Sensus Healthcare Inc

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Summary of Significant Accounting Policies

Description of the Business

Sensus Healthcare, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “Sensus” or the “Company”) is a manufacturer of radiation therapy devices sold to healthcare providers globally through its distribution and marketing network. The Company operates from its corporate headquarters located in Boca Raton, Florida.

In February 2024, the Company formed Sensus Healthcare Services, LLC, a wholly-owned subsidiary that provides operational healthcare services in the form of leased equipment, radiation oncology and physics oversight, including radiotherapy technologists for dermatology clinics.

Basis of Presentation and Principles of Consolidation

These condensed 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 subsidiaries. Accounts and transactions between condensed consolidated entities have been eliminated.

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by GAAP. In the opinion of management, all adjustments considered necessary for a fair statement of the results have been included. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or for any other period.

The condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”).

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.

Reclassification of Prior Year Presentation

Certain prior period amounts have been reclassified for consistency with the current period presentation. The reclassifications are limited to the condensed consolidated statements of cash flow and have no impact on the reported results of operations.

Revenue Recognition

The Company derives revenue 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 pricefor contractsin 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, the Company measures the consideration indirectly by reference to the stand-alone selling price of the products promised to the customer or class of customer in exchange for the consideration.

Our service contracts include maintenance or repair service contracts for device purchases and personnel service contracts to assist the use and operation of leased-out equipment under lessor agreements.

The revenues from maintenance or repair 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. There is no termination provision in the service contract or any penalties in practice for cancellation of the service contract.

The revenues from personnel service contracts are recognized in the period the work is performed, as the Company has elected the practical expedient to recognize revenue in the amount to which the entity has a right to invoice. The service contracts can be terminated by mutual written agreement.

The Company has determined that in practice no significant discount is given on service contracts when offered with the device purchase or equipment lease as compared to when 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 purchase or equipment lease. The Company may also incur preparation cost to ensure the customer’s space meets the requirement and specifications for the operation of the equipment. The preparation cost is expensed as incurred.

The components of disaggregated revenue for the three and nine months ended September 30, 2024 and 2023 were as follows:

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

Deferred revenue activity as of September 30, 2024 was as follows:

Remaining performance obligations of deposits for products 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 September 30, 2024 is as follows:

For the nine months ended September 30, 2024 and 2023, the Company paid commissions for certain 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.

In addition, the Company incurs commissions associated with equipment lease agreements, which are accounted as initial direct costs and recorded in other noncurrent assets in the condensed consolidated balance sheets. The commission is capitalized at the commencement of the lease and recognized as an expense in selling and marketing expenses over the lease term.

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.

One customer in the U.S. accounted for 65% and 52% of revenue for the three months ended September 30, 2024 and 2023, respectively,74% and 52% of revenue for the nine months ended September 30, 2024 and 2023, respectively, and 88% and 85% of the accounts receivable as of September 30, 2024 and December 31, 2023, respectively.

Geographical Information

The following table illustrates total revenue for the three and nine months ended September 30, 2024 and 2023 by country.

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 relatively 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 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.

Cash and Cash Equivalents

Cash and cash equivalents primarily consist of cash, money market funds and short-term, highly liquid investments with original maturities of three months or less.

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 estimates future credit losses based on the age of customer receivable balances, collection history and forecasted economic trends. Future collections can be significantly different from historical collection trends or current estimates. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. The allowance for expected credit losses was $123 thousand and $0 as of September 30, 2024 and December 31, 2023, respectively. Credit loss expense was $81 thousand and $2 thousand for the three months ended September 30, 2024 and 2023, respectively, and $123 thousand and $7 thousand for the nine months ended September 30, 2024 and 2023, 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, restricted stocks and warrants. Diluted net income (loss) per share is computed by giving effect to all potential dilutive common share equivalents outstanding for the period.

The factors used in the net income (loss) per share computation are as follows:

Diluted net income per share for the three and nine months ended September 30, 2024 includes the dilutive effect of stock options and restricted stock awards that were issued in December 2022 and January 2024 to directors, officers, and employees. Diluted weighted average common shares outstanding for the three and nine months ended September 30, 2024 does not exclude any stock options as their exercise prices were lower than the average price of our shares of common stock during the period. Diluted weighted average common shares outstanding for the three and nine months ended September 30, 2024 does not exclude any shares issued under restricted stock awards in December 2022 or January 2024, as the average price of our shares of common stock during the three and nine months ended September 30, 2024 was higher than average unrecognized compensation expense. Diluted net loss per share for the three and nine months ended September 30, 2023 excludes the dilutive effect of stock options and restricted stock awards as they are antidilutive during a period of net loss. The assumed proceeds of stock options and the restricted stock awards for the treasury stock method is the sum of proceeds from exercise and the average amount of unrecognized compensation expense.

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 liability represents 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 condensed consolidated balance sheets. Operating lease assets are amortized to rent expense over the lease term and included in operating expenses in the condensed consolidated statements of income (loss).

For leases in which the Company is the lessor, the Company identifies the lease and non-lease components and allocates the contract consideration to the different components on a relative stand-alone selling price basis at lease inception. The Company uses a residual approach for the components when the stand-alone selling price is not directly observable or those for which the Company has not established a price.

The Company elects the practical expedient to combine lease and non-lease components when the components qualify to be combined. Continuous supporting services are the primary non-lease components and are not predominant. As a result, the combined components are accounted for as a lease under Accounting Standards Codification ("ASC") 842,Leases. The revenues from non-lease components that are not qualified to be combined are recognized when the services are rendered under ASC 606,Revenue from Contracts with Customers. The revenues from non-lease components were $97 thousand and $147 thousand for the three and nine months ended September 30, 2024, respectively.

For operating leases where the Company is the lessor, the Company recognizes the underlying assets and depreciates them over the estimated useful life which is based upon to estimate the residual value expected at the end of the lease term. Lease income is recognized on a straight-line basis over the lease term when the lease payment is determined. Leasing revenue is not recognized when collection of all contractual rents over the term of the agreement is not probable. When collection is not probable, the Company limits the lease revenue to the lesser of the revenue recognized on a straight-line basis or cash basis. The lease income is included in revenues in the condensed consolidated statements of income (loss).

Variable lease payments associated with the leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented within revenues in the condensed consolidated statements of income (loss).

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 Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("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 was originally effective 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’scondensed consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07,*Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,*to enhance disclosures about significant segment expenses for public entities reporting segment information under ASC Topic 280. The amendments require public entities to disclose significant expense categories for each reportable segment, other segment items, the title and position of the chief operating decision-maker, and interim disclosures of certain segment-related information previously required only on an annual basis. The amendments clarify that entities reporting single segments must disclose both the new and existing segment disclosures under Topic 280, and a public entity is permitted to disclose multiple measures of segment profit or loss if certain criteria are met. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on itscondensed consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to enhance transparency into income tax disclosures. The amendments require annual disclosure of certain information relating to the rate reconciliation, income taxes paid by jurisdiction, income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign jurisdictions, income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign jurisdictions. The amendments also eliminate certain requirements relating to unrecognized tax benefits and certain deferred tax disclosure relating to subsidiaries and corporate joint ventures. The ASU is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.

In March 2024, the FASB issued ASU 2024-01,*Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards,*to clarify how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. The ASU is effective for fiscal years beginning after December 15, 2024, and interim periods within those annual periods. Early adoption is permitted. These updates are not expected to have a significant impact on the Company’s condensed consolidated financial statements.

Note 2 — Property and Equipment

Property and equipment consist of the following:

Depreciation expense was $53 thousand and $60 thousand for the three months ended September 30, 2024 and 2023, respectively, and $154 thousand and $167 thousand for the nine months ended September 30, 2024 and 2023, respectively.

Note 3 — Debt

As of December 31, 2022, the Company had a revolving credit facility with Silicon Valley Bank (“SVB”) that provided for maximum borrowings equal to the lesser of (a) the $15 million commitment amount or (b) the borrowing base plus a $7.5 million non-formula sublimit.

On September 11, 2023, the Company entered into a new revolving credit facility (the “Credit Facility”) with Comerica Bank (“Comerica”), replacing the prior facility with SVB, that provided for maximum borrowings of $10 million. The Credit Facility may be terminated by the Company or Comerica at any time without penalty. At September 30, 2024, the available borrowings under this facility were $10 million. Any borrowings bear interest at the Secured Overnight Financing Rate plus 2.50% (or 7.46% at September 30, 2024) and would be due upon demand by Comerica. The Credit Facility is secured by all of the Company’s assets. At September 30, 2024, the Credit Facility contained a financial covenant requiring that the Company maintain unencumbered liquid assets having a minimum value of$3,500,000 in a Comerica account. In October 2024, the Credit Facility was amended to extend the term of the Credit Facility and to increase the maximum borrowings to $15 million. The amended Credit Facility includes updated covenants requiring that the Company maintain (1) unencumbered liquid assets having a minimum value of $10,000,000 in a Comerica account; (2) minimum profitability of $1 on a trailing 12-month basis; and (3) the contractual relationship with the manufacturer of the SRT-100 discussed in Note 6,*Commitments and Contingencies – Manufacturing Agreement.*There were no other significant changes to the terms of the Credit Facility.

The Company was in compliance with its financial covenants under the respective facilities as of September 30, 2024 and December 31, 2023. There were no borrowings outstanding under either facility at September 30, 2024 and December 31, 2023.

Note 4 — Product Warranties

Changes in product warranty liability were as follows for the nine months ended September 30, 2024:

Note 5 — Leases

Operating Lease Agreements

The Company leases its headquarters office from an unrelated third party under a lease expiring in September 2027. The amortization of the right of use lease asset was $49 thousand for the three months ended September 30, 2024 and 2023, respectively, and $144 thousand and $139 thousand for the nine months ended September 30, 2024 and 2023, respectively.

Future minimum lease payments under the Company’s non-cancellable leases as of September 30, 2024 are as follows:

Cash paid for amounts included in the measurement of the operating lease liability was $132 thousand and $152 thousand for the nine months ended September 30, 2024 and 2023, respectively, and is included in cash flows from operating activities in the accompanying condensed consolidated statements of cash flows.

Operating lease cost recognized as expense was $57 thousand for the three months ended September 30, 2024 and 2023, and $171 thousand for the nine months ended September 30, 2024 and 2023. The financing component for operating lease liability represents the effect of discounting the operating lease payments to their present value.

Lessor Accounting

Beginning in the quarter ended June 30, 2024, the Company, through its subsidiary, Sensus Healthcare Services, LLC, leases superficial radiotherapy equipment to dermatology clinics. The leases generally have initial lease terms of sixty months and automatically renew for a one-year period upon the expiration of the initial lease terms. Payments due under the leases may be fixed or variable payments.

The component of lease income for the three and nine months ended September 30, 2024 is as follows:

The future minimum fixed lease payments to be received under the lease agreements as of September 30, 2024 are as follows:

Note 6 – Commitments and Contingencies

Manufacturing Agreement

The Company has a contract manufacturing agreement with an unrelated third party for the production and manufacture of the SRT-100 (and subsequently the SRT-100 Vision and the SRT-100+), in accordance with the Company’s product specifications. The agreement renews for successive one-year periods unless either party notifies the other party in writing, at least sixty days prior to the anniversary date of the agreement, that it will not renew the agreement. The Company or the manufacturer may terminate the agreement upon ninety days’ prior written notice.

The Company pays this manufacturer for finished goods in advance of the inventory being received. The Company paid this manufacturer $0.2 million and $1.3 million for finished goods for the three months ended September 30, 2024 and 2023, respectively, and $5.9 million and $9.2 million for the nine months ended September 30, 2024 and 2023, respectively. Finished goods of $2.6 million and $3.5 million were received from this manufacturer for the three months ended September 30, 2024 and 2023, respectively, and $7.8 million and $11.2 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024 and December 31, 2023, a prepayment related to these finished goods of $1.7 million and $3.0 million, respectively, was presented in prepaid inventory in the accompanying condensed consolidated balance sheets.

Legal Contingencies

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

In 2015, the Company learned that the Department of Justice (the “Department”) had commenced an investigation of the billing to Medicare by a physician who had treated patients with the Company’s SRT-100. The Department subsequently advised the Company that it was considering expanding the investigation to determine whether the Company had any involvements in physician’s use of certain reimbursements codes. The Company has received two Civil Investigative Demands from the Department seeking documents and written responses in connection with its investigation. The Company has fully cooperated with the Department. The Company disputes that it has engaged in any wrongdoing with respect to such reimbursement claims; among other considerations, the Company does not submit claims for reimbursement or provide coding or billing advice to physicians. To the Company’s knowledge, the Department has made no determination as to whether the Company engaged in any wrongdoing, or whether to pursue any legal action against the Company. Should the Department decide to pursue legal action, the Company believes it has strong and meritorious defenses and will vigorously defend itself. As of September 30, 2024, the Company was unable to estimate the cost associated with this matter.

Note 7 — Stockholders’ Equity

Preferred Stock

The Company has authorized 5 million shares of preferred stock. No shares of preferred stock were issued or outstanding at September 30, 2024 or December 31, 2023.

Treasury Stock

Treasury stock includes shares surrendered by employees for tax withholding on the vesting of restricted stock awards and shares repurchased in open market transactions.7,870 shares were surrendered by employees for tax withholding for the three and nine months ended September 30, 2024.3,935 and 8,422 shares were surrendered by employees for tax withholding for the three and nine months ended September 30, 2023, respectively. During the three and nine months ended September 30, 2024, the Company did not repurchase any shares in open market transactions. During the three and nine months ended September 30, 2023, the Company repurchased 9,427 shares in open market transactions.

Note 8 — Equity-based Compensation

2016 and 2017 Equity Incentive Plans

The Company’s 2016 Equity Incentive Plan and the 2017 Incentive Plan, as amended in June 2023 (collectively, the “Plans”), provide for the issuance of up to 397,473 shares and 750,000 shares, respectively. In addition, unless the Compensation Committee specifically determines otherwise, the maximum number of shares available under the Plans and the awards granted under the 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 the Company’s common stock. The awards may be made in the form of restricted stock awards or stock options, among other things. As of September 30, 2024 and December 31, 2023,295,223 and 312,973 shares were available to be granted under the Plans, respectively.

On February 1, 2020, a total of 35,000 shares of restricted stock were issued to employees. The restricted shares vest 25% per year over a four-year period. The grant date fair value of $4.11 per share is being recognized as expense on a straight-line basis over the vesting period. During the nine months ended September 30, 2024,2,500 shares of common stock vested. As of September 30, 2024, the shares issued on February 1, 2020 were fully vested.

On July 21, 2021, a total of 130,000 shares of restricted stock were issued to employees and board members. The restricted shares vest 25% at grant date and 25% per year over a three-year period. The grant date fair value of $3.84 per share is being recognized as expense on a straight-line basis over the vesting period. During the nine months ended September 30, 2024,32,500 shares of common stock vested. As of September 30, 2024, the shares issued on July 21, 2021 were fully vested.

On December 19, 2022, a total of 77,000 shares of restricted stock were issued to employees. The restricted shares vest 25% per year over a four-year period. The fair value of $6.40 per share, the stock price on grant date, is being recognized as expense on a straight-line basis over the vesting period. During the nine months ended September 30, 2024,2,250 shares of unvested common stock were forfeited due to the termination of three employees.

On January 26, 2023,10,000 shares of common stock were issued to an employee and were recorded at the fair value of $8.96 per share, the stock price on the grant date. The shares were fully vested on the grant date.

On January 11, 2024,20,000 shares of common stock with a fair value of $2.65 per share, the stock price on the grant date, were issued to an employee.10,000 of the shares were vested and the expense related to these shares was recognized on the grant date. The remaining 10,000 shares are scheduled to cliff vest in January 2025. The grant date fair value of $2.65 per share is being recognized as expense on a straight-line basis over the vesting period.

Restricted Stock

Restricted stock activity for the nine months ended September 30, 2024 is summarized below:

The Company recognizes forfeitures as they occur. The reduction of stock compensation expense related to the forfeitures was $0 for the three months ended September 30, 2024 and 2023, and $2 thousand and $19 thousand for the nine months ended September 30, 2024 and 2023, respectively.

Stock compensation expense related to restricted stock, excluding the recognition of forfeitures, was $45 thousand and $67 thousand for the three months ended September 30, 2024 and 2023, respectively, and $203 thousand and $295 thousand for the nine months ended September 30, 2024 and 2023, respectively.

Unrecognized stock compensation expense was $257 thousand as of September 30, 2024, which will be recognized over a weighted-average period of 2.1 years.

Stock Options

Stock options expireten years after the grant date. Options that have been granted are exercisable and vest based on the terms of the related agreements.

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

No stock compensation expense related to stock options was incurred for the three and nine months ended September 30, 2024 and 2023. The stock options outstanding as of September 30, 2024 and December 31, 2023 had an intrinsic value of $21 thousand and $0, respectively.

Note 9 — Income Taxes

The Company accounts for income taxes in accordance with ASC 740,Income Taxes, (“ASC 740”), 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 periods, disclosure and transition.

Effective income tax rates for interim periods are based upon the Company’s current estimated annual tax rate, which varies based upon the Company’s estimate of taxable earnings or loss and the mix of taxable earnings or loss in the various states in which the Company operates. In addition, the Company recognizes taxes related to unusual or infrequent items or resulting from a change in judgment regarding a position taken in a prior period as discrete items in the interim period in which the event occurs.

As of September 30, 2024 and December 31, 2023, management determined there continues to be sufficient positive evidence that it is more likely than not that the net deferred tax asset (other than foreign net operation losses) is realizable.

Income tax expense (benefit) was $559 thousand and ($125) thousand for the three months ended September 30, 2024 and 2023, respectively. Income tax expense (benefit) was $1,965 thousand and ($1,428) thousand for the nine months ended September 30, 2024 and 2023, respectively.

The effective tax rates for the three months ended September 30, 2024 and 2023 were 31.5% and 7.9%, respectively. The effective tax rates for the nine months ended September 30, 2024 and 2023 were 27.8% and 27.7%, respectively. The increase in the effective tax rate for the three months ended September 30, 2024 compared to the prior year periods was primarily due to an increase in nondeductible expenses in proportion to pretax income (loss).

The effective tax rate differs from the U.S. federal statutory rate for the three and nine months ended September 30, 2024, primarily due to nondeductible expenses, state income taxes and the favorable impact of tax credits. The effective tax rate differs from the U.S. federal statutory rate for the three and nine months ended September 30, 2023, primarily due to nondeductible expenses and state income taxes.

As of September 30, 2024, the Company’s U.S. federal and certain state tax returns remain subject to examination, beginning with those filed for the year ended December 31, 2017.

Note 10 — Subsequent Events

The Company has evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued for potential recognition or disclosure. The Company did not identify any subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.