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.
Overview
As discussed elsewhere in this Report, Sensus seeks to achieve
profitability. However, Sensus faces a number of uncertainties in 2021 that could impact our ability to achieve this goal. These
include the ongoing coronavirus epidemic and international trade issues. Either of these matters could adversely affect the Company’s
ability to do business in a number of countries and geographic regions, including China.
In order to achieve profitability, the Company is reducing
operational expenses where necessary in order to continue to invest in research and development related to the Company’s
products.
Impact of COVID-19
The outbreak of 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, as well as on the
Company’s and its employees, operations, and customer demand. The Company has been able to continue to operate and service
its customers throughout the pandemic. However, the pandemic significantly impacted the Company’s sales throughout 2020,
as social distancing forced physicians to temporarily close their practices, and could further impact the Company’s operations
and the operations of the Company’s customers, suppliers and vendors as a result of ongoing 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. The Company cannot reasonably estimate the impact at
this time. (See Note 1, Business Overview, of the consolidated financial statements).
Components of our results of operations
Sensus manages our business globally within one reportable
segment, which is consistent with how management views the business, prioritizes investment and resource allocation decisions and
assesses operating performance.
Results of Operations
For the Years Ended December 31,
Operating expenses
Other income (expense)
Gain on extinguishment of loan 757,782 -
Interest expense (14,230 ) -
2020 Compared with 2019
Revenues of $9,576,932 in 2020 decreased $17,686,316
from $27,263,248 in 2019, primarily reflecting the impact of COVID-19 and the decrease in the number of units sold. Due to COVID-19,
the Company was unable to sell effectively to its markets due to travel restrictions and other factors. The Company believes these
factors are gradually subsiding as the healthcare industry has developed and continues to develop effective vaccines and other
treatments for COVID-19 and as local, state, and federal governments ease distancing restrictions. Additionally, the overall embrace
of technology that enables the global business community to communicate effectively without the need for close proximity is expected
to help the Company reach its potential clients for 2021.
Cost of sales of $4,327,839 in 2020 decreased by $5,378,265
from $9,706,104 in 2019, reflecting the lower number of units sold due to the COVID-19 pandemic.
Gross profit decreased $12,308,051, or 70.1%, from
2019, primarily driven by continued fixed costs and depreciation and amortization expenses combined with the decline in units sold.
Any increase in 2021 in gross profit or gross margin, as a percentage of revenue, is largely dependent upon the status of the COVID-19
pandemic and the market’s response to the COVID-19 pandemic.
Selling and marketing expenses decreased $3,766,709,
or 41.4%, from 2019, primarily attributable to cancellations of trade shows due to COVID-19, a decrease in commission expense due
to lower sales and reduced spending on marketing activities.
Research and development expenses decreased $2,260,189
or 35.2.%, from 2019, reflecting lower spending as the SculpturaTM project entered production phase during 2020.
Other income (expense), net of $1,398,348 in 2020 increased
$1,130,058 from $268,290 in 2019. The net increase was primarily attributable to the forgiveness of $757,782 of our loan under
the Small Business Administration Paycheck Protection Program (See “Financial Condition” below and Note 5, Debt,
of the consolidated financial statements) and a bargain purchase gain $588,011 which was recorded as a result of acquisitions (See
Note 2, Acquisitions, of the consolidated financial statements)
Financial Condition
The Company’s cash, cash equivalent and investment
balance decreased to $14,906,976 at December 31, 2020 from $15,489,695 at December 31, 2019, primarily due to cash used in operating
activities and the purchase of property and equipment.
There were no borrowings under the revolving line of credit
at December 31, 2020 and 2019.
In light of the COVID-19 pandemic, the Company took proactive
steps during 2020 to manage costs and bolster liquidity. These steps included increasing borrowing availability as a precautionary
measure to preserve financial flexibility in view of the uncertainty in global markets resulting from the COVID-19 pandemic and
obtaining a loan of $1,022,785 under the Small Business Administration Paycheck Protection Program enabled by the Coronavirus Aid,
Relief, and Economic Security (“CARES”) Act of 2020 which was used for employee compensation and facilities costs.
Liquidity and Capital Resources
Overview
In general terms, liquidity is a measurement of the Company’s
ability to meet its cash needs. For the years ended December 31, 2020 and 2019, a significant source of funding has been cash flows
from investing and financing activities. The Company believes that proceeds from investment maturing, borrowing capacity and access
to capital resources are sufficient to meet operating capital and funding requirements for the next 12 months from the issuance
date of this annual report. The Company’s liquidity position and capital requirements may be impacted by a number of factors,
including the following:
● ability to generate and increase revenue;
● fluctuations in gross margins, operating expenses and net results; and
● fluctuations in working capital.
The Company’s primary short-term capital needs, which
are subject to change, include expenditures related to:
● expansion of sales and marketing activities; and
● expansion of research and development activities.
Sensus’ management regularly evaluates cash requirements
for current operations, commitments, capital requirements and business development transactions, and may seek to raise additional
funds for these purposes in the future.
Cash flows
The following table provides a summary of the Company’s
cash flows for the periods indicated:
For the Years Ended December 31,
Net cash provided by (used in):
Increase (decrease) in cash and cash equivalents $ 6,806,688 $ (4,383,968 )
Cash flows from operating activities
Net cash used in operating activities was $434,180 for
the year ended December 31, 2020, consisting of a net loss of $6,835,526 partially offset by an increase in net operating
assets of $5,561,274 and non-cash charges of $840,072. The increase in net operating assets was primarily related to a
decrease in sales and resulting in a decrease in accounts receivable, offset by an increase in inventory and a decrease in
accounts payable and accrued expenses. Non-cash charges consisted of depreciation and amortization, partially offset by the
gain on bargain purchase in 2020. Net cash used in operating activities was $2,106,642 for the year ended December 31, 2019,
consisting of a net loss of $1,700,003 and an increase in net operating assets of $2,212,112, partially offset by non-cash
charges of $1,805,474. The increase in net operating assets was primarily due to the increase in sales and other longer
payment terms on certain sales, resulting in an increase in accounts receivable, an increase in inventory and an increase in
deferred revenue offset by a decrease in accounts payable and accrued expenses. Non-cash charges consisted primarily of stock
compensation expense, bad debt and depreciation and amortization.
Cash flows from investing activities
Net cash provided by investing activities was $7,030,862,
primarily due to matured investments of $7,389,407, partially offset by $358,545 of acquisition of property and equipment. Net
cash used in investing activities was $4,897,810 due the purchase of debt securities held-to-maturity of $7,797,217 and $400,593
for acquisition of property and equipment offset by matured investments of $3,300,000 during the year ended December 31, 2019.
Cash flows from financing activities
Net cash provided by financing activities was $210,006 during
the year ended December 31, 2020, mostly from the balance of the loan of $266,777 under the Small Business Administration Paycheck
Protection Program. Net cash provided by financing activities was $2,620,484 during the year ended December 31, 2019, mostly from
the exercise of investor warrants of $2,739,238 offset by withholding tax on stock compensation of $118,754.
Indebtedness
Please see Note 5, Debt, to the financial statements.
Contractual Obligations and Commitments
Please see Note 7, Commitments and Contingencies,
to the financial statements.
Off-Balance Sheet Arrangements
The Company did not have during the periods presented, and
does not currently have, any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the 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
the financial condition and results of operations. For a detailed discussion on the application of these and other accounting policies,
see the notes to the financial statements included in this Annual Report on Form 10-K.
JOBS Act
Sensus is an “emerging growth company,” as defined
in the Jumpstart Our Business Startups Act. As such, the Company can 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:
Sensus is expected to remain an emerging growth company until
December 31, 2021, following which it would continue to be a “smaller reporting company,” which will enable it to continue
to take advantage of many of these exemptions, as discussed below. Investors may find Sensus’ common stock less attractive
if the Company chooses to rely on these exemptions. If some investors find Sensus’ common stock less attractive as a result
of any choices to reduce future disclosure, there may be a less active trading market for the Company’s common stock and
the price of its common stock may be more volatile.
In addition, an emerging growth company can delay its adoption
of certain accounting standards until those standards would otherwise apply to private companies. However, the Company have chosen
to “opt out” of such extended transition period, and as a result, plans 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 the 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
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3
Notes to the consolidated financial statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To
the Stockholders 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, 2020 and
2019, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in
the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2020, 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 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
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 audits 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 audits 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 audits 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 audits provides a reasonable basis for our opinion.
Marcum llp
We have served as the Company’s auditor since 2012.
Fort Lauderdale, FL
March 5, 2021
SENSUS HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
Assets
Current assets
Investment in debt securities - 7,389,407
Liabilities and stockholders’ equity
Current liabilities
Commitments and contingencies
Stockholders’ equity
Preferred stock, 5,000,000 shares authorized and none issued and outstanding - -
See accompanying notes to the consolidated
financial statements.
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
Operating expenses
Other income (expense)
Gain on bargain purchase 588,011 —
Gain on extinguishment of loan 757,782 —
Interest expense (14,230 ) —
Net loss per share – basic and diluted $ (0.42 ) $ (0.10 )
See accompanying notes to the consolidated
financial statements.
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020
AND 2019
Common Stock Additional Paid-in Treasury Stock Accumulated
Shares Amount Capital Shares Amount Deficit Total
See accompanying notes to the consolidated
financial statements.
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
Cash flows from operating activities
Inventory write-down - 90,083
Gain on bargain purchase (588,011 ) -
Changes in operating assets (decrease (increase)):
Changes in operating liabilities (increase (decrease)):
Net cash provided by (used in) operating activities (434,180 ) (2,106,642 )
Cash flows from investing activities
Acquisition of property and equipment $ (358,545 ) $ (400,593 )
Investment in debt securities - held to maturity - (7,797,217 )
Net cash provided by (used in) investing activities 7,030,862 (4,897,810 )
Cash flows from financing activities
Proceeds from loan payable 266,777 -
Withholding taxes on stock compensation (57,331 ) (118,754 )
Net cash provided by (used in) financing activities 210,006 2,620,484
Net increase (decrease) in cash and cash equivalents 6,806,688 (4,383,968 )
Supplemental disclosure of cash flow information:
Interest paid $ 12,456 $ -
Supplemental schedule of noncash investing and financing transactions
Transfer of inventory to property and equipment $ - $ 240,137
PPP loan (forgiveness portion) $ 757,782 $ -
Lease liabilities arising from obtaining right-of-use-assets $ - $ 1,714,814
See accompanying notes to the consolidated
financial statements.
SENSUS HEALTHCARE, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 — Organization
and Summary of Significant Accounting Policies
Description of
the Business
Sensus Healthcare, Inc. (together, with its subsidiary, unless
the context otherwise indicates, “Sensus” or the “Company”) is a manufacturer of radiation therapy devices
and sells the devices to healthcare providers globally through its distribution and marketing network. The Company operates as
one segment from its corporate headquarters located in Boca Raton, Florida.
BASIS of PRESENTATION
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 and its subsidiary. Accounts and transactions between consolidated entities have been eliminated.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during
the reporting periods. 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. Actual results could differ from those estimates.
Impact of COVID-19
The outbreak of 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, as well as, on
the Company’s and its’ employees, operations, and customer demand. The Company has been able to continue to operate and service its customers throughout the pandemic. However, the pandemic significantly
impacted the Company’s sales throughout 2020, as social distancing forced physicians to temporarily close their practices,
and could further impact the Company’s operations and the operations of the Company’s customers, suppliers and vendors
as a result of ongoing 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.
The Company cannot reasonably estimate the future impact at this time.
Revenue Recognition
Revenue is recognized upon transfer of control of promised goods
or services to customers in an amount to which the Company expects to be entitled 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.
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. The service level provided is identical when the service contract is on a purchased stand-alone basis
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 components of disaggregated revenue are as follows:
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 2020 and 2019 is as follows:
Product Service Total
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, 2020 is as follows:
Year Service Revenue
The Company provides warranties, generally for one year, in
conjunction with the sale of its product. 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 device 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.
Concentration of
Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable and investments in debt securities.
The Company places its cash and cash equivalents with highly rated financial institutions.
Segment and Geographical
Information
The Company’s revenue is generated primarily from customers
in the U.S., which represented approximately 97% and 92% of revenue for the years ended December 31, 2020 and 2019, respectively.
One customer in the U.S. accounted for approximately 40% and 68% of revenue for the years ended December 31, 2020 and 2019, respectively,
and 56% and 79% of the accounts receivable as of December 31, 2020 and 2019, respectively.
Fair Value of Financial
Instruments
Carrying amounts of cash equivalents, accounts receivable, accounts
payable and 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
Cash and cash equivalents primarily consists of cash, money
market funds and short-term, highly liquid investments with original maturities of three months or less.
For purposes of the statements 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 are those that the Company expects to convert
to cash after one year. The Company classifies its investments in debt securities (level 2) at the time of purchase as
held-to-maturity and re-evaluates 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. At December 31, 2019, these securities were
carried at amortized cost plus accrued interest and consist of the following:
AmortizedCost Gross Unrealized Gain Gross Unrealized Loss Fair Value
Short Term:
At December 31, 2020, the Company did not have any short-term
investments.
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
$24,000 and $80,000 as of December 31, 2020 and 2019, respectively. Bad debt expense for the years ended December 31, 2020 and
2019 were approximately $24,000 and $350,000, 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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is calculated on the straight-line basis over the estimated useful life of 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 for demonstrations and other programs that was reclassified to property and equipment for the years ended December
31, 2020 and 2019 was approximately $0 and $240,000, respectively.
Intangible Assets
Intangible assets are comprised of the Company’s patent
rights and finite-lived intangible assets acquired in acquisitions.
The carrying value of finite-lived assets and their remaining
useful lives 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, if potential impairment circumstances are 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 value of the asset is
determined not to be recoverable based on the undiscounted cash flow test, the difference between the carrying value of the asset
and its current fair value would be recognized as an expense in the period in which the impairment occurs. No impairment charges
were recorded for intangible assets long-lived assets for the years ended December 31, 2020 and 2019.
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 and warrants. Diluted net income per share is computed by giving effect to all potential dilutive common share equivalents
outstanding for the period. In periods when 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 loss per share as their effect
is antidilutive. Shares excluded were computed under the treasury stock method as follows:
For the Years Ended December 31,
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. The Company has accounted for issuances 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,
generally periods over which the shares, options and warrants vest.
Advertising Costs
Advertising and promotion costs are charged to expense as incurred.
Advertising and promotion costs included in selling and marketing expense in the accompanying statements of operations amounted
to approximately $515,000 and $1,321,000 for the years ended December 31, 2020 and 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 control an underlying asset
for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from
the lease. Control of an underlying asset is conveyed 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. 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 Company has
lease agreements which include lease and non-lease components, which the Company has elected to account for as a single lease component
for all classes of underlying assets.
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 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.
Note 2 — ACQUISITIONS
On August 3, 2020, the Company acquired two mobile aesthetic
laser companies, now known as Sensus Laser Aesthetic Solutions (“SLAS”). The companies are expected to complement and
expand the Company’s current offerings.
The aggregate purchase price of $999,000 was deemed to be compensation
for post-acquisition services and will be recorded as compensation expense over the remaining service periods.
The purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the date of the transaction. A preliminary summary of the estimated
fair values of the assets acquired and liabilities assumed is as follows:
Fair Value
Accounts receivable $ 38,483
Finite-lived intangible assets:
Customer relationships 86,737
Other liabilities assumed (87,727 )
Bargain purchase gain $ 588,011
A bargain purchase gain results from an acquisition if the fair
value of the purchase consideration paid in connection with such acquisition is less than the net fair value of the assets acquired,
and liabilities assumed. Accordingly, the Company recorded a bargain purchase gain of $588,011 which is included in other income
on the consolidated statements of operations for the year ended December 31, 2020.
Finite-lived intangible assets are amortized over their estimated
useful lives, which range from one to 13 years.
For the year ended December 31, 2020, the acquisition of these
two laser rental companies contributed approximately $166,000 to gross profit and did not have a material impact on net loss. Consequently,
the Company has not presented pro forma financial statements for this acquisition.
Note 3 — Property
and Equipment
Property and equipment consists of the following:
As of December 31, Estimated useful
Depreciation expense was approximately $613,000 and $449,000
for the years ended December 31, 2020 and 2019, respectively. Accumulated depreciation on asset disposals was approximately $74,000
for the year ended December 31, 2020.
Note 4 — INTANGIBLES
Patent Rights Customer Relationships Trade Names Total
Amortization expense was approximately $108,000 and $96,000
for the years ended December 31, 2020 and 2019, respectively.
Estimated amortization expense for the finite-lived intangible
assets for each of the five succeeding years is as follows:
For the Year Ending December 31,
In 2020, in connection with the two mobile laser company acquisitions,
the Company acquired finite-lived trade names and finite-lived customer relationship intangible assets, with weighted-average estimated
lives of approximately 13 years and one year, respectively. See Note 2, Acquisitions, for information on these transactions.
Note 5 — DEBT
The Company has a revolving credit facility that, through April
2020, provided for maximum borrowings equal to the lesser of (a) the $5 million commitment amount or (b) a borrowing base equal
to 80% of eligible accounts receivable plus 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 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% (4.00%
at December 31, 2020) and Prime plus 1.50% on non-formula borrowings (4.75% at December 31, 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; restricts the sale, disposition or transfer of assets of the Company; and requires
the maintenance of a monthly adjusted quick ratio restrictive covenant, as defined in the facility. The Company was in compliance
with its financial covenants as of December 31, 2020 and December 31, 2019. There were no borrowings outstanding under the revolving
credit facility at December 31, 2020 and December 31, 2019. The Company pays commitment fees of 0.25% per annum on the average
unused portion of the line of credit.
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 of 2020, 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 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. The Company applied for and has been notified that $757,782 in eligible expenditures for payroll
and other expenses described in the CARES Act has been forgiven. Loan forgiveness is reflected in gain on extinguishment of the
loan in the consolidated statements of operations.
Note 6 — Product
Warranties
Changes in product warranty liability were as follows for the
year ended December 31, 2020:
Warranties accrued during the period 295,735
Payments on warranty claims (296,138 )
Note 7 — Commitment
and Contingencies
Operating Lease
Agreements
The Company leases its headquarters office from an unrelated
third party. The lease was last renewed in 2016 and expires in September 2022 with an option to extend with prior notice upon terms
to be negotiated.
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, 2020.
Maturity of Operating Lease Liabilities Amount
Total undiscounted operating leases payments $ 1,337,617
Less: Imputed interest (222,088 )
Present Value of Operating Lease Liabilities $ 1,115,529
Other Information
Weighted-average remaining lease term 6.0 years
Weighted-average discount rate 5.0 %
An initial Right of Use (“ROU”) asset of approximately
$805,000 was recognized as a non-cash assets addition with the adoption of the new lease accounting standard. The value of the
ROU assets was reduced by approximately $324,000 and $330,000 during the years ended December 31, 2020 and 2019, respectively.
Cash paid for amounts included in the present value of operating lease liabilities was approximately $359,000 and $310,000 for
the years ended December 31, 2020 and 2019, respectively, and is included in cash flows from operating activities in the accompanying
consolidated statement of cash flows. Operating lease costs were approximately $373,000 and $351,000 for the years ended December
31, 2020 and 2019, respectively.
Manufacturing Agreement
In 2010, the Company entered into a three-year contract manufacturing
agreement with an unrelated third party for the production and manufacture of the SRT-100 (and subsequently the SRT-100 Vision
and the SRT-100 Plus), in accordance with the Company’s product specifications. The agreement renews for successive one-years
periods unless either party notifies the other party in writing, at least 60 days prior to the anniversary date of the agreement,
that it will not renew the agreement. The Company or the manufacturer may terminate the agreement upon 90 days’ prior written
notice.
Purchases from this manufacturer totaled approximately $2,474,000
and $5,786,000 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, approximately $697,000
and $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 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 8 — Employee
Benefit Plans
The Company sponsors a 401(k) defined contribution retirement
plan that allows eligible employees to contribute a portion of their compensation, as defined by the plan and subject to Internal
Revenue Code limitations. The Company makes contributions to the plan which include matching a percentage of the employees’
contributions up to certain limits. Expenses related to this plan totaled approximately $125,000 and $123,000 for the years ended
December 31, 2020 and 2019, respectively.
Note 9 — Stockholders’
Equity
The Company has authorized 50,000,000 shares of common stock,
of which 16,564,311 were issued and 16,491,103 outstanding at December 31, 2020; 16,540,478 shares were issued and 16,485,780 outstanding
as of December 31, 2019, respectively.
Warrants
In 2016, investors in the Company’s initial public offering
(the “IPO”), received three-year warrants to purchase 2,300,000 shares of common stock at an exercise price of $6.75
per share; the warrants were exercisable through June 8, 2019. In 2019, the Company entered into an amendment to the Warrant Agreement
to extend the expiration date of the investor warrants from June 8, 2019 until June 8, 2020. During the year ended December 31,
2019, warrants for 405,813 shares were exercised.
In addition, the underwriters’ of 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 until June 2, 2021 at an exercise price of $6.75 per unit. As of December 31,
2020, none of the unit warrants have been exercised.
The following table summarizes the Company’s warrant activity:
Warrants
Granted — — —
Exercised (83 ) — —
The intrinsic value of the common stock warrants was $0 as of
December 31, 2020 and December 31, 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 which 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 which 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.
The stock options had an intrinsic value of $0 as of December
31, 2020 and December 31, 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 $24,000
and $8,000 for the years ended December 31, 2020 and 2019, respectively.
Unrecognized stock compensation expense was approximately $331,000
as of December 31, 2020, which will be recognized over a weighted average period of 1.75 years.
A summary of restricted stock activity is presented as follows: