UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒

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

 

For the Quarterly Period Ended September 30, 2017

 

OR

 

☐

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

 

For the transition period from ____________ to ____________

 

Commission File Number: 001-37714

 

Sensus Healthcare, Inc. 

(Exact name of registrant as specified in its charter)

 

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

 

(561) 922-5808 

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒
		(Do not check if smaller reporting company)	Emerging growth company ☒

 

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

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

 

As of October 31, 2017, 13,488,714 shares of the Registrant’s Common Stock, $0.01 par value, were outstanding.

 

 

SENSUS HEALTHCARE, INC. 

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

		Page
PART I – Financial Information
Item 1.	Condensed Financial Statements (Unaudited)
	Balance Sheets as of September 30, 2017 and December 31, 2016	4
	Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016	5
	Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2017	6
	Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	7
	Notes to the Condensed Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	20
PART II – Other Information
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Mine Safety Disclosure	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
Signatures		22

 

 

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

 

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

 

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

 

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

 

●

our ability to achieve and sustain profitability;

●

market acceptance of the SRT-100 product line;

●

our ability to successfully commercialize our products, including the SRT-100;

●

our ability to compete effectively in selling our products and services, including responding to technological change and cost containment efforts of our customers;

●

the regulatory requirements applicable to us and our competitors, including any adverse regulatory action taken against us;

●

our need and ability to obtain additional financing in the future, as well as complying with the restrictions our existing revolving credit facility imposes;

●

our ability to expand, manage and maintain our direct sales and marketing organizations;

●

our actual financial results may vary significantly from forecasts and from period to period;

●

our ability to successfully develop new products, improve or enhance existing products or acquire complementary products, technologies, services or businesses;

●

our ability to obtain and maintain intellectual property of sufficient scope to adequately protect our products, including the SRT-100, and our ability to avoid infringing or otherwise violating the intellectual property rights of third parties;

●

market risks regarding consolidation in the healthcare industry;

●

the willingness of healthcare providers to purchase our products if coverage, reimbursement and pricing from third party payors for procedures using our products significantly declines;

●

the level and availability of government and third-party payor reimbursement for clinical procedures using our products;

●

our ability to effectively manage our anticipated growth, including hiring and retaining qualified personnel;

●

our ability to manufacture our products to meet demand;

●

our reliance on third party manufacturers and sole- or single-source suppliers;

●

our ability to reduce the per unit manufacturing cost of the SRT-100;

●

our ability to efficiently manage our manufacturing processes;

●

the regulatory and legal risks, and certain operating risks, that our international operations subject us to;

●

off label use of our products;

●

the fact that product quality issues or product defects may harm our business;

●

the accuracy of our financial statements and accounting estimates, including allowances for accounts receivable and inventory obsolescence;

●

any product liability claims;

●

limited trading in our shares and the concentration of ownership of our shares;

●

cyberattacks and other data breaches and the adverse effect on our reputation;

●

new legislation, administrative rules, or executive orders, including those that impact taxes and international trade regulation;

●

the provisions in our certificate of incorporation, bylaws, or Delaware law that discourage takeovers or that limit certain disputes to be brought exclusively in the Delaware Court of Chancery;

●

geographic concentration of our customers in the U.S. and China; and

●

our ability to manage the risk of the foregoing.

 

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

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. CONDENSED FINANCIAL STATEMENTS

 

SENSUS HEALTHCARE, INC.
CONDENSED BALANCE SHEETS

 

		As of September 30,				As of December 31,
		2017				2016
			(unaudited)
Assets
Current Assets
Cash and cash equivalents		$	6,838,527			$	5,042,477
Accounts receivable, net			5,069,882				3,098,635
Inventories			1,728,598				1,254,915
Investment in debt securities			3,014,507				6,462,369
Prepaid and other current assets			476,222				900,722
Total Current Assets			17,127,736				16,759,118
Property and Equipment, Net			416,133				433,408
Patent Rights, Net			554,219				626,509
Investment in Debt Securities			—				1,103,773
Deposits			24,272				24,272
Total Assets		$	18,122,360			$	18,947,080
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable and accrued expenses		$	3,727,207			$	2,762,371
Product warranties			110,480				40,481
Revolving credit facility			1,625,970				—
Deferred revenue, current portion			658,442				853,798
Total Current Liabilities			6,122,099				3,656,650
Deferred Revenue, Net of Current Portion			13,833				16,251
Total Liabilities			6,135,932				3,672,901
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, 5,000,000 shares authorized and none issued and outstanding			—				—
Common stock, $0.01 par value – 50,000,000 authorized; 13,522,168 issued and 13,488,714 outstanding at September 30, 2017; 13,546,171 issued and outstanding at December 31, 2016			135,221				135,461
Additional paid-in capital			23,079,210				22,930,975
Treasury stock, 33,454 and 0 shares at cost, at September 30, 2017 and December 31, 2016, respectively			(133,816	)			—
Accumulated deficit			(11,094,187	)			(7,792,257	)
Total Stockholders’ Equity			11,986,428				15,274,179
Total Liabilities and Stockholders’ Equity		$	18,122,360			$	18,947,080

 

See accompanying notes to the unaudited condensed financial statements.

 

 

SENSUS HEALTHCARE, INC.
CONDENSED STATEMENTS OF OPERATIONS

 

(unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Revenues		$	4,795,616			$	3,327,830			$	14,118,130			$	9,933,977
Cost of Sales			1,577,715				1,076,821				4,631,263				3,429,967
Gross Profit			3,217,901				2,251,009				9,486,867				6,504,010
Operating Expenses
Selling and marketing			1,844,199				1,115,752				6,211,124				3,244,364
General and administrative			837,972				789,718				2,798,198				2,546,262
Research and development			1,501,157				389,759				3,795,477				1,096,789
Total Operating Expenses			4,183,328				2,295,229				12,804,799				6,887,415
Loss From Operations			(965,427	)			(44,220	)			(3,317,932	)			(383,405	)
Other Income (Expense)
Interest income			18,642				14,778				59,318				20,598
Interest expense			(18,902	)			(972	)			(43,316	)			(16,825	)
Other Income (Expense), net			(260	)			13,806				16,002				3,773
Net Loss		$	(965,687	)		$	(30,414	)		$	(3,301,930	)		$	(379,632	)
Net Loss per share – basic and diluted		$	(0.07	)		$	(0.00	)		$	(0.25	)		$	(0.03	)
Weighted average number of shares used in computing net loss per share – basic and diluted			13,251,714				13,236,724				13,231,398				11,622,134

 

See accompanying notes to the unaudited condensed financial statements.

 

 

SENSUS HEALTHCARE, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(unaudited)

 

		Common Stock								Additional				Treasury Stock								Accumulated
		Shares				Amount				Paid-In Capital				Shares				Amount				Deficit				Total
December 31, 2016			13,546,171			$	135,461			$	22,930,975				—			$	—			$	(7,792,257	)		$	15,274,179
Stock based compensation			5,000				50				303,415				—				—				—				303,465
Surrender of shares for tax withholding on stock compensation			(29,003	)			(290	)			(155,180	)			(33,454	)			(133,816	)			—				(289,286	)
Net loss			—				—				—				—				—				(3,301,930	)			(3,301,930	)
September 30, 2017 (unaudited)			13,522,168			$	135,221				23,079,210				(33,454	)		$	(133,816	)		$	(11,094,187	)		$	11,986,428

 

See accompanying notes to the unaudited condensed financial statements.

 

 

SENSUS HEALTHCARE, INC.
CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the Nine Months Ended September 30,
		2017				2016
Cash Flows From Operating Activities
Net loss		$	(3,301,930	)		$	(379,632	)
Adjustments to reconcile net income (loss) to net cash and cash equivalents used in operating activities:
Bad debt expense			175,695				—
Depreciation and amortization			294,906				253,219
Provision for product warranties			174,723				97,990
Stock based compensation			303,465				625,424
Decrease (increase) in:
Accounts receivable			(2,146,942	)			(1,855,143	)
Inventories			(438,290	)			(332,488	)
Prepaid and other current assets			424,500				(516,691	)
Increase (decrease) in:
Accounts payable and accrued expenses			964,837				(266,452	)
Deferred revenue			(197,774	)			64,755
Product warranties			(104,725	)			(30,652	)
Total Adjustments			(549,605	)			(1,960,038	)
Net Cash Used In Operating Activities			(3,851,535	)			(2,339,670	)
Cash Flows from Investing Activities
Acquisition of property and equipment		$	(240,734	)		$	(262,437	)
Investment in debt securities - held to maturity			(264,365	)			(6,577,522	)
Investments matured			4,816,000				—
Net Cash Provided By (Used In) Investing Activities			4,310,901				(6,839,959	)
Cash Flows from Financing Activities
Initial public offering of units			—				12,650,000
Exercise of warrants			—				1,132,538
Revolving credit facility, net			1,625,970				(422,702	)
Withholding taxes on stock compensation			(289,286	)			—
Offering costs			—				(2,126,562	)
Cash dividends on preferred stock			—				(2,511,024	)
Net Cash Provided By Financing Activities			1,336,684				8,722,250
Net Increase (Decrease) in Cash and Cash Equivalents			1,796,050				(457,379	)
Cash and Cash Equivalents – Beginning			5,042,477				5,065,068
Cash and Cash Equivalents – Ending		$	6,838,527			$	4,607,689
Supplemental Disclosure of Cash Flow Information
Interest Paid		$	43,316			$	18,781
Non Cash Investing and Financing Activities
Reclassification of prepaid offering costs to APIC		$	—			$	130,629
Transfer of inventory to property and equipment		$	35,393			$	67,908

 

See accompanying notes to the unaudited condensed financial statements.

 

 

SENSUS HEALTHCARE, INC.
NOTES TO THE CONDENSED 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 superficial 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. The Company operates as one segment from its corporate headquarters located in Boca Raton, Florida.

 

Initial Public Offering

 

In June 2016, the Company issued 2,300,000 units in its initial public offering (“IPO”) at a price of $5.50 per unit ($5.25 attributable to the common stock and $0.25 attributable to the warrant), for net proceeds of approximately $10,393,000 after deducting underwriting discounts and commissions of $886,000 and expenses of $1,371,000. Each unit consisted of one share of common stock and a warrant to purchase one share of common stock. Immediately prior to the IPO, all shares of stock then outstanding converted into an aggregate of 10,367,883 shares of common stock following a 241.95-for-one forward stock split approved by the Company’s board of directors. On July 25, 2016, the common stock and warrants included in the units issued in the IPO commenced trading separately under the symbols “SRTS” and “SRTSW,” respectively, and trading of the units under the symbol “SRTSU” was suspended.

 

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 financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Form 10-K, filed with the SEC. The results for the nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods, or any future year or period.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates to which it is reasonably possible that a change could occur in the near term include, 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.

 

Revenue Recognition

 

The Company’s sales primarily relate to sales of the Company’s devices. The Company recognizes product revenue upon shipment provided that there is persuasive evidence of an arrangement, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company does not provide a right of return related to product sales. Revenues for service contracts are recognized over the service contract period on a straight-line basis. Revenue for rentals of equipment is recognized over the lease term on a straight-line basis.

 

The Company sells products and services under multiple-element arrangements with separate units of accounting; in these situations, total consideration is allocated to the identified units of accounting based on their relative selling prices and revenue is then recognized for each unit based on its specific characteristics. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. The principal deliverables in our multiple deliverable arrangements that qualify as separate units of accounting consist of (i) sales of medical devices and accessories and (ii) service contracts. Performance obligations, including installation and customer training, are considered inconsequential and are combined with the product as one unit of accounting. Selling prices are established using vendor-specific objective evidence (VSOE). If VSOE does not exist, the Company uses its best estimate of the selling prices for the deliverables.

 

 

The Company operates in a highly-regulated environment and is continually entering into new markets in which regulatory approval is sometimes required prior to the customer being able to use the product. In these cases, where regulatory approval is pending, revenue is deferred until such time as regulatory approval is obtained and customer acceptance becomes certain.

 

Deferred revenue consists of payments from customers for long term separately priced service contracts, sales pending regulatory approval and deposits on products. Deferred revenue as of September 30, 2017 and December 31, 2016 was as follows:

 

		As of September 30,				As of December 31,
		2017				2016
			(unaudited)
Service contracts		$	632,442			$	613,374
Sales pending regulatory approval			—				155,517
Deposits on products			26,000				84,907
Total deferred revenue, current portion		$	658,442			$	853,798
Service contracts, net of current portion			13,833				16,251
Total deferred revenue		$	672,275			$	870,049

 

The Company provides warranties, generally for one year, in conjunction with the sale of its product. These warranties are short term in nature and entitle the customer to repair, replacement, or modification of the defective product subject to the terms of the respective warranty. 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 100% for the three months ended September 30, 2017 and 2016, respectively, and approximately 99% and 74% for the nine months ended September 30, 2017 and 2016, respectively. A customer in China accounted for approximately 0% and 15% for the nine months ended September 30, 2017 and 2016, respectively. A customer in the U.S. accounted for approximately 69% and 33% of revenues for the three months ended September 30, 2017 and 2016, respectively, and approximately 58% and 15% for the nine months ended September 30, 2017 and 2016, respectively, and 85% and 39% of the accounts receivable as of September 30, 2017 and December 31, 2016, respectively.

 

Cash and Cash Equivalents

 

The Company maintains its cash and cash equivalents with financial institutions which balances exceed the federally insured limits. Federally insured limits are $250,000 for deposits. As of September 30, 2017, and December 31, 2016, the Company had approximately $6,673,000 and $4,792,000, 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-maturity and reevaluates such classification on a quarterly basis. Held-to-maturity investments consist of securities that the Company has the intent and ability to retain until maturity. These securities are carried at amortized cost plus accrued interest and consist of the following:

 

		Amortized Cost				Gross Unrealized Gain				Gross Unrealized Loss				Fair Value
Short Term:
Corporate bonds		$	6,462,369			$	167			$	7,243			$	6,455,293
United States Treasury bonds			—				—				—				—
Total Short Term:			6,462,369				167				7,243				6,455,293
Long Term:
United States Treasury bonds			502,063				—				1,174				500,890
Corporate bonds			601,710								2,618				599,091
Total Long Term:			1,103,773				—				3,792				1,099,981
Total Investments December 31, 2016		$	7,566,142			$	167			$	11,035			$	7,555,274
Short Term:
Corporate bonds		$	1,511,052			$	—			$	1,043			$	1,510,010
United States Treasury bonds			1,503,454				—				1,031				1,502,423
Total Short Term:			3,014,507				—				2,074				3,012,433
Long Term:
United States Treasury bonds			—				—				—				—
Corporate bonds			—								—				—
Total Long Term:			—				—				—				—
Total Investments September 30, 2017 (unaudited)		$	3,014,507			$	—			$	2,074			$	3,012,433

 

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 $29,000 as of September 30, 2017 and December 31, 2016, respectively. Bad debt expense for the three months ended September 30, 2017 and 2016 was approximately $0 and for the nine months ended September 30, 2017 and 2016 was approximately $176,000 and $9,000, 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.

 

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. The 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 Three Months Ended September 30,								For the Nine Months Ended September 30,
			2017				2016				2017				2016
Warrants				5,851				23,644				5,851				23,644
Shares				9,779				71,142				9,779				71,142

 

 

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 $185,000 and $168,000 for the three months ended September 30, 2017 and 2016, respectively, and $1,242,000 and $687,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

Recently issued accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. In April 2016, the FASB also issued ASU 2016-10, Identifying Performance Obligations and Licensing, implementation guidance on principal versus agent, identifying performance obligations, and licensing. ASU 2016-10 is effective for reporting periods beginning after December 15, 2017. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. For the Company, the ASU is effective January 1, 2018. The Company is continuing to evaluate the standards’ impact on the results of operations and financial condition. The Company has conducted initial analyses and is currently completing detailed contract reviews to determine if any adjustments are necessary to the existing accounting policies and to support the evaluation of the standards’ impact to the results of operations and financial condition. For the majority of the Company’s revenue arrangements, no significant impacts are expected as these transactions are not accounted for under industry-specific guidance that will be superseded by the ASU, and generally consist of obligations to transfer goods and services. The Company currently anticipates utilizing the modified retrospective method of adoption on January 1, 2018.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). Under the new guidance, companies are required to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. In addition, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances will also be classified as noncurrent. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2016. The Company adopted this standard in the first quarter of 2017 and it did not have a material impact on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 1, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption of the amendments in the update is permitted. The Company is currently evaluating the effect this standard will have on its financial statements.

 

In April 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718), which requires that the income tax effect of share-based awards be recognized in the income statement when the awards vest or are settled. The guidance will also allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The guidance is effective for years beginning after December 15, 2016 and interim periods within those years. The Company adopted this standard in the first quarter of 2017 and it did not have a material impact on its financial statements.

 

Note 2 — Property and Equipment

 

		As of September 30,				As of December 31,				Estimated
		2017				2016				Useful Lives
		(unaudited)
Operations and rental equipment		$	730,095			$	630,886				3 years
Tradeshow and demo equipment			294,474				294,475				3 years
Computer equipment			139,549				95,218				3 years
			1,164,118				1,020,579
Less accumulated depreciation			(747,985	)			(587,171	)
Property and Equipment, Net		$	416,133			$	433,408

 

 

Depreciation expense was approximately $79,000 and $60,000, for the three months ended September 30, 2017 and 2016, respectively, and approximately $223,000 and $181,000, for the nine months ended September 30, 2017 and 2016, respectively. Depreciation on asset disposal was approximately $44,000 for the three months ended September 30, 2017 and $62,000 for the nine months ended September 30, 2017.

 

Note 3 — Patent Rights

		As of September 30,				As of December 31,
		2017				2016
		(unaudited)
Gross carrying amount		$	1,253,018			$	1,253,018
Less accumulated amortization			(698,799	)			(626,509	)
Patent Rights, Net		$	554,219			$	626,509

 

Amortization expense was approximately $24,000 for the three months ended September 30, 2017 and 2016, and approximately $72,000 for the nine months ended September 30, 2017 and 2016. As of September 30, 2017, future remaining amortization expense is as follows: 

For the Year Ending December 31,
	2017 (October 1 — December 31, 2017)		$	24,097
	2018			96,386
	2019			96,386
	2020			96,386
	2021			96,386
	Thereafter			144,578
	Total		$	554,219

 

Note 4 — Revolving Credit Facility

 

On March 12, 2013, the Company entered into a two-year $3 million revolving credit facility. The credit facility was amended and extended effective March 12, 2015 through May 12, 2017. The maximum borrowing was reduced to $1,500,000 and was limited by the Company’s eligible borrowing base of 80% of eligible accounts receivable. On September 21, 2016, a second amendment to the credit facility extended the facility through September 21, 2017, increased the maximum borrowing to $2,000,000 and expanded the eligible accounts receivables to include certain international receivables. The Company was not in compliance in April and May 2017 with one of its financial covenants. On June 27, 2017, the covenant defaults were waived and the agreement was amended to modify the financial covenants effective June 2017. An amendment signed on September 15, 2017 extended the maturity date of the credit line through November 19, 2017.

 

Interest, at Prime plus 0.75% (5.00% at September 30, 2017), is payable monthly, and the outstanding principal and interest are due on the maturity date. The facility is secured by all of the Company’s assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of assets of the Company and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. Approximately $1,626,000 was outstanding under the revolving credit facility at September 30, 2017 and $0 at December 31, 2016. The Company pays commitment fees of 0.25% per annum on the average unused portion of the line of credit.

 

Note 5 — Product Warranties

 

Changes in product warranty liability were as follows for the nine months ended September 30, 2017 (unaudited).:

 

Balance, beginning of period		$	40,481
Warranties accrued during the period			174,723
Payments on warranty claims			(104,724	)
Balance, end of period		$	110,480

  

 

Note 6 — Commitment and Contingencies

 

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. Future minimum lease payments as of September 30, 2017 are as follows:

Year
	2017 (October 1 — December 31, 2017)		$	47,000
	2018			190,000
	2019			196,000
	2020			202,000
	2021			208,000
	Thereafter			160,000
	Total		$	1,003,000

 

Rental expense for the three months ended September 30, 2017 and 2016 was approximately $46,000 and $25,000, respectively, and for the nine months ended September 30, 2017 and 2016 was approximately $131,000 and $74,000, respectively.

 

Manufacturing Agreement

 

In July 2010, the Company entered into a three-year contract manufacturing agreement with an unrelated third party for the production and manufacture of the Company’s main product in accordance with the Company’s product specifications. The agreement renews for successive years 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 with 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 $1,582,000 and $713,000 for the three months ended September 30, 2017 and 2016, respectively, and approximately $3,074,000 and $2,298,000 for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, and December 31, 2016 approximately $658,000 and $566,000, 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. The Company does not believe that any legal proceedings are likely to have a material effect on the business, financial condition, or results of operations.

 

Note 7 — Stockholders’ Equity

 

The Company has authorized 50,000,000 shares of common stock, of which 13,522,168 were issued and 13,488,714 outstanding at September 30, 2017; 13,546,171 shares were issued and outstanding as of December 31, 2016, respectively.

 

Stock Issuances

 

On January 1, 2016, Sensus Healthcare, LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Sensus Healthcare, Inc. As a result of the corporate conversion, the holders of the different classes of units of Sensus Healthcare, LLC became holders of common stock of Sensus Healthcare, Inc. Holders of warrants and options, respectively, to purchase membership interests of Sensus Healthcare, LLC became holders of warrants and options to purchase common stock of Sensus Healthcare, Inc., respectively. Each membership interest converted to one share of common stock.

 

During 2011, the Company offered to a limited number of investors (the “investor members”) preferred membership interests (the “interests”) consisting of (i) cumulative, non-compounded, 8% per annum preferential return, payable annually, if and when such distributions are made by the Company’s board of directors and (ii) participation in the Company’s net profits, net losses and distributions of the Company’s assets pursuant to the operating agreement. The offering raised approximately $6.4 million in gross proceeds ($6.0 million net of offering costs), utilizing a private placement memorandum. As of December 31, 2015, accumulated unpaid preferential distributions were approximately $2,674,000 ($0.87 per share). Preferential distributions no longer accrued after December 31, 2015. In June 2016, after the completion of the IPO, the accumulated unpaid distribution as of December 31, 2015 was payable in cash or shares, at the option of each stockholder with a preferential distribution. On July 15, 2016, the Company accrued dividends in the amount of approximately $2,553,000, representing the amount for which former holders of membership units with a preferred return elected to receive dividends in cash. In addition, 23,138 shares valued at approximately $122,000 of common stock were issued to those that elected to receive the dividends in shares.

 

 

Warrants

 

In April 2013, the closing date of the second common offering, the Company’s placement agent received investor rights to 5 year warrants to purchase 86,376 common shares of the Company at an exercise price of $4.55 per unit, which was equal to 110% of the offering price.

 

In June 2016, from the IPO, the investors received three-year warrants to purchase 2,300,000 shares of common stock at an exercise price of $6.75 per share; the warrants are exercisable through June 2, 2019. Following the first anniversary of the date of issuance, if certain conditions are met, the Company may redeem any and all of the outstanding warrants at a price equal to $0.01 per warrant.

 

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

 

The following table summarizes the Company’s warrant activity:

 

				Common Unit Warrants
					Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (In Years)
	Outstanding – December 31, 2016				2,524,376			$	6.67				2.50
	Granted				—				—				—
	Exercised				—				—				—
	Forfeited				—				—				—
	Outstanding – September 30, 2017				2,524,376			$	6.67				1.76
	Exercisable – September 30, 2017				2,524,376			$	6.67				1.76

 

The intrinsic value of the common stock warrants was approximately $29,000 as of September 30, 2017, and $114,000 as of December 31, 2016.

 

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. The 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. Stock compensation expense of approximately $102,000 and $101,000 was recognized for the three months ended September 30, 2017 and 2016, respectively, and approximately $303,000 and $135,000 was recognized for the nine months ended September 30, 2017 and 2016, respectively. Unrecognized stock compensation expense was approximately $1,101,000 as of September 30, 2017, which will be recognized over the remaining vesting period. As of September 30, 2017, 84,807 shares were available to be granted under the 2016 Plan and 500,000 shares were available to be granted under the 2017 Plan.

 

 

The Company recognizes forfeitures as they occur rather than estimating a forfeiture rate. The reduction of stock compensation expense related to the 5,000 shares forfeited for the three and nine months ended in September 30, 2017 was approximately $0 and $7,000.

 

A summary of the restricted stock activity for the nine months ended September 30, 2017 is presented as follows:

 

				Shares				Weighted Average Grant Date Fair Value
	Unvested balance at December 31, 2016				412,914			$	5.04
	Granted				10,000				4.99
	Vested				(180,914	)			4.24
	Forfeited				(5,000	)			5.25
	Unvested balance at September 30, 2017				237,000			$	5.64

 

Treasury Stock

 

The Company accounts for purchases of treasury stock under the cost method with the cost of such share purchases reflected in treasury stock in the accompanying condensed balance sheet. As of September 30, 2017, the Company had 33,454 treasury shares.

 

Note 8 — Income Taxes

 

Book income before taxes was negative for the three and nine months ended September 30, 2017. Tax expense for the three and nine months ended September 30, 2017 was $0.

 

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

 

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

 

As of September 30, 2017, the Company has US federal and certain state tax returns subject to examination, beginning with those filed for the year 2013.

 

Note 9 — 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. Other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.

 

On October 31, 2017, the Company amended its revolving credit facility to extend the maturity to October 31, 2019. The availability under the amended facility will equal the lesser of the $5 million commitment amount or the borrowing base plus the $2.5 million non-formula sublimit. The borrowing base consists of 80% of eligible accounts receivable, as defined in the agreement. Interest at Prime plus 0.75% (Prime plus 1.50% on non-formula borrowings) is payable monthly, and the outstanding principal and interest are due on the maturity date. The facility is secured by all of the Company’s assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of assets of the Company and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. The Company will pay commitment fees of 0.25% per annum on the average unused portion of the line of credit.

 

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, 2016 (“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

 

Sensus Healthcare, LLC, a Delaware limited liability company (the “Company”), was formed on May 7, 2010, to design, manufacture and market proprietary medical devices specializing in the treatment of non-melanoma skin cancers and other skin conditions, such as keloids, with superficial radiation therapy. In June 2010, Sensus Healthcare, LLC, a Florida limited liability company (“Sensus (FL)”) acquired all the assets associated with our primary product, the SRT-100, from Topex, Inc. for $1.3 million. Following this acquisition, we relaunched the SRT-100 under the Sensus Healthcare brand. In December 2011, we merged with Sensus (FL), with the Delaware limited liability company surviving the merger for the purpose of changing our domicile from Florida to Delaware. On January 1, 2016, Sensus Healthcare, LLC converted into a Delaware corporation pursuant to a statutory conversion and we changed our name to Sensus Healthcare, Inc. As a result of the corporate conversion, all holders of units of Sensus Healthcare, LLC became holders of common stock of Sensus Healthcare, Inc. Holders of warrants and options to purchase units of Sensus Healthcare, LLC became holders of warrants and options to purchase common stock of Sensus Healthcare, Inc., respectively.

 

The SRT-100 is a photon x-ray low energy superficial radiotherapy system that provides patients an alternative to surgery for treating non-melanoma skin cancers, including basal cell and squamous cell skin cancers and other skin conditions such as keloids. The SRT-100 may also be used to treat primary lesions that would otherwise be difficult to treat or require extensive surgery involving sensitive areas of the head and neck regions, such as the fold in the nose, eyelids, lips, corner of the mouth, and the lining of the ear, which could lead to a less than desirable cosmetic outcome. Superficial radiation therapy treatment procedures do not require the use of anesthetics and eliminates the need for skin grafting. The SRT-100 provides healthcare providers and patients with a safe, virtually painless, and substantially non-scarring treatment option for non-melanoma skin cancer and other skin conditions, such as keloids. It allows dermatologists to retain non-melanoma skin cancer patients, rather than referring them to specialists, while offering radiation oncologists an alternative to costly linear accelerator–based treatments with a process that is less invasive, more time-efficient, and improves practice economics. Our revenue is primarily derived from sales of our SRT-100 product line.

 

Components of our results of operations

 

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

 

Results of Operations

 

		For the Three Months Ended  September 30,								For the Nine Months Ended  September 30,
		2017				2016				2017				2016
Revenues		$	4,795,616			$	3,327,830			$	14,118,130			$	9,933,977
Cost of Sales			1,577,715				1,076,821				4,631,263				3,429,967
Gross Profit			3,217,901				2,251,009				9,486,867				6,504,010
Operating Expenses
Selling and marketing			1,844,199				1,115,752				6,211,124				3,244,364
General and administrative			837,972				789,718				2,798,198				2,546,262
Research and development			1,501,157				389,759				3,795,477				1,096,789
Total Operating Expenses			4,183,328				2,295,229				12,804,799				6,887,415
Loss From Operations			(965,427	)			(44,220	)			(3,317,932	)			(383,405	)
Other Income (Expense)
Interest income			18,642				14,778				59,318				20,598
Interest expense			(18,902	)			(972	)			(43,316	)			(16,825	)
Other Income (Expense), net			(260	)			13,806				16,002				3,773
Net Loss		$	(965,687	)		$	(30,414	)		$	(3,301,930	)		$	(379,632	)

 

 

Three months ended September 30, 2017 compared to the three months ended September 30, 2016

 

Revenue. Revenue was $4,795,616 for the three months ended September 30, 2017 compared to $3,327,830 for the three months ended September 30, 2016, an increase of $1,467,785, or 44.1%. The growth in revenue was primarily attributable to an increase in sales of the higher priced SRT-100 Vision product in the current quarter, as well as an increase in the number of units sold.

 

Cost of sales. Cost of sales was $1,577,715 for the three months ended September 30, 2017 compared to $1,076,821 for the three months ended September 30, 2016, an increase of $500,894, or 46.5%. The increase in cost of sales was due to the increase in sales.

 

Gross profit. Gross profit was $3,217,901 for the three months ended September 30, 2017 compared to $2,251,009 for the three months ended September 30, 2016, an increase of $966,892, or 43.0%. Our overall gross profit percentage was 67.1% in the three months ended September 30, 2017 compared to 67.6% in the corresponding period in 2016.

 

Selling and marketing. Selling and marketing expense was $1,844,199 for the three months ended September 30, 2017 compared to $1,115,752 for the three months ended September 30, 2016, an increase of $728,448, or 65.3%. The increase was primarily attributable to an increase in sales headcount and higher participation in tradeshows and other marketing activities.

 

General and administrative. General and administrative expense was $837,972 for the three months ended September 30, 2017 compared to $789,718 for the three months ended September 30, 2016, an increase of $48,253, or 6.1%. The net increase was primarily due to an increase in professional fees and headcount.

 

Research and development. Research and development expense was $1,501,157 for the three months ended September 30, 2017 compared to $389,759 for the three months ended September 30, 2016, an increase of $1,111,398, or 285.2%. The increase in research and development spending was primarily attributable to new R&D projects.

 

Other income (expense). We incur interest expense in connection with our secured credit facility with Silicon Valley Bank and earn interest income from our investment in held-to-maturity securities.

   

Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

 

Revenue. Revenue was $14,118,130 for the nine months ended September 30, 2017 compared to $9,933,977 for the nine months ended September 30, 2016, an increase of $4,184,153, or 42.1%. The growth in revenue was primarily attributable to an increase in sales of the higher priced SRT-100 Vision product.

 

Cost of sales. Cost of sales was $4,631,263 for the nine months ended September 30, 2017 compared to $3,429,967 for the nine months ended September 30, 2016, an increase of $1,201,296, or 35.0%. The increase in cost of sales was due to the increase in sales.

 

Gross profit. Gross profit was $9,486,867 for the nine months ended September 30, 2017 compared to $6,504,010 for the nine months ended September 30, 2016, an increase of $2,982,857, or 45.9%. Our overall gross profit percentage was 67.2% in the nine months ended September 30, 2017 compared to 65.5% in the corresponding period in 2016. The increase in gross margin percentage was primarily due to increased sales of the higher margin SRT-100 Vision product.

 

Selling and marketing. Selling and marketing expense was $6,211,124 for the nine months ended September 30, 2017 compared to $3,244,364 for the nine months ended September 30, 2016, an increase of $2,966,760, or 91.4%. The increase was primarily attributable to an increase in sales headcount and higher participation in tradeshows and other marketing activities.

 

General and administrative. General and administrative expense was $2,798,198 for the nine months ended September 30, 2017 compared to $2,546,262 for the nine months ended September 30, 2016, an increase of $251,936, or 9.9%. The net increase was primarily due to an increase in headcount, director and officer insurance premiums and other public company expenses, partially offset by a decrease in stock compensation expense and professional fees.

 

Research and development. Research and development expense was $3,795,477 for the nine months ended September 30, 2017 compared to $1,096,789 for the nine months ended September 30, 2016, an increase of $2,698,688, or 246.1%. The increase in research and development spending was primarily attributable to new R&D projects.

 

Other income (expense). We incur interest expense in connection with our secured credit facility with Silicon Valley Bank and earn interest income from our investment in held-to-maturity securities.

  

 

Financial Condition

 

Our cash, cash equivalent and investment balance decreased from $12.6 million at December 31, 2016 to $9.9 million at September 30, 2017, primarily as a result of the operating loss of $3.3 million during the first nine months of 2017.

 

Borrowings under the revolving line of credit as of September 30, 2017 were approximately $1.6 million.

 

Liquidity and Capital Resources

 

Overview

 

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

 

●

our ability to generate and increase revenue;

 

●

fluctuations in gross margins, operating expenses and net results; and

 

●

fluctuations in working capital.

 

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

 

●

expansion of our sales, marketing and distribution activities; and

 

●

expansion of our research and development activities.

 

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

  

Cash flows

 

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

 

		For the Nine Months Ended September 30,
		(unaudited)
		2017				2016
Net Cash Provided by (Used In):
Operating Activities		$	(3,851,535	)		$	(2,339,670	)
Investing Activities			4,310,901				(6,839,959	)
Financing Activities			1,336,684				8,722,250
Total		$	1,796,050			$	(457,379	)

 

Cash flows from operating activities

 

Net cash used in operating activities was $3,851,535 for the nine months ended September 30, 2017, consisting of a net loss of $3,301,930 and an increase in net operating assets of $1,498,394, partially offset by non-cash charges of $948,789. The increase in net operating assets was primarily due to the increase in sales resulting in an increase in accounts receivable as well as an increase in inventory and a decrease in deferred revenues, less a decrease in prepaid and other currents assets as well as an increase in account payables and accrued expenses. Non-cash charges consisted of stock compensation expense, depreciation and amortization, bad debts and warranty provision. Net cash used in operating activities was $2,339,670 for the nine months ended September 30, 2016, primarily due to the increase in accounts receivable as well as an increase in prepaid expenses.

 

Cash flows from investing activities

 

Net cash provided by investing activities was $4,310,901 due to the maturity of debt securities held-to-maturity for $4,816,000, offset by the purchase of debt securities held-to-maturity for $264,365 and $240,734 for acquisition of property and equipment during the nine months ended September 30, 2017. Cash used in investing activities was $6,839,959 for the nine months ended September 30, 2016 due to the purchase of debt securities held-to-maturity for $6,577,522 and $262,437 for acquisition of property and equipment.

 

 

Cash flows from financing activities

 

Net cash provided by financing activities was $1,336,684 during the nine months ended September 30, 2017, mostly from the $1,625,970 borrowing from our revolving credit facility. Net cash provided by financing activities was $8,722,250 during the nine months ended September 30, 2016, of which $10,523,438 was the net proceeds from our initial public offering, $1,132,538 from the exercise of warrants, less $2,511,024 used for the payment of dividends to former preferred investors and $422,702 used for the repayment of outstanding borrowing under the line of credit.

 

Indebtedness

 

Silicon Valley Bank Secured Credit Facility

 

On March 12, 2013, we entered into a two-year $3 million revolving credit facility. The credit facility was amended and extended effective March 12, 2015 through May 12, 2017. The maximum borrowing was reduced to $1,500,000 and was limited by our eligible borrowing base of 80% of eligible accounts receivable. On September 21, 2016, we entered into a second amendment to the credit facility, which extended the facility through September 21, 2017, increased the maximum borrowing to $2,000,000 and expanded the eligible accounts receivables to include certain international receivables. We were not in compliance in April and May 2017 with one of our financial covenants. On June 27, 2017, the covenant defaults were waived and the agreement was amended to modify the financial covenants effective June 2017. An amendment signed on September 15, 2017 extended the maturity date of the credit line through November 19, 2017.

 

Interest, at Prime plus 0.75% (5.00% at September 30, 2017), is payable monthly, and the outstanding principal and interest are due on the maturity date. The facility is secured by all of our assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of our assets and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. Approximately $1,626,000 was outstanding under the revolving credit facility at September 30, 2017 and $0 at December 31, 2016. We pay commitment fees of 0.25% per annum on the average unused portion of the line of credit.

 

On October 31, 2017, we amended our revolving credit facility to extend the maturity to October 31, 2019. The availability under the amended facility will equal the lesser of the $5 million commitment amount or the borrowing base plus the $2.5 million non-formula sublimit. The borrowing base consists of 80% of eligible accounts receivable, as defined in the agreement. Interest at Prime plus 0.75% (Prime plus 1.50% on non-formula borrowings) is payable monthly, and the outstanding principal and interest are due on the maturity date. The facility is secured by all of our assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of our assets and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant, as defined in the agreement. We will pay commitment fees of 0.25% per annum on the average unused portion of the line of credit.

 

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, 2016.

 

JOBS Act

 

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

 

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

 

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Control and Procedures

 

As of September 30, 2017, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of September 30, 2017, 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

 

Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). There have 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.

 

Item 1A.

Risk Factors

 

An investment in our securities involves risks. You should carefully consider the risk factors as previously disclosed in our Form 10-K filed with the SEC for the year ended December 31, 2016, as updated in our subsequent quarterly reports, together with the other information in this Quarterly Report on Form 10-Q, including the financial statements and related notes, before deciding whether to purchase, hold, or sell our securities. The occurrence of any of these risks could harm our business, financial condition, or results of operations or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. There have been no material changes to the risk factors as previously disclosed in our Form 10-K filed with the SEC for the year ended December 31, 2016, 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 have been no unregistered sales of securities during the three months ended September 30, 2017.

  

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

 

In June 2016, we completed an initial public offering, or IPO, of units consisting of one share of common stock and one warrant to purchase one share of common stock. In connection with the IPO, we issued 2,300,000 units of our common stock at a price of $5.50 per unit, including 300,000 units pursuant to the underwriters’ full exercise of their over-allotment option for an aggregate offering price of $12.65 million. The offer and sale of all of the securities in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1, as amended (File No. 333-209451), which was declared effective by the SEC on June 2, 2016.

 

We received total net proceeds from the IPO of approximately $10.5 million after deducting underwriting discounts and commissions of approximately $0.9 million and other offering expenses of approximately $1.4 million. We have used approximately $2.6 million for the payment of dividends to former preferred investors and approximately $4.6 million to fund our operations.

 

 

The remaining proceeds from the IPO have been invested in highly liquid money market funds and debt securities with maturities of 12 months or less. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on June 2, 2016.

 

(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

 

On October 31, 2017, we entered into the Third Amendment to Second Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Silicon Valley Bank. The Amended Loan Agreement increases the existing credit facility from $2 million to an amount equal to the lesser of $5 million or the borrowing base plus the $2.5 million non-formula sublimit (as those terms are defined in the Amended Loan Agreement). In addition, the maturity date was extended until October 31, 2019. Interest accrues at the prime rate plus 0.75% (prime plus 1.50% on non-formula borrowings) and is payable monthly. The facility is secured by all of our assets and limits the amount of additional indebtedness, restricts the sale, disposition or transfer of our assets and requires the maintenance of a certain monthly adjusted quick ratio restrictive covenant(as defined in the Amended Loan Agreement). We will pay commitment fees of 0.25% per annum on the average unused portion of the facility.

  

Item 6.

Exhibits

 

A list of exhibits required to be filed as part of this report is set forth in the Exhibit Index, which is presented elsewhere in this document, and is incorporated herein by reference.

 

 

SIGNATURES

 

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

 

	SENSUS HEALTHCARE, INC.
Date: November 6, 2017	/s/ Joseph C. Sardano
	Joseph C. Sardano
	Chief Executive Officer
	(Principal Executive Officer)
Date: November 6, 2017	/s/ Arthur Levine
	Arthur Levine
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

 

 

EXHIBIT INDEX

  

Exhibit No.

Description

  

	10.1	Second Amendment to Second Amended and Restated Loan and Security Agreement, dated as of September 15, 2017
	10.2*	Third Amendment to Second Amended and Restated Loan and Security Agreement, dated as of October 31, 2017
	31.1	Certification of Joseph C. Sardano, Chairman and Chief Executive Officer of Sensus Healthcare, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

31.2

Certification of Arthur Levine, Chief Financial Officer of Sensus Healthcare, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

32.1

Certification of Joseph C. Sardano, Chairman and Chief Executive Officer of Sensus Healthcare, Inc., Pursuant to 18 U.S.C. Section 1350.

 

32.2

Certification of Arthur Levine, Chief Financial Officer of Sensus Healthcare, Inc., Pursuant to 18 U.S.C. Section 1350.

 

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

 

*	Confidential information has been omitted and filed separately with the Securities Exchange Commission. Confidential treatment has been requested with respect to this omitted information.