarter | |||||||||||||||||||||||||
Common stock price: | ||||||||||||||||||||||||||||||||
High | $ | 6.00 | $ | 6.01 | $ | 4.65 | $ | 5.24 | $ | 6.50 | $ | 6.69 | $ | N/A | $ | N/A | ||||||||||||||||
Low | 4.85 | 3.50 | 3.52 | 4.35 | 5.10 | 5.70 | N/A | N/A | ||||||||||||||||||||||||
Close | 5.16 | 4.98 | 4.02 | 4.39 | 5.25 | 5.70 | N/A | N/A | ||||||||||||||||||||||||
Cash dividends per share(2) | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Dividends
Dividends
We have notThe Company has never declared or paid any dividenddividends on ourits common stock. Following the completion of our initial public offering, we paid a cash dividend of approximately $2.6 million to former holders of our limited liability company units with a preferred return. We anticipatestock and anticipates that for the foreseeable future all earnings will be retained for use in our business and norather than paid out as dividends. Any future payment of cash dividends will be paid to stockholders. Any payment of cash dividends in the future on the Company’s common stock will be dependent upon ourthe Company’s financial condition, results of operations, current and anticipated cash requirements, and plans for expansion, as well as other factors that the Board of Directors deems relevant. Additionally, certain contractual agreements and provisions of Delaware law impose restrictions on our ability to pay dividends. For example, ourthe Company’s current revolving line of credit restricts ourthe ability to pay dividends or make any distributions or payments or redeem, retire, or purchase any capital stock without the prior written consent of the lender, provided that wethe Company may pay dividends solely in common stock.stock without prior consent. Should the Company enter into a new credit facility or facilities, any such facility may contain similar or additional restrictions on the payment of dividends or may prohibit the payment of dividends altogether (see “Risk Factors -- Sensus may be required to obtain additional funds in the future, and these funds may not be available on acceptable terms or at all” for additional information). Additionally, Section 170(a) of the Delaware General Corporation Law (“DGCL”)DGCL only permits dividends to be declaredpaid out of two legally available sources: (1) out of surplus, or (2) if there is no surplus, out of net profits for the year in which the dividend is declared or the preceding year (so-called “nimble dividends”). However, dividends may not be declared or paid out of net profits if “the capital of the corporation, computed in accordance with sections[sections] 154 and 244 of[of the DGCL,DGCL], shall have been diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.” Contractual obligations and applicable law will restrict ourthe ability to declare and pay dividends in the future.
Use of Proceeds from the Sale of Registered Securities
In June 2016, we completed an initial public offering, or IPO, of units consisting of one share of common stock and one warrant to purchase one share of common stock. In connection with the IPO, we issued 2,300,000 units of our common stock at a price of $5.50 per unit, including 300,000 units pursuant to the underwriters’ full exercise of their over-allotment option for an aggregate offering price of $12.65 million. The offer and sale of all of the securities in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1, as amended (File No. 333-209451), which was declared effective by the SEC on June 2, 2016.
We received total net proceeds from the IPO of approximately $10.5 million after deducting underwriting discounts and commissions of approximately $0.9 million and other offering expenses of approximately $1.4 million. As of December 31, 2017, we have used approximately $2.6 million for the payment of dividends to former preferred investors and approximately $3.8 million to fund our operations.
The remaining proceeds from the IPO have been invested in highly-liquid money market funds and debt securities with maturities of 18 months or less. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on June 2, 2016.
Unregistered Sales of Securities
There were no unregistered sales of securities during the year ended December 31, 2017.2022.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
None.In March 2022, the Company announced that its Board of Directors had authorized a program to purchase up to $3,000,000 of shares of its common stock. Purchases may be made in a variety of methods, including open market, from time to time, depending upon market conditions, including the market price of the common stock, and other factors. The program has no time limit and may be modified, suspended, or discontinued at any time.
During the three months ended December 31, 2022, the following repurchases were made:
Not applicable.
Total number of shares repurchased | Average price paid per share | Total number of shares (or units) purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | |||||||||||||
October 1, 2022 to October 31, 2022 | - | $ | - | - | $ | 2,002,346 | ||||||||||
November 1, 2022 to November 30, 2022 | 130,630 | $ | 7.52 | 130,630 | $ | 1,020,623 | ||||||||||
December 1, 2022 to December 31, 2022 | 168,056 | $ | 5.92 | 168,056 | $ | 25,953 | ||||||||||
Total | 298,686 | $ | - | 298,686 |
Item 6. RESERVED
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following management’s discussion and analysis (“MD&A”) in conjunction with the information set forth within the financial statements and related notes included in this Annual Report on Form 10-K. The following information should provide
Overview
As discussed elsewhere in this Report, Sensus achieved profitability for the first time in 2021 and increased profitability in 2022, and seeks to maintain and increase profitability by, among other things, increasing sales and managing operational expenses where necessary in order to continue to invest in research and development of new products and marketing initiatives to promote the Company’s products. However, Sensus faces a better understandingnumber of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2017 compares with the prior year. Throughout this section, Sensus Healthcare, Inc. is referred to as “Company,” “we,” “us,” or “our.”
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including this MD&A section, 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,” “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. Please see the Introductory Note and Item 1A Risk Factors of this Annual Report for a discussion of factors2023 that could causeimpact our actual resultsability to differ materially from those in the forward-looking statements.
However, other factors besides those listed in Item 1A Risk Factors or discussed inachieve this Annual Report alsogoal. These include inflation and international trade issues. Either of these matters could adversely affect our results,the Company’s ability to do business in a number of countries 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.
geographic regions, including China.
Components of our results of operations
We manageSensus manages our business globally within one reportable segment, which is consistent with how our management reviews ourviews the business, prioritizes investment and resource allocation decisions, and assesses operating performance.
Results of Operations
For the Years Ended December 31, | ||||||||
(in thousands, except shares and per share data) | 2022 | 2021 | ||||||
Revenues | $ | 44,532 | $ | 27,042 | ||||
Cost of sales | 14,904 | 10,054 | ||||||
Gross profit | 29,628 | 16,988 | ||||||
Operating expenses | ||||||||
Selling and marketing | 6,329 | 4,838 | ||||||
General and administrative | 5,008 | 4,594 | ||||||
Research and development | 3,460 | 3,436 | ||||||
Total operating expenses | 14,797 | 12,868 | ||||||
Income from operations | 14,831 | 4,120 | ||||||
Other income (expense): | ||||||||
Gain (loss) on sale of assets | 12,779 | (1 | ) | |||||
Interest income | 382 | 2 | ||||||
Interest expense | (2 | ) | (2 | ) | ||||
Other income (expense), net | 13,159 | (1 | ) | |||||
Income before income tax | 27,990 | 4,119 | ||||||
Provision for income taxes | 3,746 | - | ||||||
Net income | $ | 24,244 | $ | 4,119 | ||||
Net income per share – basic | $ | 1.47 | $ | 0.25 | ||||
diluted | $ | 1.46 | $ | 0.25 | ||||
Weighted average number of shares used in | ||||||||
computing net income per share – basic | 16,480,991 | 16,476,122 | ||||||
diluted | 16,618,214 | 16,503,134 |
Revenue
2022 Compared with 2021
Revenues
Our sales primarily relateof $44.5 million in 2022 increased $17.5 million, or 65%, from $27.0 million in 2021. The 65% increase was driven by a higher number of units sold in 2022 in response to sales of our devices. We recognize product revenue upon shipment provided that there is persuasive evidence of an arrangement, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable, and collection of the resulting receivable is reasonably assured. We do not provide a right of return related to product sales. Revenues for service contracts are recognized over the service contract period on a straight-line basis. Revenue for rentals of equipment is recognized over the lease term on a straight-line basis.increased demand.
We sell products and services under multiple-element arrangements with separate units of accounting. In these situations, total consideration is allocated to the identified units of accounting based on their relative selling prices and revenue is then recognized for each unit based on its specific characteristics. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. The principal deliverables in our multiple deliverable arrangements that qualify as separate units of accounting consist of (i) sales of medical devices and accessories and (ii) service contracts. Service contracts are considered a performance obligation only if they provide a material right, otherwise they are considered options. Other performance obligations, including installation and customer training, are considered inconsequential and are combined with the product as one unit of accounting. Selling prices are established using vendor-specific objective evidence (VSOE). If VSOE does not exist, the Company uses its best estimate of the selling prices for the deliverables.
We operate in a highly-regulated environment and is continually entering into new markets in which regulatory approval is sometimes required prior to the customer being able to use our products. In these cases, where regulatory approval is pending, revenue is deferred until such time as regulatory approval is obtained and customer acceptance becomes certain.
Deferred revenue consists of payments from customers for long term separately priced service contracts, sales pending regulatory approval and deposits on products.
We provide warranties, generally for one year, in conjunction with the sale of our products. These warranties are short term in nature and entitle the customer to repair, replacement, or modification of the defective product subject to the terms of the respective warranty. We record an estimate of future warranty claims at the time we recognize 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.
Cost of sales
Since 2010, we have used a third party manufacturer for of $14.9 million in 2022 increased by $4.8 million, or 48%, from $10.1 million in 2021, reflecting the production and manufacturehigher number of our main products, the SRT-100 product line,units sold.
Gross profit of $29.6 million, or 66.5% of revenue, in accordance with our product specifications. Cost2022 increased by $12.6 million, or 74%, from $17.0 million, or 62.8% of sales consists primarily of direct material, direct labor, overhead, depreciation and amortization. A significant portion of our cost of sales consists of costs paid to our third party manufacturer.
Gross profit
We calculate gross profit as net revenue, less cost of sales. Our gross profit has been and will continue to be affectedin 2021. The increases were driven by a variety of factors, including average selling price, manufacturing costs, production volumes, product reliability and the implementation over time of cost-reduction strategies. Our gross profit may fluctuate from quarter to quarter.
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Selling and marketing
We focus on two primary markets - private dermatology practices and radiation oncologists in both private and hospital settings. We currently employ a multi-tier sales strategy in an attempt to optimize geographic coverage and focus on what we perceive to be our key markets. This multi-tier sales model uses a direct salesforce and international dealers and distributors.
General and administrative
General and administrative expense, or G&A, consists primarily of salaries, employee benefits, bonuses, and related costs for personnel who support our general operations such as executive management, finance, accounting and administrative functions, as well as legal and other professional fees, director and officer insurance and other public company expenses.
Research and development
Research and development costs relate to products under development by us and quality and regulatory costs and are expensed as incurred.
Other income (expense)
Other income (expense) primarily consists of interest earned on cash balances and investments less interest payments made pursuant to our secured credit facility with Silicon Valley Bank. Our interest expense will fluctuate in future periods to the extent we incur additional, or pay down, indebtedness.
Income taxes
Until December 31, 2015, we were organized as a limited liability corporation (LLC) taxed as a pass-through entity and accordingly, we did not recognize a federal or state income tax provision. Beginning in 2016, as a result of our conversion from an LLC to a Delaware corporation, we began recording a provision for income tax (benefit) expense which consists of income taxes in jurisdictions in which we conduct business. We are taxed at the rates applicable within each jurisdiction in which we operate or generate revenue. The composite income tax rate, tax provisions, deferred tax assets and deferred tax liabilities vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved.
On December 22, 2017, new federal tax reform legislation was enacted in the United States, resulting in significant changes from previous tax law. The new tax law reduced the federal corporate income tax rate to 21% from 35% effective January 1, 2018. Our federal income tax expense for periods beginning in 2018 will be based on the new rate. The new tax law also provides for immediate deduction of 100% of the costs of qualified property that have been incurred and the property placed in service during the period from September 27, 2017 to December 31, 2022. This provision will begin to phase down by 20% per year beginning January 1, 2023 and will be completely phased out as of January 1, 2027.
Inflation
Inflation has not had a material impact on net sales, revenues or income from continuing operations for our two most recent years as a result of historically low levels of inflation.
39
Significant trends and uncertainties impacting our business
Many third party payors follow coverage decisions and payment amounts determined by the CMS, which administers the U.S. Medicare program, in setting their coverage and reimbursement policies. Effective January 1, 2016 and 2017, the total reimbursement for an episode of care remained similar to the reimbursement in prior years.
Results of Operations
For the Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Revenues | $ | 20,587,827 | $ | 14,811,175 | ||||
Cost of Sales | 6,787,836 | 4,965,372 | ||||||
Gross Profit | 13,799,991 | 9,845,803 | ||||||
Operating Expenses | ||||||||
Selling and marketing | 8,305,315 | 4,915,440 | ||||||
General and administrative | 3,721,627 | 3,469,332 | ||||||
Research and development | 5,490,489 | 1,824,150 | ||||||
Total Operating Expenses | 17,517,431 | 10,208,922 | ||||||
Loss From Operations | (3,717,440 | ) | (363,119 | ) | ||||
Other Income (Expense) | ||||||||
Interest income | 75,807 | 38,538 | ||||||
Interest expense | (68,881 | ) | (21,867 | ) | ||||
Other Income (Expense), net | 6,926 | 16,671 | ||||||
Net Loss | $ | (3,710,514 | ) | $ | (346,448 | ) |
Year ended December 31, 2017 compared to the year ended December 31, 2016
Total revenue. Total revenue was $20,587,827 for the year ended December 31, 2017 compared to $14,811,175 for the year ended December 31, 2016, an increase of $5,776,652, or 39.0%. The growth in revenue was attributable to an increase in the volume of systems sold as well as a higher percentage of sales of the higher priced SRT-100 Vision product in the current year.
Total cost of sales. Cost of sales was $6,787,836 for the year ended December 31, 2017 compared to $4,965,372 for the year ended December 31, 2016, an increase of $1,822,464, or 36.7%. The increase in cost was due to a greater number of systemsunits sold during the year ended December 31, 2017 compared to the corresponding period in 2016.2022 and service revenue on installed units.
Gross profit. Gross profit was $13,799,991 for the year ended December 31, 2017 compared to $9,845,803 for the year ended December 31, 2016, an increase of $3,954,188 or 40.2%, for the reasons discussed above. Our overall gross profit margin was 67.0% in the year ended December 31, 2017 compared to 66.5% in the corresponding period in 2016, mainly due to increased sales of the higher margin SRT-100 Vision product.
Selling and marketing.Selling and marketing expense was $8,305,315 for the year ended December 31, 2017 compared to $4,915,440 for the year ended December 31, 2016, an increaseexpenses of $3,389,875$6.3 million in 2022 increased by $1.5 million, or 69.0%.31%, from $4.8 million in 2021. The increase was primarily attributable to higher spending on marketing activities, and an increase in sales personnel as well as increased participation in tradeshows and other marketing expenses.headcount.
General and administrative.General and administrative expense was $3,721,627 for the year ended December 31, 2017 comparedexpenses of $5 million in 2022 increased by $0.4 million, or 9%, from $4.6 million in 2021, due primarily to $3,469,332 for the year ended December 31, 2016, an increase of $252,295, or 7.3%. The increase was primarily due to director and officer insurance and other public company expenses, an increase in headcount,higher compensation and bad debt expense, partially offset by a reduction in professional fees and stock compensation expense.
Research and development.Research and development expense was $5,490,489 for the year ended December 31, 2017 compared to $1,824,150 for the year ended December 31, 2016, an increase expenses of $3,666,339$3.5 million in 2022 increased by $0.1 million, or 201.0%.3%, from $3.4 million in 2021. The increase inCompany expects research and development spending wasexpenses in 2023 to be generally consistent with 2022.
Other income (expense), net of $13.2 million in 2022 increased by $13.3 million from $0.1 million in 2021 and is primarily attributable to new research projects that began in the fourth quartergain on sale of 2016.
assets of $12.8 million (See Note 2, Other income (expense). DispositionWe incur interest expense in connection with our secured credit facility with Silicon Valley Bank, to the consolidated financial statements) and an interest income from our investment in held-to-maturity securities and cash equivalents. We realized an immaterial decrease in other income in 2017 compared to 2016.of $0.4 million.
Financial Condition
OurThe Company’s cash, cash equivalent, and investment balance decreased from $12,608,619increased to $25.5 million at December 31, 2016 to $11,190,1032022 from $14.5 million at December 31, 2017,2021, primarily as a result of the operating loss during 2017.due to cash received in investing activities.
BorrowingsThere were no borrowings under the revolving line of credit were $2,214,970 as of December 31, 2017, compared to $0 at December 31, 2016.2022 and December 31, 2021.
The Company continued to take proactive steps during 2022 to manage costs and preserve liquidity. These steps included maintaining borrowing availability as a precautionary measure to preserve financial flexibility in view of the uncertainty in global markets. In 2022, the Company paid the outstanding balance ($51,021) of its 2020 loan under the Small Business Administration Paycheck Protection Program (“PPP”) enabled by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”).
Liquidity and Capital Resources
Overview
In general terms, the liquidity is a measurement of ourthe Company’s ability to meet ourits cash needs. For the yearsyear ended December 31, 20172022, funding was derived primarily from the sale of the Sculptura assets for $15 million in cash . The Company believes that cash generated by operations and 2016, a significant source of funding has beenproceeds from cash flows from financing activities, including our IPO in 2016,maturing investments, as well as from borrowings under out revolving line of credit. We believe that proceeds from our IPO, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements. Ourrequirements for the next 12 months from the date of this annual report. Based upon information available to us, we believe that the Bridge Bank has assumed all contracts of SVB in effect at the time of its failure (including our line of credit) and that the Bridge Bank is expected to continue to perform under those contracts. Accordingly, we have not yet determined whether to seek to replace the current line of credit with the Bridge Bank. (For additional information, see “Risk Factors -- Sensus may be required to obtain additional funds in the future, and these funds may not be available on acceptable terms or at all”). The Company’s liquidity position and capital requirements may also be impacted by a number of factors, including the following:
● | fluctuations in gross margins, operating expenses, and net results; and |
● | financial market instability or disruptions to the banking system due to bank failures, particularly in |
OurThe Company’s primary short-term capital needs, which are subject to change, include expenditures related to:
● | expansion of |
● | expansion of |
WeSensus’s management regularly evaluate ourevaluates cash requirements for current operations, commitments, capital requirements, and business development transactions, and we may electseek to raise additional funds for these purposes in the future. However, there can be no assurance that it will be able to raise such funds or the terms on which such funds may be raised, if at all.
As of December 31, 2022, a substantial portion of our cash was deposited with or invested through SVB. Subsequent to the closing of SVB in March 2023, we opened a new operating account with a different bank, and we may open additional accounts from time to time in the future. However, in light of various factors, including the actions taken by the FDIC following the closing of SVB, the amount deposited in the new bank account is not, and any amounts deposited in or invested through other banks in the future are not expected to be, significant compared to the amounts deposited with and invested through SVB (now the Bridge Bank).
Cash flows
The following table provides a summary of ourthe Company’s cash flows for the periods indicated:
For the Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Net Cash Provided by (Used In): | ||||||||
Operating Activities | $ | (3,056,606 | ) | $ | (851,024 | ) | ||
Investing Activities | 6,173,913 | (7,852,140 | ) | |||||
Financing Activities | 1,925,684 | 8,680,573 | ||||||
Total | $ | 5,042,991 | $ | (22,591 | ) |
For the Years Ended | ||||||||
December 31 | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | (1,412 | ) | $ | (286 | ) | ||
Investing activities | 14,841 | 129 | ||||||
Financing activities | (2,428 | ) | (231 | ) | ||||
Total | $ | 11,001 | $ | (388 | ) |
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Cash flows from operating activities
Net cash used in operating activities was $3,056,606$1.4 million for the year ended December 31, 2017,2022, consisting of a net lossincome of $3,710,514 and$24.2 million partially offset by an increase in net operating assets of $568,857, partially offset by$12.7 million, gain on sale of assets of $12.8 million and deferred income taxes of $1.7 million, and non-cash charges of $1,222,765. The increase in net operating assets was primarily due to the increase in sales resulting in an increase in accounts receivable and an increase in account payable and accrued expenses.$1.6 million. Non-cash charges consisted primarily of stock compensation expense and depreciation and amortization.amortization, stock base compensation and product warranty charges. Net cash used in operating activities was $851,024$0.3 million for the year ended December 31, 2016,2021, consisting of a net lossincome of $346,448 and$4.1 million partially offset by an increase in net operating assets of $1,601,413, offset by$6.1 million and non-cash charges of $1,096,837.$1.7 million. Non-cash charges consisted of depreciation and amortization, stock base compensation and product warranty charges.
Cash flows from investing activities
Net cash provided inby investing activities was $6,173,913 due to matured investments of $6,461,507 and $287,594 for acquisition of property and equipment$14.8 million during the year ended December 31, 2017. Cash used2022, primarily due to proceeds from sale of assets, particularly the sale of the Sculptura assets for $15 million in cash, partially offset by acquisition of property and equipment. Net cash provided by investing activities totaled $7,852,140 forwas $0.1 million during the year ended December 31, 2016, which included $7,566,142 for the purchase2021, primarily due to proceeds from sale of debt securities held-to-maturity and $285,998 forequipment, partially offset by acquisition of property and equipment.
Cash flows from financing activities
Net cash provided byused in financing activities was $1,925,684$2.4 million during the year ended December 31, 2017,2022, primarily due to purchases of which $2,214,970 was from borrowing under the line of creditcommon stock and principal payments on our PPP loan, partially offset by $289,286 on withholding taxes paid onproceeds from exercises of stock compensation.options. Net cash provided byused in financing activities was $8,680,573$0.2 million during the year ended December 31, 2016 mostly from the net proceeds2021, primarily due to principal payments on our PPP loan.
Inflation
Increases in commodity and shipping prices and energy and labor costs have resulted in inflationary pressures across various parts of our IPO.
Indebtedness
On March 12, 2013, we entered into a two-year $3 million revolving credit facility. The credit facility was amendedbusiness and extended effective March 12, 2015 through May 12, 2017. The maximum borrowing was reducedoperations, including our partners and supply chain. We continue to $1,500,000monitor the impact of inflation in order to minimize its effects on our product cost and was limited by our eligible borrowing base of 80% of eligible accounts receivable. On September 21, 2016, a second amendmentsales.
Indebtedness
Please see Note 5, Debt, to the credit facility extended the facility through September 21, 2017, increased the maximum borrowing to $2,000,000 and expanded the eligible accounts receivables to include certain international receivables. We were not in compliance in April and May 2017 with one of ourconsolidated financial covenants. On June 27, 2017, the covenant defaults were waived and the agreement was further amended to modify the financial covenants effective June 27, 2017. An amendment signed on September 15, 2017 extended the maturity date of the credit line through November 19, 2017 and on October 31, 2017, we again amended our revolving credit facility to extend the maturity to October 31, 2019. The amount of credit available under the amended facility will equal the lesser of the $5 million commitment amount or the borrowing base plus the $2.5 million non-formula sub-limit. The borrowing base consists of 80% of eligible accounts receivable, as defined in the agreement.statements.
Interest, at Prime plus 0.75% (5.25% at December 31, 2017) and Prime plus 1.50% on non-formula borrowings (6.00% at December 31, 2017), is payable monthly, and the outstanding principal and interest are due on the maturity date. The facility is secured by all of our assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of our assets and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. Approximately $2,215,000 was outstanding under the revolving credit facility at December 31, 2017 and $0 at December 31, 2016. We pay commitment fees of 0.25% per annum on the average unused portion of the line of credit.
Contractual Obligations and Commitments
Our only long-term contractual commitment is the lease of our office space in Boca Raton, Florida. In July 2016, we renewed our lease and expanded our office space from 4,551 to 8,028 square feet. The lease expires in September 2022 and lease payments increase by 3% annually. Future minimum lease payments as of December 31, 2017 are as follows:
Year | Minimum Lease Payment | ||||
2018 | 190,000 | ||||
2019 | 196,000 | ||||
2020 | 202,000 | ||||
2021 | 208,000 | ||||
2022 | 160,000 | ||||
Total | $ | 956,000 |
Off-Balance Sheet ArrangementsPlease see Note 8, Commitments and Contingencies, to the consolidated financial statements.
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 analysisThe preparation of our financial condition and results of operations are based on ourconsolidated financial statements which have been prepared in accordanceconformity with generally accepted accounting principles inGAAP requires management to make estimates and assumptions that affect the U.S., or GAAP. We havereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. Management has identified certain accounting policies as critical to understanding ourthe financial condition and results of our operations. For a detailed discussion on the application of these and other accounting policies, see the notes to ourthe financial statements included in this Annual Report on Form 10-K.
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 stockholder advisory votes on golden parachute compensation. We have availed ourselves of the reduced reporting obligations and executive compensation disclosure in this Annual Report on Form 10-K, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS OF SENSUS HEALTHCARE, INC.
CONTENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Sensus Healthcare, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensus Healthcare, Inc. (the “Company”) as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations,income, stockholders’ equity and cash flows for each of the 2two years in the period ended December 31, 2017,2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the 2two years in the period ended December 31, 2017,2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditaudits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Marcum LLPCritical Audit Matters
/S/ Marcum LLPCritical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Marcum llp | |
Marcum llp |
We have served as the Company’s auditor since 2012.
Fort Lauderdale, FL.
March 23, 2023
PCAOB Number: 688
West Palm Beach, FL
February 15, 2018
45
SENSUS HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 10,085,468 | $ | 5,042,477 | ||||
Accounts receivable, net | 4,958,255 | 3,098,635 | ||||||
Inventories | 1,171,383 | 1,254,915 | ||||||
Investment in debt securities | 1,104,635 | 6,462,369 | ||||||
Prepaid and other current assets | 566,972 | 900,722 | ||||||
Total Current Assets | 17,886,713 | 16,759,118 | ||||||
Property and Equipment, Net | 394,078 | 433,408 | ||||||
Patent Rights, Net | 530,123 | 626,509 | ||||||
Investment in Debt Securities | — | 1,103,773 | ||||||
Deposits | 24,272 | 24,272 | ||||||
Total Assets | $ | 18,835,186 | $ | 18,947,080 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 4,067,894 | $ | 2,762,371 | ||||
Product warranties | 146,722 | 40,481 | ||||||
Deferred revenue, current portion | 652,242 | 853,798 | ||||||
Total Current Liabilities | 4,866,858 | 3,656,650 | ||||||
Revolving Credit Facility | 2,214,970 | — | ||||||
Deferred Revenue, Net of Current Portion | 73,083 | 16,251 | ||||||
Total Liabilities | 7,154,911 | 3,672,901 | ||||||
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; 13,522,168 issued and 13,488,714 outstanding at December 31, 2017; 13,546,171 issued and outstanding at December 31, 2016 | 135,221 | 135,461 | ||||||
Additional paid-in capital | 23,181,641 | 22,930,975 | ||||||
Treasury stock, 33,454 and 0 shares at cost, at December 31, 2017 and 2016, respectively | (133,816 | ) | — | |||||
Accumulated deficit | (11,502,771 | ) | (7,792,257 | ) | ||||
Total Stockholders’ Equity | 11,680,275 | 15,274,179 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 18,835,186 | $ | 18,947,080 |
As of December 31, | ||||||||
(in thousands, except shares and per share data) | 2022 | 2021 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 25,520 | $ | 14,519 | ||||
Accounts receivable, net | 17,299 | 12,130 | ||||||
Inventories | 3,501 | 1,759 | ||||||
Prepaid and other current assets | 6,921 | 2,837 | ||||||
Total current assets | 53,241 | 31,245 | ||||||
Property and equipment, net | 243 | 605 | ||||||
Intangibles, net | 50 | 146 | ||||||
Deposits | 24 | 75 | ||||||
Deferred tax asset | 1,713 | - | ||||||
Operating lease right-of-use assets, net | 996 | 169 | ||||||
Other noncurrent asset | 468 | - | ||||||
Total assets | $ | 56,735 | $ | 32,240 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | 5,521 | $ | 4,058 | ||||
Product warranties | 403 | 508 | ||||||
Operating lease liabilities, current portion | 190 | 174 | ||||||
Loan payable | - | 51 | ||||||
Income tax payable | 890 | - | ||||||
Deferred revenue, current portion | 693 | 1,172 | ||||||
Total current liabilities | 7,697 | 5,963 | ||||||
Operating lease liabilities | 830 | - | ||||||
Deferred revenue, net of current portion | 139 | 262 | ||||||
Total liabilities | 8,666 | 6,225 | ||||||
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; 16,902,761 issued and 16,390,419 outstanding at December 31, 2022; 16,694,311 issued and 16,617,274 outstanding at December 31, 2021 | 169 | 167 | ||||||
Additional paid-in capital | 45,031 | 44,115 | ||||||
Treasury stock, 512,342 and 77,037 shares at cost, at December 31, 2022 and December 31, 2021, respectively | (3,433 | ) | (325 | ) | ||||
Retained earnings (Accumulated deficit) | 6,302 | (17,942 | ) | |||||
Total stockholders’ equity | 48,069 | 26,015 | ||||||
Total liabilities and stockholders’ equity | $ | 56,735 | $ | 32,240 |
See accompanying notes to the consolidated financial statements.
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
For the Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Revenues | $ | 20,587,827 | $ | 14,811,175 | ||||
Cost of Sales | 6,787,836 | 4,965,372 | ||||||
Gross Profit | 13,799,991 | 9,845,803 | ||||||
Operating Expenses | ||||||||
Selling and marketing | 8,305,315 | 4,915,440 | ||||||
General and administrative | 3,721,627 | 3,469,332 | ||||||
Research and development | 5,490,489 | 1,824,150 | ||||||
Total Operating Expenses | 17,517,431 | 10,208,922 | ||||||
Loss From Operations | (3,717,440 | ) | (363,119 | ) | ||||
Other Income (Expense) | ||||||||
Interest income | 75,807 | 38,538 | ||||||
Interest expense | (68,881 | ) | (21,867 | ) | ||||
Other Income (Expense), net | 6,926 | 16,671 | ) | |||||
Net Loss | $ | (3,710,514 | ) | $ | (346,448 | ) | ||
Net Loss per share – basic and diluted | $ | (0.28 | ) | $ | (0.03 | ) | ||
Weighted average number of shares used in computing net loss per share – basic and diluted | 13,236,519 | 12,028,435 |
For the Years Ended | ||||||||
December 31, | ||||||||
(in thousands, except shares and per share data) | 2022 | 2021 | ||||||
Revenues | $ | 44,532 | $ | 27,042 | ||||
Cost of sales | 14,904 | 10,054 | ||||||
Gross profit | 29,628 | 16,988 | ||||||
Operating expenses | ||||||||
Selling and marketing | 6,329 | 4,838 | ||||||
General and administrative | 5,008 | 4,594 | ||||||
Research and development | 3,460 | 3,436 | ||||||
Total operating expenses | 14,797 | 12,868 | ||||||
Income from operations | 14,831 | 4,120 | ||||||
Other income (expense): | ||||||||
Gain (loss) on sale of assets | 12,779 | (1 | ) | |||||
Interest income | 382 | 2 | ||||||
Interest expense | (2 | ) | (2 | ) | ||||
Other income (expense), net | 13,159 | (1 | ) | |||||
Income before income tax | 27,990 | 4,119 | ||||||
Provision for income taxes | 3,746 | - | ||||||
Net income | $ | 24,244 | $ | 4,119 | ||||
Net income per share – basic | $ | 1.47 | $ | 0.25 | ||||
diluted | $ | 1.46 | $ | 0.25 | ||||
Weighted average number of shares used in computing net income per share – basic | 16,480,991 | 16,476,122 | ||||||
diluted | 16,618,214 | 16,503,134 |
See accompanying notes to the consolidated financial statements.
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 20172022 AND 20162021
Common Stock | Additional | Treasury Stock | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Shares | Amount | Deficit | Total | ||||||||||||||||||||||
December 31, 2015 | 10,367,883 | $ | 103,678 | $ | 13,263,735 | — | $ | — | $ | (7,445,809 | ) | $ | 5,921,604 | |||||||||||||||
Stock based compensation | 307,666 | 3,077 | 723,300 | — | — | — | 726,377 | |||||||||||||||||||||
Initial public offering of units, net of offering costs | 2,300,000 | 23,000 | 10,369,809 | — | — | — | 10,392,809 | |||||||||||||||||||||
Exercise of warrants and options | 547,484 | 5,475 | 1,127,063 | — | — | — | 1,132,538 | |||||||||||||||||||||
Preferred dividend | 23,138 | 231 | (2,552,932 | ) | — | — | — | (2,552,701 | ) | |||||||||||||||||||
Net loss | — | — | — | — | — | (346,448 | ) | (346,448 | ) | |||||||||||||||||||
December 31, 2016 | 13,546,171 | $ | 135,461 | $ | 22,930,975 | — | $ | — | $ | (7,792,257 | ) | $ | 15,274,179 | |||||||||||||||
Stock based compensation | 5,000 | 50 | 405,846 | — | — | — | 405,896 | |||||||||||||||||||||
Surrender of shares for tax withholding on stock compensation | (29,003 | ) | (290 | ) | (155,180 | ) | (33,454 | ) | (133,816 | ) | — | (289,286 | ) | |||||||||||||||
Net loss | — | — | — | — | — | (3,710,514 | ) | (3,710,514 | ) | |||||||||||||||||||
December 31, 2017 | 13,522,168 | $ | 135,221 | $ | 23,181,641 | (33,454 | ) | $ | (133,816 | ) | $ | (11,502,771 | ) | $ | 11,680,275 |
Common Stock | Additional Paid-In | Treasury Stock | Retained Earnings (Accumulated | |||||||||||||||||||||||||
(in thousands, except shares) | Shares | Amount | Capital | Shares | Amount | Deficit) | Total | |||||||||||||||||||||
December 31, 2020 | 16,564,311 | $ | 166 | $ | 43,701 | (73,208 | ) | $ | (310 | ) | $ | (22,061 | ) | $ | 21,496 | |||||||||||||
Stock-based compensation | 130,000 | 1 | 414 | - | - | - | 415 | |||||||||||||||||||||
Surrender of shares for tax withholding on stock-based compensation | - | - | - | (3,829 | ) | (15 | ) | - | (15 | ) | ||||||||||||||||||
Net income | - | - | - | - | - | 4,119 | 4,119 | |||||||||||||||||||||
December 31, 2021 | 16,694,311 | $ | 167 | $ | 44,115 | (77,037 | ) | $ | (325 | ) | $ | (17,942 | ) | $ | 26,015 | |||||||||||||
Stock-based compensation | 77,000 | - | $ | 187 | - | - | - | 187 | ||||||||||||||||||||
Exercise of stock options | 131,450 | 2 | $ | 729 | - | - | - | 731 | ||||||||||||||||||||
Stock repurchase | - | - | $ | - | (425,209 | ) | (2,999 | ) | - | (2,999 | ) | |||||||||||||||||
Surrender of shares for tax withholding on stock-based compensation | - | - | $ | - | (10,096 | ) | (109 | ) | - | (109 | ) | |||||||||||||||||
Net income | - | - | $ | - | - | - | 24,244 | 24,244 | ||||||||||||||||||||
December 31, 2022 | 16,902,761 | $ | 169 | $ | 45,031 | (512,342 | ) | $ | (3,433 | ) | $ | 6,302 | $ | 48,069 |
See accompanying notes to the consolidated financial statements.
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Operating Activities | ||||||||
Net loss | $ | (3,710,514 | ) | $ | (346,448 | ) | ||
Adjustments to reconcile net income (loss) to net cash and cash equivalents used in operating activities: | ||||||||
Bad debt expense | 191,391 | — | ||||||
Depreciation and amortization | 387,917 | 337,583 | ||||||
Provision for product warranties | 237,561 | 32,877 | ||||||
Stock based compensation | 405,896 | 726,377 | ||||||
Decrease (increase) in: | ||||||||
Accounts receivable | (2,051,011 | ) | (1,027,063 | ) | ||||
Inventories | 118,925 | (332,4962 | ) | |||||
Prepaid and other current assets | 333,751 | (777,614 | ) | |||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued expenses | 1,305,522 | 633,956 | ||||||
Deferred revenue | (144,724 | ) | (65,971 | ) | ||||
Product warranties | (131,320 | ) | (40,759 | ) | ||||
Total Adjustments | 653,907 | (504,576 | ) | |||||
Net Cash Used In Operating Activities | (3,056,606 | ) | (851,024 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Acquisition of property and equipment | $ | (287,594 | ) | $ | (285,998 | ) | ||
Investment in debt securities - held to maturity | — | (7,865,675 | ) | |||||
Investments matured | 6,461,507 | 299,533 | ||||||
Net Cash Provided By (Used In) Investing Activities | 6,173,913 | (7,852,140 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Initial public offering of units | — | 12,650,000 | ||||||
Exercise of warrants | — | 1,132,538 | ||||||
Revolving credit facility, net | 2,214,970 | (422,702 | ) | |||||
Withholding taxes on stock compensation | (289,286 | ) | — | |||||
Offering costs | — | (2,126,562 | ) | |||||
Cash dividends on preferred stock | — | (2,552,701 | ) | |||||
Net Cash Provided By Financing Activities | 1,925,684 | 8,680,573 | ||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 5,042,991 | (22,591 | ) | |||||
Cash and Cash Equivalents – Beginning | 5,042,477 | 5,065,068 | ||||||
Cash and Cash Equivalents – Ending | $ | 10,085,468 | $ | 5,042,477 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Interest Paid | $ | 43,316 | $ | 23,773 | ||||
Non Cash Investing and Financing Activities | ||||||||
Reclassification of prepaid offering costs to APIC | $ | — | $ | 130,629 | ||||
Transfer of inventory to property and equipment | $ | 35,393 | $ | 67,908 |
For the Years Ended | ||||||||
December 31, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 24,244 | $ | 4,119 | ||||
Adjustments to reconcile net income to net cash and cash equivalents used in operating activities: | ||||||||
Bad debt expense | 145 | 78 | ||||||
Depreciation and amortization | 315 | 613 | ||||||
Loss on sale of property and equipment | - | 47 | ||||||
Gain on sale of assets | (12,779 | ) | - | |||||
Loss on disposal of assets | 197 | - | ||||||
Gain resulting from termination of lease | - | (38 | ) | |||||
Provision for product warranties | 722 | 530 | ||||||
Stock-based compensation | 187 | 415 | ||||||
Impairment of intangible assets | - | 88 | ||||||
Deferred income taxes | (1,713 | ) | - | |||||
Decrease (increase) in: | ||||||||
Accounts receivable | (5,314 | ) | (8,432 | ) | ||||
Inventories | (3,191 | ) | 2,735 | |||||
Deposits | 51 | - | ||||||
Prepaid and other current assets | (3,869 | ) | (557 | ) | ||||
Other noncurrent asset | (468 | ) | - | |||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued expenses | 799 | 962 | ||||||
Operating lease liability | (199 | ) | - | |||||
Income tax payable | 890 | - | ||||||
Deferred revenue | (602 | ) | (637 | ) | ||||
Product warranties | (827 | ) | (209 | ) | ||||
Total adjustments | (25,656 | ) | (4,405 | ) | ||||
Net cash used in operating activities | (1,412 | ) | (286 | ) | ||||
Cash flows from investing activities | ||||||||
Acquisition of property and equipment | (159 | ) | (128 | ) | ||||
Proceeds from sale of assets | 15,000 | 257 | ||||||
Net cash provided by investing activities | 14,841 | 129 | ||||||
Cash flows from financing activities | ||||||||
Repurchase of common stock | (2,999 | ) | - | |||||
Withholding taxes on stock-based compensation | (109 | ) | (15 | ) | ||||
Repayment of loan payable | (51 | ) | (216 | ) | ||||
Exercise of stock options | 731 | - | ||||||
Net cash used in financing activities | (2,428 | ) | (231 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 11,001 | (388 | ) | |||||
Cash and cash equivalents – beginning of period | 14,519 | 14,907 | ||||||
Cash and cash equivalents – end of period | $ | 25,520 | $ | 14,519 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Interest paid | $ | 2 | $ | 2 | ||||
Income tax paid | $ | 4,570 | $ | - | ||||
Supplemental schedule of noncash investing and financing transactions: | ||||||||
Operating lease right-of-use asset and lease liability increase from lease modification | $ | 1,045 | $ | - | ||||
Decrease in operating lease right-of-use asset and operating lease liabilities from early termination of lease | $ | - | $ | 655 | ||||
Transfer of inventory to property and equipment | $ | 48 | $ | 66 |
See accompanying notes to the consolidated financial statements.
SENSUS HEALTHCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Summary of Significant Accounting Policies
Description of the Business
Sensus Healthcare, Inc. (the(together, with its subsidiary, unless the context otherwise indicates, “Sensus” or the “Company”) is a manufacturer of superficial radiation therapy devices and has established a distribution and marketing network to sellsells 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.globally through its distribution and marketing network. The Company operates as one segment from its corporate headquarters located in Boca Raton, Florida.
Initial Public OfferingBasis of Presentation and Principles of Consolidation
In June 2016,These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company issued 2,300,000 units inand its initial public offering (“IPO”) at a price of $5.50 per unit ($5.25 attributable to the common stocksubsidiary. Accounts and $0.25 attributable to the warrant), for net proceeds of approximately $10,393,000 after deducting underwriting discounts and commissions of $886,000 and expenses of $1,371,000. Each unit consisted of one share of common stock and a warrant to purchase one share of common stock. Immediately prior to the IPO, all shares of stock then outstanding converted into an aggregate of 10,367,883 shares of common stock following a 241.95-for-one forward stock split approved by the Company’s board of directors. On July 25, 2016, the common stock and warrants included in the units issued in the IPO commenced trading separately under the symbols “SRTS” and “SRTSW,” respectively, and trading of the units under the symbol “SRTSU” was suspended.transactions between consolidated entities have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, andincluding disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuesrevenue and expensesexpense during the reporting period. Significant estimates to which it is reasonably possible that a change could occur in the near term include, revenue recognition, inventory reserves, receivable allowances, recoverability of long lived assets and estimation of the Company’s product warranties.periods. Actual results could differ from those estimates.
Revenue Recognition
The Company’s sales primarily relate torevenue derives from sales of the Company’s devices. The Company recognizes product revenue upon shipment provided that there is persuasive evidence of an arrangement, there are no uncertainties regarding customer acceptance, the sales price is fixeddevices and determinable, and collection of the resulting receivable is reasonably assured. The Company does not provide a right of returnservices related to product sales. Revenues for service contracts are recognized overmaintaining and repairing the devices as part of a service contract periodor on an ad-hoc basis without a straight-line basis. Revenue for rentals of equipment is recognized over the lease term on a straight-line basis.
The Company sells products and services under multiple-element arrangements with separate units of accounting; in these situations, total consideration is allocated to the identified units of accounting based on their relative selling prices and revenue is then recognized for each unit based on its specific characteristics. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. The principal deliverables in our multiple deliverable arrangements that qualify as separate units of accounting consist of (i) sales of medical devices and accessories and (ii) service contracts. Service contracts are considered a performance obligation only if they provide a material right, otherwise they are considered options. Other performance obligations, including installation and customer training, are considered inconsequential and are combined with the product as one unit of accounting. Selling prices are established using vendor-specific objective evidence (VSOE). If VSOE does not exist, the Company uses its best estimate of the selling prices for the deliverables.contract.
The Company operates in a highly-regulated environment and is continually entering into new markets in which regulatory approval is sometimes required prior to the customer being able to use the product. In these cases, where regulatory approval is pending, revenue is deferred until such time as regulatory approval is obtained and customer acceptance becomes certain.
Deferred revenue consists of payments from customers for long term separately priced service contracts, sales pending regulatory approval, and deposits on products. Deferred revenue as of December 31, 2017 and 2016 was as follows:
As of December 31, | ||||||||
2017 | 2016 | |||||||
Service contracts | $ | 570,242 | $ | 613,374 | ||||
Sales pending regulatory approval | — | 155,517 | ||||||
Deposits on products | 82,000 | 84,907 | ||||||
Total deferred revenue, current portion | $ | 652,242 | $ | 853,798 | ||||
Service contracts, net of current portion | 73,083 | 16,251 | ||||||
Total deferred revenue | $ | 725,325 | $ | 870,049 |
The Company provides warranties, generally for one year, in conjunction with the sale of its product.products. These warranties are short term in nature and entitle the customer to repair, replacement, or modification of the defective product, subject to the terms of the respectiverelevant warranty. The Company has determined that these warranties do not represent separate performance obligations, as the customer does not have the option to purchase the warranty separately and the warranty does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. The Company records an estimate of future warranty claims at the time the Companyit recognizes revenue from the sale of the productdevice based upon management’s estimate of the future claims rate.
Revenue is recognized upon transfer of control of promised goods or services to customers when the product is shipped or the service is rendered, based on the amount the Company expects to receive in exchange for those goods or services. The Company enters into contracts that can include multiple services, which are accounted for separately if they are determined to be distinct.
To determine the transaction price for contracts in which a customer promises consideration in a form other than cash, the Company measures the estimated fair value of the noncash consideration at contract inception. If the Company cannot reasonably estimate the fair value of the noncash consideration, it measures the consideration indirectly by reference to the standalone selling price of the products promised to the customer or class of customer in exchange for the consideration.
The revenues from service contracts are recognized over the service contract period on a straight-line basis. In the event that a customer does not sign a service contract, but requests maintenance or repair services after the warranty expires, the Company recognizes revenue when the service is rendered.
The Company has 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. The service level provided is identical whether the service contract is purchased on a stand-alone basis or together with the device. There is no termination provision in the service contract or any penalties in practice for cancellation of the service contract.
The components of disaggregated revenue are as follows:
For the Years Ended | ||||||||
December 31, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Product Revenue - recognized at a point in time | $ | 40,007 | $ | 22,217 | ||||
Service Revenue - recognized at a point in time | 1,351 | 1,712 | ||||||
Service Revenue - recognized over time | 3,174 | 3,113 | ||||||
Total Revenue | $ | 44,532 | $ | 27,042 |
The Company operates in a highly regulated environment, primarily in the U.S. dermatology market, in which state regulatory approval is sometimes required prior to the customer being able to use the product. In cases where such regulatory approval is pending, revenue is deferred until such time as regulatory approval is obtained.
Deferred revenue activity for 2022 and 2021 is as follows:
(in thousands) | Product | Service | Total | |||||||||
December 31, 2020 | $ | 23 | $ | 2,048 | $ | 2,071 | ||||||
Revenue recognized | (23 | ) | (3,113 | ) | (3,136 | ) | ||||||
Amounts invoiced | 97 | 2,402 | 2,499 | |||||||||
December 31, 2021 | $ | 97 | $ | 1,337 | $ | 1,434 | ||||||
Revenue recognized | (1,015 | ) | (3,174 | ) | (4,189 | ) | ||||||
Amounts invoiced | 963 | 2,624 | 3,587 | |||||||||
December 31, 2022 | $ | 45 | $ | 787 | $ | 832 |
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 December 31, 2022 is as follows:
(in thousands)
Year | Service Revenue | |||
2023 | $ | 648 | ||
2024 | 96 | |||
2025 | 23 | |||
2026 | 20 | |||
Total | $ | 787 |
The Company pays commissions for equipment sales. Because the recovery of commissions is expected to occur from product revenue within one year, the Company charges commissions to expense as incurred.
Shipping and handling costs are expensed as incurred and are included in cost of sales.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable and investments in debt securities.receivable.
SegmentOn March 10, 2023, Silicon Valley Bank (“SVB”) was closed by California and Geographical Informationfederal regulatory agencies. As a result of these actions, the FDIC established Silicon Valley Bridge Bank (the “Bridge Bank”). Based upon information available to us, we believe that the Bridge Bank has assumed all contracts SVB entered into prior to its failure, that the Bridge Bank is expected to continue to perform under those contracts, and that all counterparties are consequently expected to perform under those contracts.
The Company’s revenue is generated primarily from customersOne customer in the United States, which representedU.S. accounted for approximately 97%73% and 81%57% of revenue for the years ended December 31, 20172022 and 2016, respectively. A customer in China accounted for approximately 2% and 10% of revenue for the years ended December 31, 2017 and 2016, respectively. A customer in the U.S. accounted for approximately 59% and 20% of revenue for the years ended December 31, 2017 and 2016,2021, respectively, and 87%91% and 39%94% of the accounts receivable as of December 31, 20172022 and 2016,2021, respectively.
Segment and Geographical Information
The following table illustrates total revenue for the years ended December 31, 2022 and 2021 by geographic region.
For the Year Ended | ||||||||||||||||
December 31, | ||||||||||||||||
(in thousands) | 2022 | 2021 | ||||||||||||||
United States | $ | 41,976 | 94 | % | $ | 25,616 | 95 | % | ||||||||
China | 2,452 | 6 | % | 1,410 | 5 | % | ||||||||||
Other | 104 | 0 | % | 16 | 0 | % | ||||||||||
Total Revenue | $ | 44,532 | 100 | % | $ | 27,042 | 100 | % |
Fair Value of Financial Instruments
Carrying amounts of cash equivalents, accounts receivable, accounts payable accrued liabilities and the revolving credit facility approximate fair value due to their relative short maturities.
Fair Value Measurements
The Company uses a fair value hierarchy that prioritizes inputs to valuation approaches used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs:
Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.
● | Level 1 assets may include listed mutual funds, ETFs and listed equities |
Level 2 Inputs:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies.
● | Level 2 assets may include debt securities and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data. |
Level 3 Inputs:
Unobservable inputs for the valuation of the asset or liability, which may include nonbinding broker quotes.
● | Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. |
Significance of Inputs: The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Foreign Currency
The Company’s foreign operation functional currency is the U.S. dollar. The Company considers its Israel subsidiary an extension of the parent company operations in the United States. The cash flow in the foreign operation depends primarily on the funding by the parent company.
Cash and Cash Equivalents
The Company maintains its cashCash and cash equivalents primarily consists of cash, money market funds and short-term, highly liquid investments with financial institutions which balances exceed the federally insured limits. Federally insured limits are $250,000 for deposits. Asoriginal maturities of December 31, 2017 and 2016, the Company had approximately $9,952,000 and $4,792,000, respectively in excess of federally insured limits.three months or less.
For purposes of the statementstatements 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.
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 | $ | 6,462,369 | $ | 167 | $ | 7,243 | $ | 6,455,293 | ||||||||
Total Short Term: | 6,462,369 | 167 | 7,243 | 6,455,293 | ||||||||||||
Long Term: | ||||||||||||||||
United States Treasury bonds | 502,063 | — | 1,174 | 500,890 | ||||||||||||
Corporate bonds | 601,710 | 2,618 | 599,091 | |||||||||||||
Total Long Term: | 1,103,773 | — | 3,792 | 1,099,981 | ||||||||||||
Total Investments December 31, 2016 | $ | 7,566,142 | $ | 167 | $ | 11,035 | $ | 7,555,274 | ||||||||
Short Term: | ||||||||||||||||
Corporate bonds | $ | 602,599 | $ | — | $ | 256 | $ | 602,343 | ||||||||
United States Treasury bonds | 502,036 | — | 332 | 501,704 | ||||||||||||
Total Short Term: | 1,104,635 | — | 588 | 1,104,047 | ||||||||||||
Total Investments December 31, 2017 | $ | 1,104,635 | $ | — | $ | 588 | $ | 1,104,047 |
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 approximately $16,000$107 thousand and $29,000$69 thousand as of December 31, 20172022 and 2016,2021, respectively. Bad debt expense for the years ended December 31, 20172022 and 20162021 was approximately $191,000$145 thousand and $33,000,$78 thousand, respectively.
Inventories
Inventories consist of finished product and components and are stated at the lower of cost and net realizable value, determined using the first-in-first-out method.
Prepaid and Other Current Assets
Prepaid and other current assets consists of the following:
For the Years Ended | ||||||||
December 31, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Deposits on inventories | $ | 6,337 | $ | 2,529 | ||||
Prepaid insurance | 46 | 40 | ||||||
Other current assets | 538 | 268 | ||||||
Total | $ | 6,921 | $ | 2,837 |
Property and Equipment
Property and equipment are stated at cost.cost less accumulated depreciation. Depreciation on property and equipment is calculated on the straight-line basis over the estimated useful liveslife of the assets.each asset. Maintenance and repairs are expensed as incurred; expenditures that enhance the value of property or extend their useful lives are capitalized. When assets are sold or returned, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income.
Inventory units designated for customer demonstrations, as part of the sales process, are reclassified to property and equipment and the depreciation is recorded to selling and marketing expense. The inventory usedProperty and equipment for demonstrations and other programs that waswere reclassified to propertyor from inventory was approximately $48 thousand and equipment$66 thousand for the years ended December 31, 20172022 and 2016 was approximately $35,000 and $68,000,2021, respectively.
Inventory units designated for customer rental agreements are reclassified to property and equipment and the depreciation is recorded to cost of sales.
Intangible Assets
Intangible assets are comprised of the Company’s patent rights and are amortized over the patents’ estimated useful lifefinite-lived intangible assets acquired in acquisitions.
The carrying value of approximately 13 years. As of December 31, 2017, thefinite-lived assets and their remaining useful life was 66 months.
Long-Lived Assets
The Company evaluates its long-lived assets, includinglives are reviewed at least annually to determine if triggering events have occurred that may indicate a potential impairment or revision to the amortization period. For finite-lived intangible assets, for possibleif potential impairment whenever circumstances indicate thatare considered to exist, the Company will perform a recoverability test using an undiscounted cash flow analysis. Actual results could differ from these cash flow estimates, which could materially impact the impairment conclusion. If the carrying amountvalue of the asset or related group of assets, mayis determined not to be recoverable from estimated future cash flows in accordance with accounting guidance. If circumstances suggestbased on the recorded amounts cannot be recovered, based upon estimated future undiscounted cash flows,flow test, the difference between the carrying valuesvalue of such assets are reduced tothe asset and its current fair value. Novalue would be recognized as an expense in the period in which the impairment occurs. Impairment charges of $0 and $88 thousand were recorded for long-livedintangible assets for the years ended December 31, 20172022 and 2016.2021, respectively.
Research and Development
Research and development costs related to products under development by the Company and quality and regulatory costs and are expensed as incurred.
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 using the treasury stock method for options, restricted stock and warrants. The dilutedDiluted net income per share is computed by giving effect to all potential dilutive common share equivalents outstanding for the period. In periods when
The factors used in the Company has incurred a net loss, options and warrants to purchase common shares are considered common share equivalents but have been excluded from the calculation of diluted net lossearnings per share as their effect is antidilutive. Shares excluded were computed under the treasury stock methodcomputation are as follows:
For the Years Ended December 31, | |||||||||
2017 | 2016 | ||||||||
Warrants | 4,076 | 19,489 | |||||||
Unvested shares | — | 72,670 |
For the Years Ended | ||||||||
December 31, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Basic | ||||||||
Net income | $ | 24,244 | $ | 4,119 | ||||
Weighted average common shares outstanding | 16,481 | 16,476 | ||||||
Basic earnings per share | $ | 1.47 | $ | 0.25 | ||||
Diluted | ||||||||
Net income | $ | 24,244 | $ | 4,119 | ||||
Weighted average common shares outstanding | 16,481 | 16,476 | ||||||
Dilutive effects of: | ||||||||
Assumed exercise of stock options | 55 | - | ||||||
Restricted stock awards | 82 | 27 | ||||||
Dilutive shares | 16,618 | 16,503 | ||||||
Diluted earnings per share | $ | 1.46 | $ | 0.25 |
Equity-Based Compensation
Pursuant to relevant accounting guidance related to accounting for equity-based compensation, the Company is required to recognize all share-based payments to non-employees and employees in the financial statements based on grant-date fair values on the grant date.values. The Company has accounted for issuanceissuances of shares, options, and warrants in accordance with the guidance, which requires the recognition of expense, based on grant-date fair values, over the service period, which is generally periodsthe period over which the shares, options and warrants vest.
Advertising Costs
Advertising and promotion expensescosts are charged to expense as incurred. Advertising and promotion expensecosts included in selling and marketing expense in the accompanying statements of operationsincome amounted to approximately $1,684,000$871 thousand and $1,051,000$460 thousand for the years ended December 31, 20172022 and 2016,2021, respectively.
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Operating Leases
Rent expenseLeases
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 control an underlying asset for the lease term, and operating leases which contain escalating rental clauseslease liabilities represent the Company’s obligation to make lease payments arising from the lease. Control of an underlying asset is recorded on a straight-line basisconveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. 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.
Recently issued accounting pronouncements
In May 2014, When determining the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 eliminated transaction- and industry-specific revenue recognition guidancelease 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 current GAAP and replaced it with a principle based approach for determining revenue recognition. ASU 2014-09 requires that companies recognize revenue based onsimilar economic conditions to determine the present value of transferred goods or services as they occur in the contract. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. In April 2016, the FASB also issued ASU 2016-10, Identifying Performance Obligations and Licensing, implementation guidance on principal versus agent, identifying performance obligations, and licensing. ASU 2016-10 is effective for reporting periods beginning after December 15, 2017. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.lease payments. The Company has completedlease agreements which include lease and non-lease components, which the evaluationCompany has elected to account for as a single lease component for all classes of this ASU impact onunderlying assets.
The lease payments used to determine the resultsCompany’s operating lease assets may include lease incentives, and stated rent increases are recognized in the Company’s operating lease assets in the Company’s consolidated balance sheets. Operating lease assets are amortized to rent expense over the lease term and included in operating expenses in the consolidated statements of operations and financial condition. income.
Income Taxes
The Company has concluded, after completing a detailed contract review, that the adoption of the new standard does not have a material impact on the financial results and determined that no material adjustments were necessary to the existing accounting policies. The Company will adopt the modified retrospective method of adoption on January 1, 2018.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). Under the new guidance, companies are required to classify allrecognizes deferred tax assets and liabilities as noncurrent onfor the balance sheet insteadexpected future tax consequences of separating deferred taxes into current and noncurrent amounts. In addition, companies will no longer allocate valuation allowances between current and noncurrentevents that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax assets because those allowancesand liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will alsonot be classifiedrealized.
Uncertain tax positions are recognized in the financial statements only if that position is more likely than not to be sustained upon examination by taxing authorities, based on the technical merits of the position. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
Recent Accounting Standard
In March 2020, the Financial Accounting Standard Board (FASB) issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide temporary optional expedients and exceptions to U.S. GAAP guidance on contract modifications to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate, or LIBOR, to alternative reference rates, such as noncurrent. Thisthe Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The guidance is effective for financial statements issued for annual periods beginning afterprospectively as of March 12, 2020 through December 15, 2016. The Company adopted this standard in the first quarter of 201731, 2022 and it did not have a material impact on its financial statements.
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 is currently evaluating the effect this standard will have on its financial statements.
years. In April 2016,December 2022, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718),2022-06, Deferral of the Sunset Date of Topic 848 which requires thatwas issued to defer the income tax effectsunset date of share-based awards be recognized in the income statement when the awards vest orTopic 848 to December 31, 2024. These updates are settled. The guidance will also allow an employernot expected to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The guidance is effective for years beginning after December 15, 2016 and interim periods within those years. The Company adopted this standard in the first quarter of 2017 and it did not have a materialsignificant impact on itsthe Company’s financial statements.
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Note 2 – Disposition
In April 2021, the Company sold certain property and equipment to a former employee for approximately $257 thousand. During the year ended December 31, 2021, the Company recorded $88 thousand of impairment charges on intangible assets and $47 thousand for a loss on the sale of property and equipment associated with this transaction.
On February 25, 2022, the Company sold its Sculptura assets for $15 million in cash. The sale price was allocated to the existing assets and liabilities based on the book value at the date of the transaction. A summary of the assets and liabilities sold is as follows:
(in thousands) | Book Value | |||
Cash | $ | 15,000 | ||
Inventory | (1,401 | ) | ||
Property and equipment | (157 | ) | ||
Other liabilities | (663 | ) | ||
Gain on asset sale | $ | 12,779 |
Note 3 — Property and Equipment
As of December 31, | Estimated | |||||||||
2017 | 2016 | Useful Lives | ||||||||
Operations and rental equipment | $ | 542,639 | $ | 630,886 | 3 years | |||||
Tradeshow and demo equipment | 271,275 | 294,475 | 3 years | |||||||
Computer equipment | 94,298 | 95,218 | 3 years | |||||||
908,212 | 1,020,579 | |||||||||
Less accumulated depreciation | (514,134 | ) | (587,171 | ) | ||||||
Property and Equipment, Net | $ | 394,078 | $ | 433,408 |
Property and equipment consists of the following:
As of December 31, | As of December 31, | Estimated | ||||||||
(in thousands) | 2022 | 2021 | Useful Lives | |||||||
Operations equipment | $ | 1,222 | $ | 1,760 | 3 years | |||||
Tradeshow and demo equipment | 990 | 927 | 3 years | |||||||
Computer equipment | 162 | 129 | 3 years | |||||||
Subtotal | 2,374 | 2,816 | ||||||||
Less accumulated depreciation | (2,131 | ) | (2,211 | ) | ||||||
Property and Equipment, Net | $ | 243 | $ | 605 |
Depreciation expense was approximately $292,000$219 thousand and $241,000$509 thousand for the years ended December 31, 20172022 and 2016,2021, respectively. Accumulated depreciation on asset disposals was approximately $364,000 for the year ended December 31, 2017.
Note 3 — Patent Rights
As of December 31, | ||||||||
2017 | 2016 | |||||||
Gross carrying amount | $ | 1,253,018 | $ | 1,253,018 | ||||
Less accumulated amortization | (722,895 | ) | (626,509 | ) | ||||
Patent Rights, Net | $ | 530,123 | $ | 626,509 |
Amortization expense was approximately $96,000$435 thousand and $88 thousand for the years ended December 31, 20172022 and 2016. As2021, respectively.
Note 4 — INTANGIBLES
Patent | Customer | Trade | ||||||||||||||
(in thousands) | Rights | Relationships | Names | Total | ||||||||||||
December 31, 2020 | $ | 241 | $ | 84 | $ | 13 | $ | 338 | ||||||||
Impaired assets | - | (81 | ) | (7 | ) | (88 | ) | |||||||||
Amortization expense | (96 | ) | (2 | ) | (6 | ) | (104 | ) | ||||||||
December 31, 2021 | $ | 145 | $ | 1 | $ | - | $ | 146 | ||||||||
Amortization expense | (96 | ) | - | - | (96 | ) | ||||||||||
December 31, 2022 | $ | 49 | $ | 1 | $ | - | $ | 50 |
Amortization expense was approximately $96 thousand and $104 thousand for the years ended December 31, 2022 and 2021, respectively. The weighted-average amortization period for intangible assets is 0.7 years in total.
Estimated amortization expense for the finite-lived intangible assets for each of succeeding years is as follows:
For the Year Ending December 31, (in thousands) | ||||
2023 | $ | 49 | ||
2024 | - | |||
2025 | - | |||
2026 | 1 | |||
Total | $ | 50 |
Note 5 — DEBT
The Company has had a revolving credit facility with SVB that, as of December 31, 2017, future remaining amortization expense is as follows:
For the Year Ending December 31, | |||||
2018 | $ | 96,386 | |||
2019 | 96,386 | ||||
2020 | 96,386 | ||||
2021 | 96,386 | ||||
2022 | 96,386 | ||||
Thereafter | 48,193 | ||||
Total | $ | 530,123 |
Note 4 — Revolving Credit Facility
On March 12, 2013, the Company entered into a two-year $3 million revolving credit facility. The credit facility was amended and extended effective March 12, 2015 through May 12, 2017. The2021, provided for maximum borrowing was reducedborrowings equal to $1,500,000 and was limited by the Company’s eligible borrowing base of 80% of eligible accounts receivable. On September 21, 2016, a second amendment to the credit facility extended the facility through September 21, 2017, increased the maximum borrowing to $2,000,000 and expanded the eligible accounts receivables to include certain international receivables. The Company was not in compliance in April and May 2017 with one of its financial covenants. On June 27, 2017, the covenant defaults were waived and the agreement was amended to modify the financial covenants effective June 2017. An amendment signed on September 15, 2017 extended the maturity date of the credit line through November 19, 2017. On October 31, 2017, the Company amended its revolving credit facility to extend the maturity to October 31, 2019. The availability under the amended facility will equal the lesser of (a) the $5$10 million commitment amount or (b) the borrowing base plus the $2.5a $3 million non-formula sublimit. TheIn April 2022, the term was extended to April 1, 2024, and the maximum borrowings were increased to the lesser of (a) the $15 million commitment amount or (b) the borrowing base consists of 80% of eligible accounts receivable, as defined inplus a $7.5 million non-formula sublimit. At December 31, 2022, the agreement.
available borrowing was $15 million. Interest on any borrowings, at Prime plus 0.75% (5.25%(8.25% at December 31, 2017)2022) and Prime plus 1.50% on non-formula borrowings (6.00%(9% at December 31, 2017),2022) 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 of the Company; restricts the sale, disposition or transfer of assets of the CompanyCompany; and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement.facility. The Company was in compliance with its financial covenants as of December 31, 20172022 and 2016. Approximately $2,215,000 wasDecember 31, 2021. There were no borrowings outstanding under the revolving credit facility at December 31, 20172022 and $0 at December 31, 2016.2021. The Company payshas paid commitment fees of 0.25% per annum on the average unused portion of the line of credit.
On March 10, 2023, SVB was closed by California and federal regulatory agencies. As a result of these actions, the FDIC established the Bridge Bank as successor to SVB. Based upon information available to us, we believe that the Bridge Bank has assumed all contracts of SVB in effect at the time of its failure (including our line of credit) and that the Bridge Bank is expected to continue to perform under those contracts.
On April 20, 2020, the Company received a loan of $1,022,785 under the Small Business Administration (“SBA”) Paycheck Protection Program enabled by the CARES Act, to be used for employee compensation and facilities costs. The loan provided for a six-month deferral period during which no payments were due, although interest accrued during this period. The loan matured in April 2022 and provided for interest at the rate of 1% per annum. The loan was subject to forgiveness for principal that was used for the limited purposes that expressly qualify for forgiveness under SBA requirements. During 2020, $757,782 in eligible expenditures for payroll and other expenses described in the CARES Act were forgiven. In 2022, the loan was paid off.
Note 56 — Product Warranties
Changes in product warranty liability were as follows for the yearyears ended December 31, 2017:2022 and 2021:
Balance, beginning of period | $ | 40,481 | ||
Warranties accrued during the period | 237,561 | |||
Payments on warranty claims | (131,320 | ) | ||
Balance, end of period | $ | 146,722 |
(in thousands) | ||||
Balance, December 31, 2020 | $ | 187 | ||
Warranties accrued during the period | 530 | |||
Payments on warranty claims | (209 | ) | ||
Balance, December 31, 2021 | $ | 508 | ||
Warranties accrued during the period | 722 | |||
Payments on warranty claims | (827 | ) | ||
Balance, December 31, 2022 | $ | 403 |
Note 67 — Commitment and ContingenciesLeases
Operating Lease Agreements
The Company leases its headquarters office from an unrelated third party. Previously, the lease was last renewed in 2016 and was to expire in September 2022. In July 2016,April 2022, the Company renewed itsthe headquarters office lease withthrough September 2027.
With the renewal, the present value of the right of use lease assets (“ROU”) and operating lease liability at the renewal of the lease was $1,156 thousand using an unrelated third partyincremental borrowing rate of 5% as imputed interest. The amortization of the ROU was $194 thousand and $208 thousand for its headquarters office. The renewal was effective September 1, 2016 and expanded the office space being occupied. The lease expires in Septemberyears ended December 31, 2022 and lease payments increase by 3% annually. Future minimum lease payments2021, respectively.
The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of December 31, 2017 are as follows:2022.
Year | Minimum Lease Payment | ||||
2018 | 190,000 | ||||
2019 | 196,000 | ||||
2020 | 202,000 | ||||
2021 | 208,000 | ||||
2022 | 160,000 | ||||
Total | $ | 956,000 |
(in thousands)
Rental expense
Maturity of Operating Lease Liabilities | Amount | |||
2023 | $ | 221 | ||
2024 | 238 | |||
2025 | 245 | |||
2026 | 253 | |||
2027 | 194 | |||
Total undiscounted operating leases payments | $ | 1,151 | ||
Less: Imputed interest | (131 | ) | ||
Present Value of Operating Lease Liabilities | $ | 1,020 | ||
Other Information | ||||
Weighted-average remaining lease term | 4.75 years | |||
Weighted-average discount rate | 5 | % |
Cash paid for yearamounts included in the measurement of operating lease liabilities was $199 thousand and $331 thousand for the years ended December 31, 20172022 and 2016 was approximately $178,0002021, respectively, and $100,000, respectively.is included in cash flows from operating activities in the accompanying consolidated statement of cash flows.
Operating lease cost recognized as expense was $255 thousand and $335 thousand for the years ended December 31, 2022 and 2021, respectively. The financing component for operating lease obligations represents the effect of discounting the operating lease payments to their present value.
The Company’s subsidiary previously leased a manufacturing facility under a 10-year lease expiring in July 2029. In accordance with the lease terms, the Company terminated the lease as of October 31, 2021, without penalty.
Note 8 – 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 Company’s main productSRT-100 (and subsequently the SRT-100 Vision and the SRT-100+), in accordance with the Company’s product specifications. The agreement renews for successive yearsone-year periods unless either party notifies the other party in writing, at least 60 days prior to the anniversary date of thisthe agreement, that it will not renew the agreement. The Company or the manufacturer has the option tomay terminate the agreement withupon 90 daysdays’ prior written notice. Any change in the relationship with the manufacturer could have an adverse effect on the Company’s business.
Purchases from this manufacturer totaled approximately $3,838,000$22.9 and $3,917,000$5.9 million for the years ended December 31, 20172022 and 2016,2021, respectively. As of December 31, 2017,2022 and 20162021, approximately $829,000$1.5 and $563,000,$1.2 million, respectively, was due to this manufacturer, which is presented in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
56
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 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 has received two Civil Investigative Demands 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 79 — Employee Benefit Plans
We sponsorThe Company sponsors a 401(k) defined contribution retirement plan that allows eligible employees to contribute a portion of their compensation, through payroll deductions in accordance with specifiedas defined by the plan guidelines. We makeand subject to Internal Revenue Code limitations. The Company makes contributions to the plans thatplan which include matching a percentage of the employees’ contributions up to certain limits. Expenses related to this plan totaled approximately $95,000$95 thousand and $71,000$98 thousand for the years ended December 31, 20172022 and 2016,2021, respectively.
Note 810 — Stockholders’ Equity
Preferred Stock
The Company has authorized 50,000,0005 million shares of preferred stock. No shares of preferred stock were issued or outstanding at December 31, 2022 or December 31, 2021.
Common Stock
During the year ended December 31, 2022, the Company issued 131,450 shares of common stock upon the exercise of which 13,522,168 were issued and 13,488,714 outstanding at December 31, 2017; 13,546,171 shares were issued and outstanding as of December 31, 2016, respectively.
Stock Issuances
On January 1, 2016, Sensus Healthcare, LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Sensus Healthcare, Inc. As a result of the corporate conversion, the holders of the different classes of units of Sensus Healthcare, LLC became holders of common stock of Sensus Healthcare, Inc. Holders of warrants and options respectively, to purchase membership interests of Sensus Healthcare, LLC became holders of warrants and options to purchase common stock of Sensus Healthcare, Inc., respectively. Each membership interest converted to one share of common stock.
During 2011, the Company offered to a limited number of investors (the “investor members”) preferred membership interests (the “interests”) consisting of (i) cumulative, non-compounded, 8% per annum preferential return, payable annually, if and when such distributions are made by the Company’s board of directors and (ii) participation in the Company’s net profits, net losses and distributions of the Company’s assets pursuant to the operating agreement. The offering raised approximately $6.4 million in gross proceeds ($6.0 million net of offering costs), utilizing a private placement memorandum. As of December 31, 2015, accumulated unpaid preferential distributions were approximately $2,674,000 ($0.87 per share). Preferential distributions no longer accrued after December 31, 2015. In June 2016, after the completion of the IPO, the accumulated unpaid distribution as of December 31, 2015 was payable in cash or shares, at the option of each stockholder with a preferential distribution. On July 15, 2016, the Company accrued dividends in the amount of approximately $2,553,000, representing the amount for which former holders of membership units with a preferred return elected to receive dividends in cash. In addition, 23,138 shares valued at approximately $122,000 of common stock were issued to those that elected to receive the dividends in shares.
During 2014, the Company granted a 1% ownership interest in the Company to an executive which was to vest upon a change in control of the Company. During 2015, the terms were amended such that the ownership interest will vest in the event of involuntary termination or a liquidity event, as defined. In accordance with accounting principles generally accepted in the United States, compensation cost for awards with performance conditions should be recorded in the Company’s financial statements at which time that it is probable the performance condition is achieved. As of December 31, 2015, the achievement of the performance condition was not probable and accordingly no compensation cost was recorded. Following the IPO in June 2016, the performance condition was met and accordingly, stock compensation expense of approximately $465,000 was recorded in 2016. The grant date fair value of the equity award was estimated using both an income and market approach. Under the income approach, the Company used a discounted cash flow method based on Company projections, historical financial information and guideline company/industry growth and margin indicators. The discount rate applied was based on the weighted average cost of capital of guideline public companies and was estimated at approximately 21%. The Company also used a market approach to estimate its enterprise value based on a multiple of revenue and earnings of guideline public companies. Using both of these approaches, management was able to estimate the fair value per share on the grant date which was approximately $4.42 per share or approximately $465,000.
Warrants
In April 2013, the closing date of the second common offering, the Company’s placement agent received investor rights to 5 year warrants to purchase 86,376 common shares of the Company at an exercise price of $4.55$5.55.
Treasury Stock
Treasury stock includes 10,096 shares surrendered by employees for tax withholding on the vesting of restricted stock awards. In 2022, the Company repurchased 425,209 shares in open market transactions at prices per unit, which was equalshare ranging from $5.87 to 110%$8.36. The total cost of the offering price.repurchased shares was approximately $3 million. Pending a decision on the ultimate disposition of these shares, they are recorded as treasury stock at cost.
Note 11 – Equity-based Compensation
In June 2016, from the 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 are exercisable through June 2, 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.
In addition, the underwriter’s representatives 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.
The following table summarizes the Company’s warrant activity:
Common Unit Warrants | |||||||||||||
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (In Years) | |||||||||||
Outstanding – December 31, 2016 | 2,524,376 | $ | 6.67 | 2.50 | |||||||||
Granted | — | — | — | ||||||||||
Exercised | — | — | — | ||||||||||
Forfeited | — | — | — | ||||||||||
Outstanding – December 31, 2017 | 2,524,376 | $ | 6.67 | 1.50 | |||||||||
Exercisable – December 31, 2017 | 2,524,376 | $ | 6.67 | 1.50 |
The intrinsic value of the common stock warrants was approximately $19,000 as of December 31, 2017, and $114,000 as of December 31, 2016.
2016 and 2017 equity incentiveEquity 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.shares. 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.shares. 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 ourthe Company’s common stock. The awards may be made in the form of restricted stock awards or stock options, among other things. As of December 31, 2022, 58,973 shares are available to be granted in the plans.
On June 2, 2016, 307,666February 1, 2020, a total of 35,000 shares of restricted stock were issued to employees and were recorded at the fair value of $5.25$4.11 per share. The restricted shares vest 25% per year over a four-year time vesting period and are being recognized as perexpense on a straight-line basis over the initial offering price. In addition, on January 20, 2017, 10,000vesting period of the awards.
On July 21, 2021, a total of 130,000 shares of restricted stock were issued to one employeeemployees and board members and were recorded at the fair value of $4.99$3.84 per share. The restricted shares vest 25% at grant date and 25% per year over a three-year vesting period and are being recognized as expense on a straight-line basis over the vesting period of the awards.
On December 19, 2022, a total of 77,000 shares of restricted stock were issued to employees and were recorded at the fair value of $6.4 per share, which is the stock price on grant date. 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.
Restricted Stock compensation expense of approximately $406,000 and $236,000 was recognized
Restricted stock activity for the years ended December 31, 20172022 and 2016, respectively. Unrecognized stock compensation expense was approximately $960,000 as of December 31, 2017, which will be recognized over the remaining vesting period. As of December 31, 2017, 84,807 shares were available to be granted under the 2016 Plan and 500,000 shares were available to be granted under the 2017 Plan.2021 is summarized below:
Weighted- Average Grant | ||||||||
Restricted | Date Fair | |||||||
Outstanding at | Stock | Value | ||||||
December 31, 2020 | 37,500 | $ | 4.17 | |||||
Granted | 130,000 | 3.84 | ||||||
Vested | (43,750 | ) | 3.96 | |||||
Forfeited | - | - | ||||||
December 31, 2021 | 123,750 | $ | 3.90 | |||||
Granted | 77,000 | 6.40 | ||||||
Vested | (41,250 | ) | 3.90 | |||||
Forfeited | - | - | ||||||
December 31, 2022 | 159,500 | $ | 5.11 |
The Company recognizes forfeitures as they occur rather than estimating a forfeiture rate.occur. The reduction of stock compensation expense related to the 5,000 shares forfeitedforfeitures was $0 for the yearyears ended in December 31, 20172022 and 2021, respectively.
Unrecognized stock compensation expense was approximately $7,000.$709 thousand as of December 31, 2022, which will be recognized over a weighted-average period of 3.12 years.
Stock Options
A summaryStock options expire 10 years after the grant date. Options that have been granted are exercisable and vest based on the terms of the restrictedrelated agreements. The following table summarizes the Company’s stock activityoptions activity:
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Number of | Exercise | Term | ||||||||||
Options | Price | (In Years) | ||||||||||
Outstanding - December 31, 2020 | 229,334 | $ | 5.55 | 7.07 | ||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Expired | - | - | - | |||||||||
Outstanding - December 31, 2021 | 229,334 | $ | 5.55 | 6.07 | ||||||||
Exercisable - December 31, 2021 | 229,334 | $ | 5.55 | 6.07 | ||||||||
Granted | - | - | - | |||||||||
Exercised | (131,450 | ) | 5.55 | - | ||||||||
Expired | - | - | - | |||||||||
Outstanding - December 31, 2022 | 97,884 | $ | 5.55 | 5.08 | ||||||||
Exercisable – December 31, 2022 | 97,884 | $ | 5.55 | 5.08 |
The stock options outstanding had an intrinsic value of $183 thousand and $382 thousand as of December 31, 2022 and 2021, respectively. The total intrinsic value of options exercised during the years ended December 31, 2022 and 2021 was $561 thousand and $0, respectively. The tax benefit for the tax deductions from option exercise was $791 thousand and $0 for the year ended December 31, 2017 is presented as follows:2022 and 2021, respectively.
Shares | Weighted Average Grant Date Fair Value | ||||||||
Unvested balance at December 31, 2016 | 412,914 | $ | 5.04 | ||||||
Granted | 10,000 | 4.99 | |||||||
Vested | (180,914 | ) | 4.24 | ||||||
Forfeited | (5,000 | ) | 5.25 | ||||||
Unvested balance at December 31, 2017 | 237,000 | $ | 5.64 |
Treasury Stock
The Company accounts compensation expense related to restricted stock and stock options was $187 thousand and $415 thousand 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 ofyears ended December 31, 2017, the Company had 33,454 treasury shares.2022 and 2021, respectively.
Note 912 — Income Taxes
The income tax provision (benefit) consisted of the following:
For The Years Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Current – federal | — | — | ||||||
Current – state | — | — | ||||||
Deferred – federal | (767,337 | ) | (137,616 | ) | ||||
Deferred – state | (114,049 | ) | (11,666 | ) | ||||
(881,386 | ) | (149,282 | ) | |||||
Change in valuation allowance | 881,386 | 149,282 | ||||||
Income tax provision (benefit) | $ | — | $ | — | ||||
For The Years Ended December 31, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Current - Federal | $ | 2,977 | $ | - | ||||
Current - State | 2,482 | - | ||||||
Deferred - Federal | 2,218 | (854 | ) | |||||
Deferred - State | (369 | ) | (236 | ) | ||||
Deferred - International | (55 | ) | (15 | ) | ||||
Total | 7,253 | (1,105 | ) | |||||
Change in valuation allowance | (3,507 | ) | 1,105 | |||||
Income tax provision | $ | 3,746 | $ | - |
For the years ended December 31, 20172022 and December 31, 2016,2021, the expected tax expense (benefit) based on the statutory rate is reconciled with the actual tax expense (benefit) as follows:
For The Years Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
U.S. federal statutory rate | (35.0 | )% | (35.0 | )% | ||||
State taxes, net of federal benefit | (2.7 | )% | (3.4 | )% | ||||
Permanent differences | 3.2 | % | (4.7 | )% | ||||
Change in tax rates | 14.4 | % | 0.0 | % | ||||
Other | (3.7 | )% | 0.0 | % | ||||
Change in valuation allowance | 23.8 | % | 43.1 | % | ||||
Income tax provision (benefit) | 0.0 | % | 0.0 | % |
For The Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
U.S. federal statutory rate | 21.0 | % | 21.0 | % | ||||
State taxes, net of federal benefit | 7.3 | % | 4.9 | % | ||||
Permanent differences | (0.4 | %) | 0.1 | % | ||||
Change in tax rates | (1.1 | %) | 0.9 | % | ||||
Return-to-provision adjustments | (0.9 | %) | (0.1 | %) | ||||
Change in valuation allowance | (12.5 | %) | (26.8 | %) | ||||
Income tax provision | 13.4 | % | 0.0 | % |
As of December 31, 20172022 and December 31, 2016,2021, the Company’s net deferred tax asset consisted of the effects of temporary differences attributable to the following:
December 31, | ||||||||
2017 | 2016 | |||||||
Net operating losses | $ | 793,864 | $ | — | ||||
Stock-based compensation | 68,730 | 274,553 | ||||||
Depreciation and amortization | 12,473 | (56,926 | ) | |||||
Accrued expenses and reserves | 77,532 | 45,115 | ||||||
Prepaid expenses | (6,911 | ) | (33,259 | ) | ||||
Customer deposits | 17,779 | 5,696 | ||||||
Research and development credit | 155,320 | — | ||||||
Other, net | 4,550 | 6,772 | ||||||
Deferred tax asset, net | 1,123,337 | 241,951 | ||||||
Valuation allowance | (1,123,337 | ) | (241,951 | ) | ||||
Deferred tax asset, net of valuation allowance | — | — |
2022 | 2021 | |||||||
Deferred tax assets: | ||||||||
Net operating losses | $ | 849 | $ | 2,336 | ||||
Stock-based compensation | 117 | 274 | ||||||
Depreciation and amortization | 209 | - | ||||||
Accrued expenses and reserves | 404 | 240 | ||||||
Customer deposits | 35 | 183 | ||||||
Tax credit | 290 | 750 | ||||||
Charitable contributions | - | 26 | ||||||
Lease accounting | 6 | 2 | ||||||
Other, net | - | 2 | ||||||
Gross deferred tax assets | 1,910 | 3,813 | ||||||
Valuation allowance | (185 | ) | (3,692 | ) | ||||
Total deferred tax assets | 1,725 | 121 | ||||||
Deferred tax liabilities | ||||||||
Prepaid expenses | (12 | ) | (11 | ) | ||||
Depreciation and amortization | - | (110 | ) | |||||
Total deferred tax liabilities | (12 | ) | (121 | ) | ||||
Net deferred tax assets | $ | 1,713 | $ | - |
The Company’s federal net operating loss (“NOL”) carryforward as of 2021 was fully utilized in 2022. The Company has federal tax net operating loss carryforwards of approximately $3,263,000state NOL in various jurisdictions, in aggregate $7.7 million as of December 31, 2017 and2022. A majority of the state net operating loss carryforwards spread across various jurisdictions with a combined totalNOL’s are attributed to the State of approximately $2,264,000 as of December 31, 2017. These net operating loss carryforwards, if not used to reduce taxable income in future periods, willIllinois which begin to expire in 2029, for both federal and state tax purposes.2029. Additionally, the Company also has federal Research and Developmentstate tax credit carryforwards of approximately $156,000$340 thousand as of December 31, 2017.2022. These credit carryforwards ifdo not used in future periods, will begin to expire in 2029.expire. The Company’s Israel subsidiary has $766 thousand of NOL carryforwards which do not expire.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the future generation of taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversalability to carryback taxable income, future reversals of deferred tax liabilities, projectedexisting taxable temporary differences, tax-planning strategies, and future taxable income exclusive of reversing temporary differences and taxing strategiescarryforwards in making this assessment. Based on this assessment, management has establishedThe Company experienced a full valuation allowance against allhistory of losses prior to 2021, becoming profitable in 2021 and remaining profitable in 2022. Management expects the netCompany to remain profitable and determined in 2022 that it is more-likely-than not that the federal and state deferred tax assets will be realized. A valuation allowance has been recorded for each period, since it is more likely than not that all of the deferred tax assets will not be realized. Thethat are attributed to the Company’s Israel subsidiary. Consequently, the valuation allowance decreased by $3.5 million and increase by $1.1 million for the years ended December 31, 20172022 and 2016 increased by approximately $881,000 and $149,000,2021, respectively.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements as of December 31, 20172022 and 2016.2021. The Company does not expect any significant changes in its unrecognized tax benefits within 12 months of the reporting date. The Company has U.S. federal and certain state tax returns subject to examination by tax authorities beginning with those filed for the year ended December 31, 2014.2017. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of operations.income.
Note 13 — Subsequent Events
On December 22, 2017, the United States enacted tax reform legislation known as the H.R.1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Act”), resulting in significant modifications to existing law. The Company has completed the accounting for the effects of the Act during this period. Our financial statements for the year ended December 31, 2017, reflect certain effects of the Act which includes a reduction in the corporate tax rate from 35% to 21%, as well as other changes. As a result of the changes to tax laws and tax rates under the Act, the Company incurred an incremental increase in income tax expense of approximately $562,000 during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities from 35% to 21%. This incremental amount was offset by a change to the Company’s valuation allowance resulting in no net effect.
Note 10 — Subsequent Events
The Company evaluatesevaluated subsequent events and transactions that occuroccurred after the balance sheet date up to the date that the financial statements were issued for potential recognition or disclosure. TheOther than the SVB matters discussed in Note 1, Organization And Summary Of Significant Accounting Policies, and in Note 5, Debt, the Company did not identify any subsequent eventsevent that would have required adjustment or disclosure in the financial statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.There have been no disagreements on accounting and financial disclosure matters.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Control and Procedures
As of December 31, 2017,2022, the end of the period covered by this Annual Report on Form 10-K, 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 December 31, 2017,2022, the end of the period covered by this Annual Report on Form 10-K, we maintained effective disclosure controls and procedures.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our internal control over financial reporting. Our management used the updated Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to perform this evaluation. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was effective as of December 31, 2017.2022.
As an emerging growtha smaller reporting company, our independent registered accounting firm is not required to issue an attestation report on our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). There have beenwere no changes in our internal control over financial reporting that occurred during our most recently completedthe fourth quarter of the fiscal year ending December 31, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.The Company is furnishing no other information in this Form 10-K.
Item 9C. DISCLOSURES REGARDING FOREIGN JURISDICTION THAT PREVENT INSPECTIONS
Not applicable.
PART III.
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item will be set forth in the Proxy Statement for our 20182023 Annual Meeting and is incorporated into this report by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Proxy Statement for our 20182023 Annual Meeting and is incorporated into this report by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Our 2016 and 2017 Equity Incentive Plans were each approved by our stockholders. The following table provides certain information regarding the Company’s equity compensation plans.
The other information required by this item will be set forth in the Proxy Statement for our 20182023 Annual Meeting and is incorporated into this report by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the Proxy Statement for our 20182023 Annual Meeting and is incorporated into this report by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the Proxy Statement for our 20182023 Annual Meeting and is incorporated into this report by reference.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this reportreport:
The Company’s Financial Statements included in Part II of this Annual Report on Form 10-K are incorporated by reference into this Item 15.
Other schedules and exhibits are omitted because the required information either is not applicable or is shown in the financial statements or the notes thereto.
Financial Statements |
The Company’s consolidated financial statements included beginning on page F-1.
2. | Financial Statement Schedules |
Financial statement schedules have been omitted because they are not applicable, not required or the information required is included in the Company’s consolidated financial statements or note thereto.
3. | Exhibits Required to be Filed by Item 601 of Regulation S-K |
The Exhibit Index beginning on page 6329 of this Annual Report on Form 10-K is incorporated by reference to this Item 15.
Item 16. FORM 10-K SUMMARY
None.
63
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
64
EXHIBIT INDEX
26 |
+ | Indicates a management contract or compensatory plan. |
# | Portions of exhibit have been |
* | Filed electronically herewith. |
Instruments defining the rights of holders of unregistered long-term debt of the issuer and its subsidiaries have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the issuer and its consolidated subsidiaries. The issuer agrees to furnish a copy of any such instrument to the Commission upon request. |
27 |
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 23, 2023 | /s/ Joseph C. Sardano |
Joseph C. Sardano | |
Chief Executive Officer | |
(Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name | Title | Date | ||
/s/ Joseph Sardano | Chief Executive Officer and Chairman | March 23, 2023 | ||
Joseph Sardano | (Principal Executive Officer) | |||
/s/ Javier Rampolla | Chief Financial Officer | March 23, 2023 | ||
Javier Rampolla | (Principal Financial and Accounting Officer) | |||
/s/ Megan Cornish | Director | March 23, 2023 | ||
Megan Cornish | ||||
/s/ John Heinrich | Director | March 23, 2023 | ||
John Heinrich | ||||
/s/ William H. McCall | Director | March 23, 2023 | ||
William H. McCall | ||||
/s/ Samuel O’Rear | Director | March 23, 2023 | ||
Samuel O’Rear | ||||
/s/ Anthony B. Petrelli | Director | March 23, 2023 | ||
Anthony B. Petrelli |
28