SENSUS HEALTHCARE, INC.
NOTES TO THE FINANCIAL STATEMENTS

(unaudited)

Note 1 — Organization and Summary of Significant Accounting Policies

Description of the Business

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

Basis of Presentation

The accompanying unaudited condensed financial statements in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial statements. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 20182019 included in the Company’s Form 10-K, filed with the SEC. The results for the three months ended March 31, 20192020 are not necessarily indicative of results to be expected for the year ending December 31, 2019,2020, any other interim periods, or any future year or period.

Principles of consolidation

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

Use of Estimates

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

Revenue Recognition

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

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

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

Disaggregated revenue for the three months ended March 31, 20192020 and 20182019 was as follows:

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

Deferred revenue as of March 31, 20192020 was as follows:

The Company does not disclose information about remaining performance obligations ofwith respect to 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 March 31, 2019 is2020 was as follows:

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

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

Segment and Geographical Information

The Company’s revenue is generated primarily from customers in the United States, which represented approximately 99% and 81% and 100%of total revenue for the three months ended March 31, 20192020 and 2018,2019, respectively. A single customer in the USU.S. accounted for approximately 53%11% and 75%53% of revenues for the three months ended March 31, 20192020 and 2018,2019, respectively, and approximately 87%75% and 79% of the accounts receivable as of March 31, 20192020 and December 31, 2018,2019, respectively.

Cash and Cash Equivalents

The Company maintains its cash and cash equivalents with financial institutions which balances exceed the federally insured limits. Federally insured limits are $250,000 for deposits. As of March 31, 20192020 and December 31, 2018,2019, the Company had approximately $5,679,000$11,819,000 and $11,726,000,$7,740,000, respectively in excess of federally insured limits.

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

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-maturityheld-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 areare carried at amortized cost plus accrued interest and consist of the following:

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 $0 and $80,000 as of March 31, 20192020 and December 31, 2018. Bad debt expense for the three months ended March 31, 2019 and 2018 was approximately $0 and $2,000, respectively.2019.

Inventories

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

Earnings Per Share

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

Advertising Costs

Advertising and promotion expenses are charged to expense as incurred. Advertising and promotion expense included in selling expense in the accompanying statements of operations amounted to approximately $539,000$270,000 and $522,000$539,000 for the three months ended March 31, 20192020 and 2018,2019, respectively.

Leases

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

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

Recently issued and Adopted accounting Standards

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

Note 2 — Property and Equipment

Depreciation expense was approximately $104,000$129,000 and $76,000,$104,000, for the three months ended March 31, 20192020 and 2018,2019, respectively.

Note 3 — Patent Rights 

Amortization expense was approximately $24,000 for the three months ended March 31, 20192020 and 2018.2019. As of March 31, 2019,2020, future remaining amortization expense is as follows:

Note 4 — Revolving Credit Facility

On October 31, 2017, theThe Company amended itshas a revolving credit facility that, through April 2020, provided for maximum borrowings equal to extend the maturity to October 31, 2019 and to amend the financial covenants. The availability under the amended facility will equal the lesser of (a) the $5 million commitment amount or the(b) a borrowing base plus the $2.5 million non-formula sublimit. The borrowing base consists ofequal to 80% of eligible accounts receivable as definedplus a $2.5 million non-formula sublimit. In October 2019, the term of the facility was extended through January 29, 2020, in January 2020; the agreement.term was further extended through April 28, 2020, and in April 2020, the term was further extended to April 1, 2022 and the maximum borrowings were increased to the lesser of (a) the $10 million commitment amount or (b) the borrowing base plus a $3 million non-formula sublimit.

Interest on any borrowings, at Prime plus 0.75% (6.25%(4.00% at March 31, 2019)2020) and Prime plus 1.50% on non-formula borrowings (7.00%(4.75% at March 31, 2019)2020), 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,indebtedness; restricts the sale, disposition or transfer of assets of the Company and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. The Company was in compliance with its financial covenants as of March 31, 20192020 and December 31, 2018.2019. There were no borrowings outstanding under the revolving credit facility at March 31, 20192020 and December 31, 2018.2019. The Company pays commitment fees of 0.25% per annum on the average unused portion of the line of credit.

Note 5 — Product Warranties

Changes in product warranty liability were as follows for the ninethree months ended March 31, 2019:2020:

Note 6 — Leases

Operating Lease Agreements

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

On March 19, 2019, the Company’s Israeli subsidiary signed a 10-year lease for a manufacturing facility, effective April 1, 2019, for approximately 5,800 square feet. The landlord has provided a four-month grace period rent free from April to July 2019, after which the 10 year lease will begin. The monthly rental payment starts at approximately $5,300 and will be subject to periodic escalations at amounts specified in the lease plus the consumer price index. In addition, the Company is responsible for maintenance fees covering its portion of the expenses of common areas. After 2, 4, 6 and 8 years, and with 180 days prior notice, the Company has the right to terminate the lease at its sole discretion with nowithout penalty.

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of March 31, 2019.2020.

An initial ROU asset of approximately $805,000 was recognized as a non-cash assets addition with the adoption of the new lease accounting standard. The ROU asset was reduced by approximately $56,000 during$83,000 and $330,000 for the three months ended March 31, 2019.2020 and the year ended December 31, 2019, respectively. Cash paid for amounts included in the present value of operating lease liabilities was approximately $62,000$91,000 and $310,000 for the three months ended March 31, 2020 and the year ended December 31, 2019, andrespectively, is included in operating cash flows. Operating lease cost was approximately $96,000 and $65,000 for the three months ended March 31, 2019.2020 and 2019, respectively. 

Note 7 — Commitments and Contingencies

Manufacturing Agreement

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

Purchases from this manufacturer totaled approximately $1,911,000$1,578,000 and $1,137,000$1,911,000 for the three months ended March 31, 20192020 and 2018,2019, respectively. As of March 31, 2019,2020, and December 31, 20182019 approximately $663,000$927,000 and $1,041,000,$1,104,000, respectively, was due to this manufacturer, which is presented in accounts payable and accrued expenses in the accompanying balance sheets.

Legal contingencies

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

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

Note 8 — Employee Benefit Plans

We 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 specified plan guidelines. We makeThe Company makes contributions to the plans that include matching a percentage of the employees’ contributions up to certain limits. Expenses related to this plan totaled approximately $28,000$31,000 and $24,000$28,000 for the three months ended March 31, 2020 and 2019, and 2018, respectively.

Note 9 — Stockholders’ Equity

The Company has authorized 50,000,000 shares of common stock, of which 16,546,19616,570,478 were issued and 16,512,74216,515,038 outstanding at March 31, 2019; 16,145,9152020; 16,540,478 shares were issued and 16,112,46116,485,780 were outstanding as of December 31, 2018.2019.

Warrants

In April 2013, the closing date of the Company’s 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 per unit, which was equal to 110% of the offering price. During the first quarter of 2018, 73,309 of the warrants were exercised, and 13,067 warrants expired.

In June 2016, from the Company’s IPO, the investors received three-year warrants to purchase 2,300,000 shares of common stock at an exercise price of $6.75 per share; the warrants 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. During the first quarter of 2019, warrants for 400,281 shares were exercised.

In addition, the underwriter’s representatives for the IPO received four-year warrants to purchase up to 138,000 units, consisting of one share of common stock and one warrant to purchase one share of common stock. The warrants for the units are exercisable between June 2, 2017 and June 2, 2021 at an exercise price of $6.75 per unit.

The following table summarizes the Company’s warrant activity:

The intrinsic value of the common stock warrants was approximately $550,000 and $1,609,000$0 as of March 31, 2019,2020, and December 31, 2018,2019, respectively.

2016 and 2017 Equity Incentive Plans

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

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

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

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

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

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

The stock options had an intrinsic value of approximately $337,000 and $427,000$0 as of March 31, 20192020 and December 31, 2018,2019, respectively.

The Company recognizes forfeitures as they occur rather than estimating a forfeiture rate. The reduction of stock compensation expense related to the forfeitures was approximately $0 and $39,000 for the three months ended March 31, 20192020 and 2018,2019, respectively.

Unrecognized stock compensation expense was approximately $1,233,000$638,000 as of March 31, 2019,2020, which will be recognized over the remaining vesting period.

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

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

Treasury Stock

The Company accounts for purchases of treasury stock under the cost method with the cost of such share purchases reflected in treasury stock in the accompanying condensed balance sheet. As of March 31, 20192020 and December 31, 2018,2019, the Company had 33,45455,440 and 54,698 treasury shares.shares, respectively.

Note 10 — Income Taxes

Book income before taxes was negative for the three months ended March 31, 2019.2020. Tax expense for the three months ended March 31, 20192020 and 20182019 was $0.

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

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

As of March 31, 2019,2020, the Company has U.S. federal and certain state tax returns subject to examination, beginning with those filed for the year 2015.2016.

Note 11 — Subsequent Events

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued for potential recognition or disclosure. TheOther than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.

The outbreak of the novel coronavirus COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and created uncertainty regarding potential impacts to the Company’s employees, operations, and customer demand. The Company, which provides medical devices, is considered an “essential business” and has been able to continue to operate. However, the COVID-19 pandemic has significantly impacted the Company’s sales and could further impact the Company’s operations and the operations of the Company’s customers, suppliers and vendors as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on the Company’s customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local, state and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business as a result of any economic recession or depression that has occurred or may occur in the future. Therefore, the Company cannot reasonably estimate the impact at this time.

In light of the COVID-19 pandemic, the Company has taken steps to manage its costs and bolster its liquidity. We increased our borrowing availability as a precautionary measure to preserve financial flexibility due to the current uncertainty in the global markets resulting from the COVID-19 pandemic. Specifically, on April 13, 2020, the Company amended its revolving credit facility to extend the maturity from April 28, 2020 to April 1, 2022 and to increase the amount available under the facility from the lesser of $5 million or the borrowing base, equal to 80% of eligible accounts receivable, plus the $2.5 million sublimit to the $10 million commitment amount or the borrowing base plus a $3 million sublimit.

On April 20, 2020, the Company received a loan under the Small Business Administration Paycheck Protection Program enabled by the CARES Act of 2020 in the amount of $1,022,785 to be used for employee compensation and facilities costs. The loan has a six-month deferral period during which no payments will be due; however, interest will accrue. The loan matures in April 2022 and provides for interest at the rate of 1% per annum. The loan is subject to forgiveness for principal that is used for the limited purposes that expressly qualify for forgiveness under SBA requirements; however, the Company has no assurance that the loan will be forgiven.

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

You should read the following discussion and analysis in conjunction with the information set forth within the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and with our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 20182019 (“Annual Report”). The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, our plans, estimates, beliefs and expectations that involve risks and uncertainties, and other non-historical statements in this discussion, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our Annual Report, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

Overview

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

Components of our results of operations

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

Significant Developments

The extent to which the COVID-19 pandemic impacts our financial condition and results will depend on future developments which are uncertain and cannot be predicted. We provide medical devices, which is considered an “essential business” and we have been able to continue to operate. We are taking a variety of measures to ensure the availability and functioning of our essential operations and to promote the safety and security of all employees. Please see Note 11 to the financial statements.

Results of Operations

Three months ended March 31, 20192020 compared to the three months ended March 31, 20182019

Revenue. Revenue was $1,679,445 for the three months ended March 31, 2020 compared to $5,436,599 for the three months ended March 31, 2019, compared to $5,955,462 for the three months ended March 31, 2018, a decrease of $518,863,$3,757,154 or 8.7%69.1%. The decline in revenuedecrease was primarily attributable to a decrease in salesdriven by the lower number of units sold, reflecting the impact of the higher priced SRT-100 Vision product inCOVID-19 outbreak, primarily near the currentend of the quarter. We expect COVID-19 to continue to be significant to our business through at least the second quarter of 2020.

Cost of sales. Cost of sales was $970,944 for the three months ended March 31, 2020 compared to $2,120,621 for the three months ended March 31, 2019, compared to $2,015,200a decrease of $1,149,677, or 54.2%. The decrease in cost of sales was commensurate with the decrease in sales.

Gross profit. Gross profit was $708,501 for the three months ended March 31, 2018, an increase of $105,421, or 5.2%. The increase in cost was due2020 compared to changes in the mix of products sold.

Gross profit. Gross profit was $3,315,978 for the three months ended March 31, 2019, compared to $3,940,262 for the three months ended March 31, 2018, a decrease of $624,284,$2,607,477, or 15.8%78.6%. Our overall gross profit percentage was 61.0%42.2% in the three months ended March 31, 20192020 compared to 66.2%61.0% in the corresponding period in 2018.2019. The decrease in gross margin percentageprofit was primarilymostly due to changesthe decrease in sales as a result of the mixCOVID-19 outbreak. As of products sold.the date of this report, we expect gross margin as a percentage of revenue for the second quarter of 2020 to be approximately the same as the gross margin reported for the first quarter of 2020 due to the anticipated lower revenue level.

Selling and marketing. Selling and marketing expense was $1,790,970 for the three months ended March 31, 2020 compared to $2,530,346 for the three months ended March 31, 2019, compared to $2,214,911 for the three months ended March 31, 2018, an increasea decrease of $315,435,$739,375, or 14.2%29.2%. The increasedecrease was primarily attributable to an increasea decrease in headcount.tradeshows expense due to cancellations related to COVID-19, a decrease in commission expense due to lower sales and reduced spending on marketing activities.

General and administrative. General and administrative expense was $1,329,557 for the three months ended March 31, 2020 compared to $1,013,162 for the three months ended March 31, 2019, compared to $1,342,253 for the three months ended March 31, 2018, a decreasean increase of $329,091,$316,395, or 24.5%31.2%. The net decreaseincrease in general and administrative expense was primarily due to stock compensation expense for shares granted in the first quarter of 2018, partially offset by other increases.one-time severance expenses and related legal fees.

Research and development. Research and development expense was $1,225,182 for the three months ended March 31, 2020 compared to $1,965,507 for the three months ended March 31, 2019, compared to $1,497,618 for the three months ended March 31, 2018, an increasea decrease of $467,889,$740,325, or 31.2%37.7%. The increasedecrease in research and development spending was primarily attributable to the FDA clearance of Sculptura^TMproject as well as ramp to production.production began.

Other income (expense). We incur interest expense in connection with our secured credit facility with Silicon Valley Bank and interest income from our cash and investments. InterestNo interest expense decreasedwas incurred in 2019 with the decrease in2020 due to no borrowings on the line of credit. Interest income decreased due to maturing of our investment in debt securities.

Financial Condition

Our cash, cash equivalent and investment balance decreasedincreased to $15.8 million at March 31, 2020 from $15.4$15.5 million at December 31, 2018 to $11.0 million at March 31, 2019, primarily as a resultdue to cash provided in operating activities of an operating loss of $2.1 million during the three months ended in March 31, 2019 as well as the $3.7 million increase in accounts receivable as a result of higher sales and longer payment terms to certain customers.$0.4 million.

There were no borrowings under the revolving line of credit at March 31, 20192020 or December 31, 2018.2019.

In light of the COVID-19 pandemic, we have taken proactive steps to manage our costs and bolster our liquidity. We increased our borrowing availability as a precautionary measure to preserve financial flexibility due to the current uncertainty in the global markets resulting from the COVID-19 pandemic. In addition, we received a loan under the Small Business Administration Paycheck Protection Program enabled by the CARES Act of 2020 to be used for employee compensation and facilities costs. Please see Note 11 to the financial statements.

Liquidity and Capital Resources

Overview

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

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

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

Cash flows

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

Cash flows from operating activities

Net cash provided by operating activities was $433,763 for the three months ended March 31, 2020, consisting of a net loss of $3,587,106 partially offset by a decrease in net operating assets of $3,688,975 and by non-cash charges of $331,894. The decrease in net operating assets was primarily due to a decrease in accounts receivable, partially offset by an increase in inventories, prepaid and other current assets and accounts payables and accrued expenses, warranties and deferred revenue. Non-cash charges consisted of stock compensation expense, depreciation and amortization and warranty provision. Net cash used in operating activities was $7,117,101 for the three months ended March 31, 2019, consisting of a net loss of $2,121,018 and an increase in net operating assets of $5,338,691, partially offset by non-cash charges of $342,608. The increase in net operating assets was primarily due to the increase in accounts receivable from longer payment terms to a key customer, and the increase in prepaid and other current assets, offset by a decrease in accounts payables and accrued expenses. Non-cash charges consisted of stock compensation expense, depreciation and amortizations and warranty provision. Net cash used in operating activities was $3,477,560 for the three months ended March 31, 2018, primarily due to the operating loss and the increase in accounts receivable.receivable and accounts payable and accrued expenses.

Cash flows from investing activities

Net cash usedprovided by investing activities was $1,817,168$3,566,705, mostly due to netmatured investments in debt securities held-to-maturity for $1,807,764of $3,701,392 during the three months ended March 31, 2019.2020. Net cash provided byused in investing activities was $817,041$1,817,168 for the three months ended March 31, 20182019 due to the maturitypurchase of debt securities held-to-maturity of $1,104,635,$3,007,764, partially offset by $287,594$1,200,000 for acquisition of property and equipment.investments matured.

Cash flows from financing activities

Net cash used in financing activities was $3,139 during the three months ended March 31, 2020 mostly from withholding taxes on stock compensation. Net cash provided by financing activities was $2,701,897 during the three months ended March 31, 2019, mainly from the exercise of 400,281 investor warrants. Net cash provided by financing activities was $2,091,530 during the three months ended March 31, 2018, mainly from $2,000,663 in borrowing from our revolving credit facility.

Capital resources

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

Indebtedness

Please see Note 4 to the financial statements.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S., or GAAP. We have identified certain accounting policies as critical to understanding our financial condition and results of our operations. For a detailed discussion on the application of these and other accounting policies, see the notes to our financial statements and our Annual Report on Form 10-K filed with the Securities and Exchange Commission or SEC, for the year ended December 31, 2018.2019.

JOBS Act

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Control and Procedures

As of March 31, 2019,2020, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-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 March 31, 2019,2020, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The following updates the risk factors previously reported in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019:

Our business, results of operations and financial condition could be materially adversely affected by the effects of widespread public health epidemics, including the novel coronavirus (“COVID-19”), that are beyond our control.

Any outbreaks of contagious diseases, public health epidemics and other adverse public health developments in countries where we, our customers, or our suppliers operate could have a material and adverse effect on our business, results of operations and financial condition. The COVID-19 outbreak, has impacted our sales as social distancing forced physicians to temporarily close their practices during the first quarter of 2020, and is expected to continue to adversely impact our business, and the nature and extent of the impact is highly uncertain and beyond our control. Uncertain factors relating to COVID-19 include the duration, spread and severity of the virus, the effects of the COVID-19 pandemic on the Company’s customers, vendors and suppliers, and the actions or perception of actions that may be taken to contain or treat its impact, including declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations.

As a result of COVID-19 and the measures designed to contain its spread, our sales have been, and are expected to continue to be negatively impacted as a result of disruption in demand, which could have a material and adverse effect on our business, results of operations and financial condition. Similarly, our suppliers may not have the materials, capacity, or capability to manufacture our products according to our schedule and specifications. If our suppliers’ operations are impacted, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would affect our results of operations. The duration of the related financial impact to us, cannot be estimated at this time. Should such disruption continue for an extended period of time, the impact could have a material adverse effect on our business, results of operations and financial condition.

An investment in our securities involves risks. You should carefully consider the risk factors as previously disclosed in our Form 10-K filed with the SEC for the year ended December 31, 2018, as updated in our subsequent quarterly reports,2019, together with the other information in this Quarterly Report on Form 10-Q, including the financial statements and related notes, before deciding whether to purchase, hold, or sell our securities. The occurrence of any of these risks could harm our business, financial condition, or results of operations or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. There have been no material changes to the risk factors as previously disclosed in our Form 10-K filed with the SEC for the year ended December 31, 2018, the discussion of which is specifically incorporated by reference into this Quarterly Report on Form 10-Q.

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

(a) Sales of Unregistered Securities

There were no unregistered sales of securities during the three months ended March 31, 2019.2020.

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

None.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

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

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