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
achieved profitability for the first time in 2021 and increased profitability in 2022, and seeks to maintain and increase profitability
by, among other things, increasing sales and managing operational expenses where necessary in order to continue to invest in research
and development of new products and marketing initiatives to promote the Company’s products. However, Sensus faces a number of
uncertainties in 2023 that could impact our ability to achieve this goal. These include inflation 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.
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,
(in thousands, except shares and per share data) 2022 2021
Operating expenses
Other income (expense):
Gain (loss) on sale of assets 12,779 (1 )
Interest income 382 2
Interest expense (2 ) (2 )
Other income (expense), net 13,159 (1 )
Provision for income taxes 3,746 -
Net income per share – basic $ 1.47 $ 0.25
Weighted average number of shares used in
20
2022 Compared with 2021
Revenues of $44.5 million in 2022 increased
$17.5 million, or 65%, from $27.0 million in 2021. The 65% increase was driven by a higher number of units sold in 2022 in response to
increased demand.
Cost of sales of $14.9 million in 2022
increased by $4.8 million, or 48%, from $10.1 million in 2021, reflecting the higher number of units sold.
Gross profit of $29.6 million, or 66.5%
of revenue, in 2022 increased by $12.6 million, or 74%, from $17.0 million, or 62.8% of revenue, in 2021. The increases were driven by
a higher number of units sold in 2022 and service revenue on installed units.
Selling and marketing expenses of $6.3
million in 2022 increased by $1.5 million, or 31%, from $4.8 million in 2021. The increase was primarily attributable to higher spending
on marketing activities, and an increase in headcount.
General and administrative expenses of
$5 million in 2022 increased by $0.4 million, or 9%, from $4.6 million in 2021, due primarily to higher compensation and bad debt expense.
Research and development expenses of $3.5
million in 2022 increased by $0.1 million, or 3%, from $3.4 million in 2021. The Company expects research and development expenses in
2023 to be generally consistent with 2022.
Other income (expense), net of $13.2 million
in 2022 increased by $13.3 million from $0.1 million in 2021 and is primarily attributable to the gain on sale of assets of $12.8 million
(See Note 2, Disposition, to the consolidated financial statements) and an interest income of $0.4 million.
Financial Condition
The Company’s cash, cash equivalent, and
investment balance increased to $25.5 million at December 31, 2022 from $14.5 million at December 31, 2021, primarily due to cash received
in investing activities.
There were no borrowings under the revolving line
of credit at December 31, 2022 and December 31, 2021.
The Company continued to take proactive steps
during 2022 to manage costs and preserve liquidity. These steps included maintaining borrowing availability as a precautionary measure
to preserve financial flexibility in view of the uncertainty in global markets. In 2022, the Company paid the outstanding balance ($51,021)
of its 2020 loan under the Small Business Administration Paycheck Protection Program (“PPP”) enabled by the Coronavirus Aid,
Relief, and Economic Security Act of 2020 (the “CARES Act”).
Liquidity and Capital Resources
Overview
In general terms, the liquidity is a measurement
of the Company’s ability to meet its cash needs. For the year ended December 31, 2022, funding was derived primarily from the sale
of the Sculptura assets for $15 million in cash . The Company believes that cash generated by operations and proceeds from maturing investments,
as well as borrowing capacity and access to capital resources are sufficient to meet operating capital and funding requirements for the
next 12 months from the date of this annual report. Based upon information available to us, we believe that the Bridge Bank has assumed
all contracts of SVB in effect at the time of its failure (including our line of credit) and that the Bridge Bank is expected to continue
to perform under those contracts. Accordingly, we have not yet determined whether to seek to replace the current line of credit with
the Bridge Bank. (For additional information, see “Risk Factors -- Sensus may be required to obtain additional funds in the
future, and these funds may not be available on acceptable terms or at all”). The Company’s liquidity position and capital
requirements may also be impacted by a number of factors, including the following:
● ability to generate and increase revenue;
● fluctuations in gross margins, operating expenses, and net results; and
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’s 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. However, there can be no assurance that it will be able to raise such funds or the
terms on which such funds may be raised, if at all.
As of December 31, 2022, a substantial portion
of our cash was deposited with or invested through SVB. Subsequent to the closing of SVB in March 2023, we opened a new operating account
with a different bank, and we may open additional accounts from time to time in the future. However, in light of various factors, including
the actions taken by the FDIC following the closing of SVB, the amount deposited in the new bank account is not, and any amounts deposited
in or invested through other banks in the future are not expected to be, significant compared to the amounts deposited with and invested
through SVB (now the Bridge Bank).
21
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):
Operating activities $ (1,412 ) $ (286 )
Financing activities (2,428 ) (231 )
Cash flows from operating activities
Net cash used in operating activities was $1.4
million for the year ended December 31, 2022, consisting of net income of $24.2 million partially offset by an increase in net operating
assets of $12.7 million, gain on sale of assets of $12.8 million and deferred income taxes of $1.7 million, and non-cash charges of $1.6
million. Non-cash charges consisted of depreciation and amortization, stock base compensation and product warranty charges. Net cash used
in operating activities was $0.3 million for the year ended December 31, 2021, consisting of net income of $4.1 million partially offset
by an increase in net operating assets of $6.1 million and non-cash charges of $1.7 million. Non-cash charges consisted of depreciation
and amortization, stock base compensation and product warranty charges.
Cash flows from investing activities
Net cash provided by investing activities was
$14.8 million during the year ended December 31, 2022, primarily due to proceeds from sale of assets, particularly the sale of the Sculptura
assets for $15 million in cash, partially offset by acquisition of property and equipment. Net cash provided by investing activities was
$0.1 million during the year ended December 31, 2021, primarily due to proceeds from sale of equipment, partially offset by acquisition
of property and equipment.
Cash flows from financing activities
Net cash used in financing activities was $2.4
million during the year ended December 31, 2022, primarily due to purchases of common stock and principal payments on our PPP loan, partially
offset by proceeds from exercises of stock options. Net cash used in financing activities was $0.2 million during the year ended December
31, 2021, primarily due to principal payments on our PPP loan.
Inflation
Increases in commodity and shipping prices and
energy and labor costs have resulted in inflationary pressures across various parts of our business and operations, including our partners
and supply chain. We continue to monitor the impact of inflation in order to minimize its effects on our product cost and sales.
Indebtedness
Please see Note 5, Debt, to the consolidated
financial statements.
Contractual Obligations and Commitments
Please see Note 8, Commitments and Contingencies,
to the consolidated financial statements.
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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
22
FINANCIAL STATEMENTS OF SENSUS HEALTHCARE, INC.
CONTENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 688) F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3
Notes to the Consolidated Financial Statements F-7
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and Board of Directors of
Sensus
Healthcare, Inc.
Opinion
on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensus
Healthcare, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, stockholders’
equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our 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
provide a reasonable basis for our opinion.
Critical
Audit Matters
Critical
audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Marcum llp
Marcum llp
We
have served as the Company’s auditor since 2012.
Fort
Lauderdale, FL.
March
23, 2023
PCAOB
Number: 688
F-2
SENSUS HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(in thousands, except shares and per share data) 2022 2021
Assets
Current assets
Prepaid and other current assets 6,921 2,837
Property and equipment, net 243 605
Deferred tax asset 1,713 -
Operating lease right-of-use assets, net 996 169
Other noncurrent asset 468 -
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued expenses $ 5,521 $ 4,058
Operating lease liabilities, current portion 190 174
Loan payable - 51
Income tax payable 890 -
Deferred revenue, current portion 693 1,172
Operating lease liabilities 830 -
Deferred revenue, net of current portion 139 262
Commitments and contingencies
Stockholders’ equity
Preferred stock, 5,000,000 shares authorized and none issued and outstanding - -
Retained earnings (Accumulated deficit) 6,302 (17,942 )
Total liabilities and stockholders’ equity $ 56,735 $ 32,240
See accompanying notes to the consolidated financial
statements.
F-3
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
December 31,
(in thousands, except shares and per share data) 2022 2021
Operating expenses
Other income (expense):
Gain (loss) on sale of assets 12,779 (1 )
Interest income 382 2
Interest expense (2 ) (2 )
Other income (expense), net 13,159 (1 )
Provision for income taxes 3,746 -
Net income per share – basic $ 1.47 $ 0.25
See accompanying notes to the consolidated financial
statements.
F-4
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022
AND 2021
Common Stock Additional Paid-In Treasury Stock Retained Earnings (Accumulated
(in thousands, except shares) Shares Amount Capital Shares Amount Deficit) Total
See accompanying notes to the consolidated
financial statements.
F-5
SENSUS HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
Cash flows from operating activities
Depreciation and amortization 315 613
Loss on sale of property and equipment - 47
Gain on sale of assets (12,779 ) -
Loss on disposal of assets 197 -
Gain resulting from termination of lease - (38 )
Provision for product warranties 722 530
Stock-based compensation 187 415
Impairment of intangible assets - 88
Deferred income taxes (1,713 ) -
Decrease (increase) in:
Deposits 51 -
Prepaid and other current assets (3,869 ) (557 )
Other noncurrent asset (468 ) -
Increase (decrease) in:
Accounts payable and accrued expenses 799 962
Operating lease liability (199 ) -
Income tax payable 890 -
Product warranties (827 ) (209 )
Net cash used in operating activities (1,412 ) (286 )
Cash flows from investing activities
Acquisition of property and equipment (159 ) (128 )
Net cash provided by investing activities 14,841 129
Cash flows from financing activities
Repurchase of common stock (2,999 ) -
Withholding taxes on stock-based compensation (109 ) (15 )
Repayment of loan payable (51 ) (216 )
Exercise of stock options 731 -
Net cash used in financing activities (2,428 ) (231 )
Net increase (decrease) in cash and cash equivalents 11,001 (388 )
Cash and cash equivalents – beginning of period 14,519 14,907
Cash and cash equivalents – end of period $ 25,520 $ 14,519
Supplemental disclosure of cash flow information:
Interest paid $ 2 $ 2
Income tax paid $ 4,570 $ -
Supplemental schedule of noncash investing and financing transactions:
Transfer of inventory to property and equipment $ 48 $ 66
See accompanying notes to the consolidated financial
statements.
F-6
SENSUS HEALTHCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Organization and Summary of Significant Accounting Policies
Description
of the Business
Sensus Healthcare, Inc. (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 and Principles of Consolidation
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.
Use
of Estimates
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. Actual results could differ from those estimates.
Revenue
Recognition
The Company’s
revenue derives from sales of the Company’s devices and services related to maintaining and repairing the devices as part of a service
contract or on an ad-hoc basis without a service contract.
The Company
provides warranties, generally for one year, 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 relevant warranty. The Company has determined that
these warranties do not represent separate performance obligations, as the customer does not have the option to purchase the warranty
separately and the warranty does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon
specifications. The Company records an estimate of future warranty claims at the time it recognizes revenue from the sale of the device
based upon management’s estimate of the future claims rate.
Revenue
is recognized upon transfer of control of promised goods or services to customers when the product is shipped or the service is rendered,
based on the amount the Company expects to receive in exchange for those goods or services. The Company enters into contracts that can
include multiple services, which are accounted for separately if they are determined to be distinct.
To determine
the transaction price for contracts in
which a customer promises consideration in a form other than cash, the Company measures the estimated fair value of the
noncash consideration at contract inception. If the Company cannot reasonably estimate the fair value of the noncash consideration, it
measures the consideration indirectly by reference to the standalone selling price of
the products promised to the customer or class of customer in exchange for the consideration.
The revenues
from service contracts are recognized over the service contract period on a straight-line basis. In the event that a customer does not
sign a service contract, but requests maintenance or repair services after the warranty expires, the Company recognizes revenue when the
service is rendered.
The Company
has determined that in practice no significant discount is given on the service contract when it is offered with the device purchase as
compared to when it is sold on a stand-alone basis. The service level provided is identical whether the service contract is purchased
on a stand-alone basis or together with the device. There is no termination provision in the service contract or any penalties in practice
for cancellation of the service contract.
F-7
The components of disaggregated revenue are as
follows:
For the Years Ended
December 31,
Product Revenue - recognized at a point in time $ 40,007 $ 22,217
Service Revenue - recognized at a point in time 1,351 1,712
Service Revenue - recognized over time 3,174 3,113
The Company operates in a highly regulated environment,
primarily in the U.S. dermatology market, in which state regulatory approval is sometimes required prior to the customer being able to
use the product. In cases where such regulatory approval is pending, revenue is deferred until such time as regulatory approval is obtained.
Deferred revenue activity for 2022 and 2021 is
as follows:
(in thousands) Product Service Total
The Company does not disclose information about
remaining performance obligations of deposits for products that have original expected durations of one year or less. Estimated service
revenue to be recognized in the future related to the performance obligations that are unsatisfied (or partially unsatisfied) as of December
31, 2022 is as follows:
(in thousands)
Year Service Revenue
The Company pays commissions for equipment sales.
Because the recovery of commissions is expected to occur from product revenue within one year, the Company charges commissions to expense
as incurred.
Shipping and handling costs are expensed as incurred
and are included in cost of sales.
Concentration
Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable.
On March 10, 2023, Silicon Valley Bank (“SVB”)
was closed by California and federal regulatory agencies. As a result of these actions, the FDIC established Silicon Valley Bridge Bank
(the “Bridge Bank”). Based upon information available to us, we believe that the Bridge Bank has assumed all contracts SVB
entered into prior to its failure, that the Bridge Bank is expected to continue to perform under those contracts, and that all counterparties
are consequently expected to perform under those contracts.
One customer in the U.S. accounted for approximately
73% and 57% of revenue for the years ended December 31, 2022 and 2021, respectively, and 91% and 94% of the accounts receivable as of
December 31, 2022 and 2021, respectively.
F-8
Segment
and Geographical Information
The following table illustrates total revenue
for the years ended December 31, 2022 and 2021 by geographic region.
For the Year Ended
December 31,
Fair Value of Financial
Instruments
Carrying amounts of cash equivalents, accounts
receivable, accounts payable and the revolving credit facility approximate fair value due to their relative short maturities.
Fair
Value Measurements
The Company uses a fair value hierarchy that prioritizes
inputs to valuation approaches used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted)
in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities measured
and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs:
Quoted prices (unadjusted) in active
markets for identical assets or liabilities at the reporting date.
● Level 1 assets may include listed mutual funds, ETFs and listed equities
Level 2 Inputs:
Quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services
or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive
at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies.
Level 3 Inputs:
Unobservable inputs for the valuation
of the asset or liability, which may include nonbinding broker quotes.
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.
F-9
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.
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
$107 thousand and $69 thousand as of December 31, 2022 and 2021, respectively. Bad debt expense for the years ended December 31, 2022
and 2021 was approximately $145 thousand and $78 thousand, respectively.
Inventories
Inventories consist of finished product and components
and are stated at the lower of cost and net realizable value, determined using the first-in-first-out method.
Prepaid and Other Current
Assets
Prepaid and other current assets consists of the following:
For the Years Ended
December 31,
Prepaid insurance 46 40
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.
Property and equipment for demonstrations and other programs that were reclassified to or from inventory was approximately $48 thousand
and $66 thousand for the years ended December 31, 2022 and 2021, 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. Impairment charges of $0 and $88 thousand were recorded
for intangible assets for the years ended December 31, 2022 and 2021, respectively.
F-10
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 per share is calculated by dividing
the net income by the weighted-average number of common shares outstanding for the period using the treasury stock method for options,
restricted stock and warrants. Diluted net income per share is computed by giving effect to all potential dilutive common share equivalents
outstanding for the period.
The factors used in the earnings per share computation
are as follows:
For the Years Ended
December 31,
Basic
Weighted average common shares outstanding 16,481 16,476
Basic earnings per share $ 1.47 $ 0.25
Diluted
Weighted average common shares outstanding 16,481 16,476
Dilutive effects of:
Assumed exercise of stock options 55 -
Restricted stock awards 82 27
Diluted earnings per share $ 1.46 $ 0.25
Equity-Based
Compensation
Pursuant to relevant accounting guidance related
to accounting for equity-based compensation, the Company is required to recognize all share-based payments to non-employees and employees
in the financial statements based on grant-date fair values. 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,
which is generally the period 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 income
amounted to approximately $871 thousand and $460 thousand for the years ended December 31, 2022 and 2021, 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 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 income.
F-11
Income
Taxes
The Company
recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between
the financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the
years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the
weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Uncertain
tax positions are recognized in the financial statements only if that position is more likely than not to be sustained upon examination
by taxing authorities, based on the technical merits of the position. The Company’s practice is to recognize interest and/or penalties
related to income tax matters in income tax expense.
Recent
Accounting Standard
In March
2020, the Financial Accounting Standard Board (FASB) issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting, to provide temporary optional expedients and exceptions to U.S. GAAP guidance on
contract modifications to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate,
or LIBOR, to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification
accounting requirements to contracts affected by what the guidance calls reference rate reform if certain criteria are met. An entity
that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination.
The guidance is effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years.
In December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Topic 848 which was issued to defer the sunset date
of Topic 848 to December 31, 2024. These updates are not expected to have a significant impact on the Company’s financial statements.
Note
2 – Disposition
In April 2021, the Company sold certain property
and equipment to a former employee for approximately $257 thousand. During the year ended December 31, 2021, the Company recorded $88
thousand of impairment charges on intangible assets and $47 thousand for a loss on the sale of property and equipment associated with
this transaction.
On February 25, 2022, the Company sold its Sculptura assets for $15
million in cash. The sale price was allocated to the existing assets and liabilities based on the book value at the date of the transaction.
A summary of the assets and liabilities sold is as follows:
(in thousands) Book Value
Property and equipment (157 )
Other liabilities (663 )
Gain on asset sale $ 12,779
Note
3 — Property and Equipment
Property and equipment consists of the following:
As of December 31, As of December 31, Estimated
Tradeshow and demo equipment 990 927 3 years
Less accumulated depreciation (2,131 ) (2,211 )
Property and Equipment, Net $ 243 $ 605
Depreciation expense was approximately $219 thousand
and $509 thousand for the years ended December 31, 2022 and 2021, respectively. Accumulated depreciation on asset disposals was approximately
$435 thousand and $88 thousand for the years ended December 31, 2022 and 2021, respectively.
F-12
Note
4 — INTANGIBLES
Patent Customer Trade
(in thousands) Rights Relationships Names Total
Impaired assets - (81 ) (7 ) (88 )
Amortization expense (96 ) (2 ) (6 ) (104 )
Amortization expense (96 ) - - (96 )
Amortization expense was approximately $96 thousand
and $104 thousand for the years ended December 31, 2022 and 2021, respectively. The weighted-average amortization period for intangible
assets is 0.7 years in total.
Estimated amortization expense for the finite-lived
intangible assets for each of succeeding years is as follows:
For the Year Ending December 31, (in thousands)
Note
5 — DEBT
The Company has had a revolving
credit facility with SVB that, as of December 31, 2021, provided for maximum borrowings equal to the lesser of (a) the $10 million commitment
amount or (b) the borrowing base plus a $3 million non-formula sublimit. In April 2022, the term was extended to April 1, 2024, and
the maximum borrowings were increased to the lesser of (a) the $15 million commitment amount or (b) the borrowing base plus a $7.5 million
non-formula sublimit. At December 31, 2022, the available borrowing was $15 million. Interest on any borrowings, at Prime plus
0.75% (8.25% at December 31, 2022) and Prime plus 1.50% on non-formula borrowings (9% at December 31, 2022) is payable monthly, and the
outstanding principal and interest are due on the maturity date. The facility is secured by all of the Company’s assets and limits
the amount of additional indebtedness of the Company; restricts the sale, disposition or transfer of assets of the 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, 2022 and December 31, 2021. There were no borrowings outstanding under the revolving credit
facility at December 31, 2022 and December 31, 2021. The Company has paid commitment fees of 0.25% per annum on the average unused portion
of the line of credit.
On March 10, 2023, SVB was closed by California
and federal regulatory agencies. As a result of these actions, the FDIC established the Bridge Bank as successor to SVB. Based upon information
available to us, we believe that the Bridge Bank has assumed all contracts of SVB in effect at the time of its failure (including our
line of credit) and that the Bridge Bank is expected to continue to perform under those contracts.
On April 20, 2020, the Company received a loan
of $1,022,785 under the Small Business Administration (“SBA”) Paycheck Protection Program enabled by the CARES Act, to be