Sensus Healthcare(SRTS) - 2021 Q4 - Annual Report

Part I Business Sensus Healthcare specializes in superficial radiation therapy (SRT) for skin conditions, selling SRT-100 products and services, and sold Sculptura assets for $15 million - The company's core business provides non-invasive treatments for oncological and non-oncological skin conditions using proprietary superficial radiation therapy (SRT) technology[22] - On February 25, 2022, the company sold its Sculptura product assets for $15 million in cash[23] - Primary revenue derives from the sale of its SRT-100 product line, including SRT-100, SRT-100+, and SRT-100 Vision models[25] - As of December 31, 2021, Sensus had an installed base of 564 units across 18 countries, primarily in the United States[39] Our Products and Services The company's portfolio centers on SRT devices (SRT-100, Vision, 100+), complemented by a 'Sentinel' service program, aesthetic laser rentals, and consumables - The SRT-100 is a photon x-ray low energy superficial radiotherapy system, offering a surgical alternative for non-melanoma skin cancers and keloids[25] - The SRT-100 Vision enhances the base model with integrated high-frequency ultrasound imaging for precise treatment planning and tumor analysis[27] - In August 2020, the company acquired two mobile aesthetic laser companies, now SLAS, to offer in-office laser rental services in Florida[31] Sales and Marketing Sensus uses a multi-tier sales strategy with a direct U.S. force and international dealers, targeting dermatology and radiation oncology markets, with growth potential in plastic surgery - The company utilizes a multi-tier sales model with a direct U.S. sales force and international dealers/distributors[35] - Primary target markets are private dermatology practices and radiation oncologists, with SRT products enabling dermatologists to retain patients[35][36] - The company is expanding into the plastic surgery market, leveraging FDA clearance for treating keloids with SRT[38] Manufacturing and Supply Sensus outsources SRT-100 manufacturing to RbM Services, LLC in the U.S., minimizing capital investment, and relies on a single preferred supplier for key components - Sensus uses a third-party manufacturer, RbM Services, LLC, in the U.S. to produce SRT-100 products under a fixed-price per unit agreement[40] - The company has a single preferred supplier for x-ray tubes and other major components, but believes adequate alternate suppliers exist, mitigating supply risk[43] Intellectual Property Sensus protects its technology with U.S. and international patents expiring until 2038, 22 pending applications, seven U.S. trademarks, and confidentiality agreements - The company holds multiple U.S. and international patents for its technology, with some expiring as late as 2038[46][50] - As of December 31, 2020, the company had 22 pending patent applications and seven registered U.S. trademarks[47] Government Regulation Sensus operates under extensive FDA (Class II, 510(k) clearance, QSR, MDR) and international regulations (CE mark), plus federal and state anti-kickback, false claims, and HIPAA laws - The company's medical devices are classified as Class II by the FDA, with marketing authorization via 510(k) clearance[53][55] - Sensus is subject to extensive ongoing FDA regulation, including Quality System Regulation (QSR), labeling, and Medical Device Reporting (MDR) for adverse events[56] - The company has obtained regulatory approvals to sell products in numerous international markets, including Australia, Canada, China, and Europe (CE mark)[61] - The business must comply with federal and state anti-kickback laws, false claims acts, and physician self-referral laws (Stark Law)[62][63][68] Employees and Human Capital As of December 31, 2021, Sensus had 37 employees, primarily in the U.S., with no union representation, and implemented COVID-19 safety measures - At the end of 2021, the company had 37 employees, primarily based in the U.S. (33) and Israel (4)[73] - In response to the COVID-19 pandemic, the company implemented safety protocols including remote work and facemasks[76] Risk Factors The company faces multiple risks in business operations, regulatory compliance, intellectual property, and stock ownership Risks Related to our Business Business risks include dependence on third-party payor reimbursement, COVID-19 impacts, reliance on the SRT-100 product line, significant customer concentration, and a single preferred supplier - The business is highly dependent on coverage and adequate reimbursement from third-party payors like Medicare and private insurers[80] - The COVID-19 pandemic has impacted sales and could continue to adversely affect business operations and supply chains[84] - The company has significant customer concentration, with one U.S. customer accounting for approximately 57% of revenues in 2021 and 40% in 2020[94] - Sensus relies on a single preferred supplier for x-ray tubes and other major components, and its loss could hinder production[92] Risks Related to our Regulatory Environment Regulatory risks include compliance with federal and state healthcare laws (Anti-Kickback, Sunshine, False Claims), medical device reporting, and potential adverse impacts from healthcare policy changes - The company is subject to various healthcare laws, including the Federal Anti-Kickback Statute, 'Sunshine' Act, and False Claims laws, with potential significant penalties for violations[100][103] - Sensus must comply with medical device reporting regulations in the U.S. and Europe for malfunctions, deaths, or serious injuries[105] - Changes in healthcare policy, including Medicare reimbursement reforms or cost-containment measures, could materially adversely affect the business[107][108] Risks Related to our Intellectual Property IP risks include inadequate patent protection, challenges to validity, competitor circumvention, costly patent litigation, and potential injunctions against product sales - The company's success relies on protecting proprietary technology through patents and IP rights, which may not sufficiently prevent competition[110] - The medical device industry is prone to extensive patent litigation, potentially leading to high costs, significant damages, and sales injunctions for Sensus[114] Risks Related to the Ownership of Sensus's Securities Securities ownership risks include a history of net losses, uncertain future profitability, limited trading volume, no anticipated dividends, substantial influence from executive officers, and anti-takeover provisions - The company had net losses through 2020, and despite 2021 net income, maintaining profitability is not assured[116] - The company does not anticipate paying dividends, requiring investors to rely on stock price appreciation for returns[118] - As of March 9, 2022, executive officers and directors beneficially owned approximately 17% of common stock, exerting substantial influence[126] - Anti-takeover provisions in the company's charter and bylaws may discourage or prevent favorable mergers or acquisitions[128] Properties Sensus's corporate headquarters is a leased 8,926 sq. ft. facility in Boca Raton, Florida, with manufacturing outsourced - The company's corporate headquarters is a leased 8,926 sq. ft. facility in Boca Raton, Florida, with the lease expiring in September 2022[133] Legal Proceedings The company is involved in ordinary course legal proceedings but does not anticipate a material effect on its financial position or operations - Sensus is involved in ordinary course legal proceedings but does not expect a material impact on its financial condition[134] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Sensus Healthcare's common stock trades on NASDAQ under 'SRTS'; no dividends are anticipated due to business needs and credit facility restrictions - The company's common stock trades on the NASDAQ Capital Market under the symbol 'SRTS'[137] - Sensus has never paid dividends and anticipates retaining all future earnings for business use, with payments also restricted by its revolving line of credit[138] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Sensus achieved profitability with revenues surging 182% to $27.0 million, resulting in $4.1 million net income, a significant turnaround Results of Operations In 2021, revenues surged 182% to $27.0 million from $9.6 million in 2020, driving gross profit to $17.0 million and resulting in $4.1 million income from operations Consolidated Statements of Operations (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Revenues | $27,042 | $9,577 | | Cost of sales | $10,054 | $4,328 | | Gross profit | $16,988 | $5,249 | | Selling and marketing | $4,838 | $5,336 | | General and administrative | $4,594 | $3,989 | | Research and development | $3,436 | $4,158 | | Total operating expenses | $12,868 | $13,483 | | Income (loss) from operations | $4,120 | ($8,234) | | Other income (expense), net | ($1) | $1,398 | | Net income (loss) | $4,119 | ($6,836) | - Revenues in 2021 increased by $17.5 million, or 182%, from 2020, reflecting a strong recovery in units sold as COVID-19 restrictions eased[148] - Research and development expenses decreased by $0.7 million (17.4%) from 2020, primarily due to lower spending as the Sculptura project entered production[150] Liquidity and Capital Resources Cash and cash equivalents were $14.5 million at year-end 2021, a slight decrease from $14.9 million in 2020, with no outstanding borrowings on the $10 million revolving credit facility Summary of Cash Flows (in thousands) | | For the Year Ended Dec 31, 2021 | For the Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in): | | | | Operating activities | $(286) | $(434) | | Investing activities | $129 | $7,030 | | Financing activities | $(231) | $211 | | Increase (decrease) in cash | $(388) | $6,807 | - The company's cash and cash equivalent balance decreased slightly to $14.5 million at year-end 2021 from $14.9 million at year-end 2020[152] - In 2020, the company received a PPP loan of $1,022,785, with $757,782 forgiven and a remaining balance of $51,021 by year-end 2021[154] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021 and 2020, with an unqualified auditor's opinion and detailed notes Note 1 — Organization and Summary of Significant Accounting Policies Sensus manufactures and sells radiation therapy devices globally; 2021 revenue included $22.2 million product and $4.8 million service, with high U.S. and customer concentration Disaggregated Revenue (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Product revenue | $22,217 | $5,449 | | Service revenue | $4,825 | $4,128 | | Total revenue | $27,042 | $9,577 | - The company has significant credit risk and revenue concentration, with 95% of 2021 revenue from the U.S. and one U.S. customer accounting for approximately 57% of revenue and 94% of accounts receivable[198] Note 2 — ACQUISITIONS The August 2020 acquisition of two mobile aesthetic laser companies resulted in a $588,000 bargain purchase gain, but a 2021 asset sale led to an $88,000 impairment and $47,000 loss - The August 2020 acquisition of two mobile aesthetic laser companies resulted in a bargain purchase gain of $588,000 in 2020[220] - In 2021, an asset sale back to an acquired party resulted in an $88,000 impairment charge on intangible assets and a $47,000 loss on property and equipment sale[222] Note 5 — DEBT Sensus has a $10 million revolving credit facility, unused as of year-end 2021 and 2020, and a 2020 PPP loan of $1,022,785 had $757,782 forgiven, with $51,000 remaining - The company maintains a revolving credit facility with a $10 million commitment, unused as of December 31, 2021 and 2020[227] - The company received a PPP loan of $1,022,785 in April 2020, with $757,782 forgiven and a remaining balance of $51,000 at year-end 2021[228] Note 11 — Subsequent Events On February 25, 2022, Sensus sold its Sculptura product assets for $15 million in cash, with a net book value of approximately $1.6 million - On February 25, 2022, the company sold its Sculptura product assets for $15 million in cash, with a net book value of approximately $1.6 million[259] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures and internal control over financial reporting were effective[262][263] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Annual Meeting Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2022 Annual Meeting Proxy Statement[270] Executive Compensation Information on executive compensation is incorporated by reference from the company's Proxy Statement for its 2022 Annual Meeting - Information regarding executive compensation is incorporated by reference from the 2022 Annual Meeting Proxy Statement[271] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, with 229,334 securities issuable upon exercise at a weighted-average price of $5.55, and 135,973 securities remaining for future issuance Equity Compensation Plan Information | Plan Category | Securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Securities Holders | 229,334 | $5.55 | 135,973 | | Total | 229,334 | $5.55 | 135,973 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Annual Meeting Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Annual Meeting Proxy Statement[274] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's Proxy Statement for its 2022 Annual Meeting - Information regarding principal accountant fees and services is incorporated by reference from the 2022 Annual Meeting Proxy Statement[275] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including consolidated financial statements and an index of exhibits required by Regulation S-K - This section contains the list of financial statements and all exhibits filed with the annual report, including material agreements and certifications[278]