Item 1A.RISK FACTORS
An investment in Sensus’s common stock
contains a high degree of risk. Investors should carefully consider the following risks and uncertainties before making an investment
decision with respect to our common stock. Our business, including our operating results and financial conditions, could be harmed if
any of these risks, as well as other risks not currently known to us or that we currently deem immaterial, were to materialize. The trading
price of Sensus’s common stock could decline due to the occurrence of any of these risks. In assessing these risks, investors should
also refer to the other information included in our filings with the SEC, including our financial statements and the related notes.
Risks Related to our Business
If third-party payors do not provide coverage
and adequate reimbursement for the use of our products, it is unlikely that our products will be widely used, and our revenue will be
negatively impacted.
In the U.S., the commercial success of Sensus’s
existing products and any future products will depend, in part, on the extent to which governmental payors at the federal and state levels,
including Medicare and Medicaid, private health insurers, and other third-party payors provide coverage for and establish adequate reimbursement
levels for procedures using these products. Neither hospitals nor physicians are likely to use Sensus’s products if they do not
receive adequate reimbursement payments for the procedures using these products.
Some private payors in the U.S. may base their
reimbursement policies on the coverage decisions determined by the Center for Medicare & Medical Services, or CMS, which administers
the Medicare program and works in partnership with state governments to administer the Medicaid program. Others may adopt different coverage
or reimbursement policies for procedures performed using Sensus’s products, while some governmental programs, such as Medicaid,
have reimbursement policies that vary from state to state, some of which may not pay an amount that supports the selling price of Sensus’s
products, if at all. A Medicare national or local coverage decision denying coverage for any of the procedures performed using the Company’s
products could result in private and other third-party payors also denying coverage. Medicare (Part B) and a number of private insurers
in the U.S. currently cover and pay for both non-melanoma skin cancer and keloid treatments using the SRT-100. A withdrawal, or even
contemplation of a withdrawal, by CMS, Medicaid or private payors of reimbursements, or any other unfavorable coverage or reimbursement
decisions by government programs or private payors, could have a material adverse effect on the Company’s revenues and business.
Reimbursement systems in international markets
vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country
basis. In many international markets, a product must be approved for reimbursement before it can be cleared for sale in that country.
Further, many international markets have government-managed healthcare systems that control reimbursement for new devices and procedures.
In most markets there are private insurance systems as well as government-managed systems. Sensus’s products may not be considered
cost-effective by international third-party payors or governments managing healthcare systems. Furthermore, reimbursement may not be
available or, if available, third-party payors’ reimbursement policies may adversely affect the Company’s ability to sell
products profitably. If sufficient coverage and reimbursement are not available for Sensus’s products, in either the U.S. or internationally,
the demand for these products and, consequently, the Company’s revenues and business, will be adversely affected.
The Company’s operations may be impaired
if our information technology systems fail to perform adequately or are the subject of a data breach or cyberattack.
The Company’s information technology systems
are critically important to operating business efficiently. The Company relies on information technology systems to manage business data,
communications, employee information, and other business processes. The Company outsources certain business process functions to third-party
providers and similarly relies on these third parties to maintain and store confidential information on their systems. The failure of
these information technology systems to perform as the Company anticipates could disrupt business and could result in transaction errors,
processing inefficiencies, and the loss of sales and customers, causing business and results of operations to suffer.
The Company has experienced, and expects to continue
to experience, cyber security threats and incidents, none of which has been material to the Company to date. Although the Company protects
our information technology systems, the Company has experienced varying degrees of cyber-incidents in the normal conduct of business,
including viruses, worms, phishing, and other malicious activities. Although there have been no serious consequences to date, such breaches
could result in unauthorized access to information, including customer, supplier, employee, or other company confidential data. The Company
carries insurance against these risks, performs penetration tests from time to time, and designs business processes to attempt to mitigate
the risk of such breaches. However, the Company’s efforts to mitigate these risks may be unsuccessful, and security breaches may
occur. Moreover, the development and maintenance of these measures requires continuous monitoring as technologies change and efforts
to overcome security measures evolve. However, a successful breach or attack could have a material negative impact on operations and
subject the Company to consequences such as direct costs associated with incident response.
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Substantially all of the Company’s
revenue is generated from the sale of the SRT-100 and related products, and any decline in the sales of these products will negatively
impact the Company’s business, financial condition, and results of operations.
The Company is focused heavily on the development
and commercialization of a limited number of products for the treatment of non-melanoma skin cancer and other skin conditions with SRT.
From the Company’s inception in 2010 through December 31, 2022, revenue has primarily been derived from sales of the SRT-100 product
line and related services and ancillary products. Although the Company has introduced new products, the Company expects most of revenue
in the near to medium term to be derived from or related to sales of the SRT-100 product line. Because of this, any decline in the sales
of these products will negatively impact the Company’s business, financial condition, and results of operations.
The Company’s technology could be
superseded by new products, treatments, or technologies that gain wider acceptance among doctors and patients, which could adversely
affect the Company.
The medical device industry is highly competitive
and subject to rapid technological change, and is significantly affected by the introduction of new products and treatment options. The
Company’s products, some of which use technologies that have been available for many years, compete for market acceptance against
those of healthcare providers who use other methods of treatment for similar diseases and conditions. If new products, treatments, and/or
technologies were developed that gain wide acceptance among doctors and patients, it could take market share away from the Company, which
could adversely affect the Company’s ability to maintain or increase revenue and/or render the Company’s products obsolete.
The Company has a single preferred supplier
for the x-ray tubes and other major components used in the Company’s products and the loss of this preferred supplier could adversely
affect the Company.
The Company has a single preferred supplier for
the x-ray tubes and other major components used in the Company’s products. Although other suppliers exist in the market, the Company
believes that our preferred supplier’s products are of a superior quality. The loss of the preferred supplier, or its inability
to supply the Company with an adequate supply of these components, could hinder the Company’s ability to effectively produce the
Company’s products to meet existing demand levels, especially if the Company were unable to timely procure them from other suppliers
in the market, which could adversely affect the Company’s ability to commercialize products and to maintain or increase revenues.
The Company’s customers are concentrated
in the U.S. (including one U.S. customer accounting for a significant portion of our sales), and economic difficulties or changes in
the purchasing policies or patterns of the Company’s customers in the U.S. could have a significant impact on our business and
operating results.
Most of the Company’s sales have been made
to customers located in the U.S. (94% and 95% in the years ended December 31, 2022 and 2021, respectively). Additionally, a single customer
in the U.S. accounted for approximately 73% and 57% of revenues for the years ended December 31, 2022, and December 31, 2021, respectively.
Because of these concentrations, revenue could fluctuate significantly due to changes in economic conditions, competitive products, or
the loss of, reduction of business with, or less favorable terms with, our significant customer or other U.S. customers. A reduction
or delay in orders for the Company’s products for these or other reasons could materially harm business and results of operations.
Sensus may be required to obtain additional
funds in the future, and these funds may not be available on acceptable terms or at all.
Sensus’s operations have consumed substantial
amounts of cash since its inception, and Sensus may need to seek additional capital in the future. We have maintained a revolving line
of credit with Silicon Valley Bank (“SVB”) since 2013. Although we have never borrowed any funds under this line of credit,
we have maintained it as our sole source of borrowings, should they be needed. On March 10, 2023, SVB was closed by California and federal
regulatory agencies. As a result of these actions, the Federal Deposit Insurance Corporation (FDIC) established Silicon Valley Bridge
Bank, N.A. (the “Bridge Bank”) as successor to SVB. Based upon information available to us, we believe that the Bridge Bank
has assumed all contracts of SVB in effect at the time of its failure (including our line of credit) and, that the Bridge Bank is expected
to continue to perform under those contracts. Accordingly, we have not yet determined whether we will seek to replace the current line
of credit with the Bridge Bank. Should we do so, we may not be able to enter into new credit facilities, and if we are able to enter into
new credit facilities, the maximum borrowings permitted under, or other terms of, any such facilities may limit the amounts we are able
to borrow or may impose greater restrictions on such borrowings or other aspects of our operations. Please see Note 5, Debt, to
the consolidated financial statements for additional information regarding current line of credit with the Bridge Bank. If we are unable
to borrow funds on favorable terms, or at all, we may not be able to support commercialization efforts, increase research and development
activities, compete effectively, or meet debt and other contractual obligations, and the growth of our business may be negatively impacted.
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The Company’s cash requirements in the
future may be significantly different from current estimates and depend on many factors, including:
● the results of commercialization efforts for products;
● the need for additional capital to fund development programs;
● success in entering into collaborative relationships with other parties; and
To the extent that Sensus raises additional capital
through the sale of equity or convertible debt securities, the ownership interests of the existing stockholders will be diluted. Moreover,
the terms of newly issued securities may include liquidation or other preferences that adversely affect common stockholders’ rights.
Debt financing, if available, may involve covenants limiting or restricting our ability to take specific actions such as incurring additional
debt, making capital expenditures, or declaring distributions or dividends. If Sensus raises additional funds through collaboration and
licensing arrangements with third parties, the Company may have to relinquish valuable rights to technologies or products or to grant
licenses on terms that are not favorable. Any of these events could adversely affect Sensus’s ability to declare dividends on its
common stock and to achieve future product development and commercialization goals and could have a material adverse effect on our business,
financial condition, and results of operations.
Consolidation in the healthcare industry
could adversely affect the Company’s future revenues and operating income.
The medical technology industry has experienced
a significant amount of consolidation, resulting in companies with greater market presence. Health care systems and other health care
companies are also consolidating, resulting in greater purchasing power for the combined companies. The disruption in the healthcare
industry caused by consolidation may lead to further competition among medical device suppliers to provide goods and services, which
could adversely affect the Company’s future revenues and operating income.
Our business, results of operations, and
financial condition could be materially adversely affected by the effects of widespread public health epidemics, including COVID-19,
that are beyond our control.
Outbreaks of contagious diseases, public health
epidemics, and other adverse public health developments in countries where we, our customers, or our suppliers operate have had and could
have a material and adverse effect on our business, results of operations and financial condition. The COVID-19 pandemic has adversely
impacted the global and national economies and certain industries and geographies in which we operate. Given its ongoing and dynamic
nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business, customers, vendors, and suppliers. The extent
of such impact will depend on future developments, which are highly uncertain. Additionally, the responses of various governmental and
nongovernmental authorities and consumers to the pandemic may have material long-term effects on us and our customers which are difficult
to quantify in the near-term or long-term.
Risks Related to our Regulatory Environment
Sensus is subject to various federal, state,
and foreign healthcare laws and regulations, and a finding of failure to comply with these laws and regulations could have a material
adverse effect on its business.
Sensus’s operations are, and will continue
to be, directly and indirectly affected by various federal, state, and foreign healthcare laws, including, but not limited to, those
described below.
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Additionally, HIPAA, as amended by HITECH, and
applicable implementing regulations, impose certain requirements relating to the privacy, security, and transmission of individually
identifiable health information without appropriate authorization on entities subject to the law, such as health plans, clearinghouses,
and healthcare providers and their business associates. Internationally, substantially every jurisdiction in which we operate has established
its own data security and privacy legal framework with which we must comply, including the Data Protection Directive 95/46/EC and national
implementation of the Directive in the member states of the European Union.
Many states have also adopted laws similar to
each of the above federal laws, such as anti-kickback and false claims laws, which may be broader in scope and apply to items or services
reimbursed by any third-party payor, including commercial insurers, as well as laws that restrict our marketing activities with healthcare
professionals and entities, and require the Company to track and report payments and other transfers of value, including consulting fees,
provided to healthcare professionals and entities. Some states mandate implementation of compliance programs to ensure compliance with
these laws. Additionally, certain states require a certificate of need prior to the installation of a radiation device, such as the SRT-100.
The Company is also subject to foreign fraud and abuse laws, which vary by country.
If the Company’s operations are found to
be in violation of any of the laws or regulations described above or any other governmental laws or regulations that apply now or in
the future, it may be subject to penalties, including administrative, civil, and criminal penalties; damages; fines; disgorgement; individual
imprisonment; contractual damages; reputational harm; exclusion from governmental healthcare programs; and the curtailment or restructuring
of its operations. Any of the foregoing could adversely affect the Company’s ability to operate its business and financial results.
Sensus is required to comply with medical
device reporting requirements and must report certain malfunctions, deaths, and serious injuries associated with its products, which
can result in voluntary corrective actions or agency enforcement actions.
Under the FDA’s medical device reporting
regulations (21 CFR 803), medical device manufacturers are required to submit information to the U.S. Food and Drug Administration when
they receive a report or become aware that a device has or may have caused or contributed to a death or serious injury or has or may
have a malfunction that would likely cause or contribute to death or serious injury if the malfunction were to recur. All manufacturers
placing medical devices on the market in the European Economic Area are legally bound to report any serious or potentially serious incidents
involving devices they produce or sell (MEDDEV 2.12-1) to the competent authority in whose jurisdiction the incident occurred through
the “European Vigilance” process.
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If an event subject to medical device reporting
requirements occurs, Sensus will need to comply with the reporting requirements, which would adversely affect its reputation and subject
Sensus to actions by regulatory authorities, such as ordering recalls, imposing fines, or seizing the affected products. Furthermore,
any corrective action, whether voluntary or involuntary, will require the dedication of time and capital and will distract management
from business operations. Any of the foregoing would negatively impact Sensus’s reputation, business, and financial results.
Healthcare policy changes may have a material
adverse effect on Sensus’s business.
The Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Reconciliation Act, included, among other things, comparative effectiveness research, an
independent payment advisory board, payment system reforms (including shared savings pilots), and other provisions, one or more of which
may significantly affect the payment for, and the availability of, healthcare services and may result in fundamental changes to federal
healthcare reimbursement programs, any of which may materially affect numerous aspects of our business.
Other healthcare reform measures may result in
more rigorous coverage criteria and in additional downward pressure on the reimbursement received for procedures utilizing our products.
In addition, other legislative changes have been proposed and adopted since the law discussed above was enacted that may adversely affect
Sensus’s revenues. Changes to existing laws may result in additional reductions in Medicare and other healthcare funding, which
could have a material adverse effect on Sensus’s business and financial operations. Any reduction in reimbursement from Medicare
or other government programs may result in a reduction in payments from private payors. The implementation of cost containment measures
or other healthcare reforms may prevent Sensus from being able to increase revenue, attain profitability, or commercialize its devices.
In addition, other legislative changes may be enacted or existing regulations, guidance, or interpretations may be changed, each of which
may adversely affect our operations.
Risks Related to our Intellectual Property
If Sensus’s patents and other intellectual
property rights do not adequately protect its products, it may lose market share to competitors and be unable to operate business profitably.
Sensus’s success significantly depends
on its ability to protect proprietary rights to the technologies used in its products. Sensus relies on two U.S. patents and two foreign
patents, as well as a combination of copyright, trade secret, and trademark laws, and nondisclosure, confidentiality, and other contractual
restrictions, to protect its proprietary technology. Sensus also has patent applications currently pending and in the process of being
submitted. However, these legal means afford only limited protection and may not adequately protect its rights or permit Sensus to gain
or keep any competitive advantage. For example, some or all of the pending patent applications or any future pending applications may
be unsuccessful. The U.S. Patent and Trademark Office may deny or require significant narrowing of claims in the pending patent applications
or future patent applications, and patents issued as a result of these patent applications, if any, may not provide Sensus with significant
commercial protection or be issued in a form that is advantageous. Sensus could also incur substantial costs in proceedings before the
U.S. Patent and Trademark Office. These proceedings could result in adverse decisions as to the priority of its inventions and the narrowing
or invalidation of claims in its issued patents. Third parties may successfully challenge issued patents and those that may be issued
in the future, which would render these patents invalid or unenforceable, which in turn could limit Sensus’s ability to stop competitors
from marketing and selling related products. In addition, pending patent applications include claims to aspects of Sensus’s products
and procedures that are not currently protected by issued patents, and third parties may successfully patent those aspects before us
or otherwise challenge our rights to these aspects.
Both the patent application process and the process
of managing patent disputes can be time consuming and expensive. Competitors may be able to design around Sensus’s patents or develop
products that provide outcomes that are comparable to Sensus’s products. Although Sensus has entered into confidentiality agreements
and intellectual property assignment agreements with certain of its employees, consultants, and advisors in order to protect our intellectual
property and other proprietary technology, these agreements may not be enforceable or may not provide meaningful protection for trade
secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. In addition,
Sensus has not sought patent protection in all countries where it sells products. If Sensus fails to timely file a patent application
in any such country or major market, Sensus may be precluded from doing so at a later date. Competitors may use Sensus’s technologies
in jurisdictions where Sensus has not obtained patent protection to develop their own products and, further, may export otherwise infringing
products to territories in which Sensus has patent protection that may not be sufficient to terminate infringing activities. Furthermore,
the laws of some foreign countries may not protect intellectual property rights to the same extent as the laws of the U.S., if at all.
In the event a competitor infringes upon one
of Sensus’s patents or other intellectual property rights, enforcing those patents and rights may be difficult and time consuming.
Even if successful, litigation to defend these patents against challenges or to enforce Sensus’s intellectual property rights could
be expensive and time consuming and could divert management’s attention. Moreover, Sensus may not have sufficient resources to
defend patents against challenges or to enforce intellectual property rights, any of which would adversely affect its ability to compete.
Any of the foregoing would negatively impact Sensus’s business, operations, and financial results.
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If Sensus’s trademarks or trade names
are not adequately protected, then Sensus may be unable to build name recognition in markets of interest and its business may be adversely
affected.
Sensus’s registered or unregistered trademarks
or trade names may be challenged, infringed, circumvented, declared generic, or determined to infringe other marks. Sensus may be unable
to protect the rights to these trademarks and trade names, which it needs to build name recognition by potential partners or customers
in markets of interest. If these trademarks are challenged, infringed upon, circumvented, or declared generic or infringing, or if Sensus
is unable to establish name recognition based on these trademarks and trade names, then it may be unable to compete effectively and Sensus’s
business may be adversely affected.
The medical device industry is characterized
by extensive patent litigation, and if Sensus becomes subject to litigation, it could be costly, result in the diversion of management’s
attention, require us to pay significant damages or royalty payments, or prevent us from marketing and selling existing or future products.
The medical device industry is characterized
by extensive litigation and administrative proceedings over patent and other intellectual property rights. Determining whether a product
infringes a patent involves complex legal and factual issues. As the number of participants in the market for skin cancer and general
oncology devices and treatments increases, the possibility of patent infringement claims against Sensus increases. Any infringement claims,
litigation or other proceedings would place a significant strain on Sensus’s financial resources, divert the attention of management
from the core business and harm Sensus’s reputation. Any of the foregoing could negatively impact Sensus’s business, operations,
and financial results.
Adverse outcomes in litigation or similar
proceedings could adversely impact business.
Sensus may in the future be named as a party
to litigation or other similar legal proceedings. Adverse outcomes in any or all of these proceedings could result in monetary damages
or injunctive relief that could adversely affect its ability to continue conducting business. If an unfavorable final outcome in any
such matter becomes probable and reasonably estimable, the Company’s financial condition could be materially and adversely affected.
Risks Related to the Ownership of Sensus’s
Securities
We have a history of net losses prior to
2021. If we do not maintain profitability, our financial condition and the value of our common stock could suffer.
The Company has a history of net losses. The
historical losses from inception through December 31, 2020 totaled approximately $21.9 million. The Company reported net income of $24.2
million and $4.1 million, respectively, during the years ended December 31, 2022 and 2021. The Company has significantly reduced its
research and development expenses and is planning to continue to control these expenses. However, there can be no assurances that this
and other actions will result in the Company’s continued profitability.
Limited trading activity for shares of
Sensus’s common stock may contribute to price volatility.
While Sensus’s common stock is listed and
traded on the Nasdaq Capital Market, there has been limited trading activity in the Company’s shares. Due to the limited trading
activity of Sensus’s common stock, relativity small trades may have a significant impact on the price of our common stock.
The Company does not anticipate paying
dividends for the foreseeable future. As a result, investors must rely on price appreciation of the Company’s common stock for
a return on its investment in the foreseeable future.
The Company expects to retain any funds and future
earnings to support the operation, growth, and development of its business and does not anticipate paying any cash dividends on its common
stock in the foreseeable future. As a result, a return on an investor’s investment in the near future will occur only if the Company’s
share price appreciates. The Company’s common stock price may not appreciate in value or maintain the price at which an investor
purchased these securities, and in either case, may not realize a return on investment or could lose all or part of an investment in
the Company’s securities.
Any future determination to declare cash dividends
will be made at the discretion of the Company’s Board of Directors (the “Board of Directors”) and will be subject to
compliance with applicable laws and covenants under any credit facilities, which may restrict or limit the Company’s ability to
pay dividends. For example, the Company’s revolving line of credit with SVB (now with the Bridge Bank) has restricted the ability
to pay dividends or make any distributions or payments or redeem, retire, or purchase any capital stock without the prior written consent
of the lender, provided that the Company may pay dividends solely in common stock. Should the Company enter into a new credit facility
or facilities following the closing of SVB, any such facility may contain similar or additional restrictions on the payment of dividends
or may prohibit the payment of dividends altogether (see “Risk Factors -- Sensus may be required to obtain additional funds in
the future, and these funds may not be available on acceptable terms or at all” for additional information). Also, the form,
frequency, and amount of dividends will depend upon the Company’s future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions, and other factors that the Board of Directors may deem relevant. Sensus may not
pay dividends as a result of any of the foregoing, and in these cases, an investor would need to rely on price appreciation of the Company’s
common stock for a return on investment.
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Sensus is a “smaller reporting company,”
and the reduced reporting requirements applicable to smaller reporting companies may make Sensus’s common stock less attractive
to investors.
As a smaller reporting company, Sensus can take
advantage of certain reduced governance and disclosure requirements, including not being required to comply with the auditor attestation
requirements in the assessment of internal control over financial reporting. As aresult, investors and others may be less
comfortable with the effectiveness of Sensus’s internal controls and the risk that materialweaknesses or other deficiencies
in internal controls go undetected may increase. In addition, as a smaller reporting company, Sensus takesadvantage of the
ability to provide certain other less comprehensive disclosures in our SEC filings, including, among other things, providing onlytwo
years of audited financial statements in annual reports and simplified executive compensation disclosures. Consequently, it may be morechallenging
for investors to analyze Sensus’s results of operations and financial prospects, as the information provided to stockholders may
bedifferent from what one might receive from other public companies in which one holds shares.
Sensus’s executive officers and directors
may exert control over the Company and may exercise influence over matters subject to stockholder approval.
Sensus’s executive officers and directors,
together with their respective affiliates, beneficially owned approximately 11% of our outstanding common stock as of February 21, 2023.
Accordingly, these stockholders, if they act together, may exercise substantial influence over matters requiring stockholder approval,
including the election of directors and approval of corporate transactions, such as a merger. This concentration of ownership could have
the effect of delaying or preventing a change in control or otherwise discourage a potential acquirer from attempting to obtain control
over Sensus, which in turn could have a material adverse effect on the market value of Sensus’s common stock.
If securities or industry analysts do not
publish research or publish unfavorable or inaccurate research about Sensus, the price of Sensus’s securities and trading volume
could decline.
The trading market for Sensus’s securities
depends, in part, on the research and reports that securities or industry analysts publish about us. Sensus may be unable to attract
or sustain coverage by well-regarded securities and industry analysts. If either none or only a limited number of securities or industry
analysts cover Sensus, or if these securities or industry analysts are not widely respected within the general investment community,
the trading price for Sensus’s securities would be materially and negatively impacted. In the event Sensus obtains securities or
industry analyst coverage, if one or more of the analysts who cover Sensus downgrades the securities or publishes inaccurate or unfavorable
research about the Company, the price of Sensus’s securities would likely decline. If one or more of these analysts cease coverage
of Sensus, or fail to publish reports on Sensus regularly, demand for the Sensus’s securities could decrease, which might cause
the price of its securities and trading volume to decline.
The Company’s certificate of incorporation
and bylaws, and Delaware law contain provisions that could discourage another company from acquiring the Company and may prevent attempts
by the Company’s stockholders to replace or remove the current directors and management.
Provisions of the Delaware General Corporation
Law (“DGCL”) and the Company’s certificate of incorporation and bylaws may discourage, delay, or prevent a merger or
acquisition that stockholders may consider favorable, including transactions in which an investor might otherwise receive a premium for
its stock. In addition, these provisions may frustrate or prevent any attempts by the Company’s stockholders to replace or remove
the current management by making it more difficult for stockholders to replace or remove directors from the Board of Directors. These
provisions include:
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● prohibiting stockholder action by written consent;
In addition, the Company is subject to Section
203 of the DGCL, which may have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors,
including discouraging takeover attempts that could result in a premium over the market price for shares of the Company’s common
stock. These provisions will apply even if a takeover offer may be considered beneficial by some stockholders and could delay or prevent
an acquisition that the Board of Directors determines is not in the best interests of the Company and its stockholders and could also
affect the price that some investors are willing to pay for the Company’s common stock.
The Company’s certificate of incorporation
provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between the Company
and its stockholders, which could limit a stockholder’s ability to obtain a favorable judicial forum for disputes with the Company
or its directors, officers, or employees.
The Company’s certificate of incorporation
provides that, unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of
Delaware is the exclusive forum for: any derivative action or proceeding brought on behalf of the Company; any action asserting a breach
of fiduciary duty; any action asserting a claim against the Company arising pursuant to the DGCL, the Company’s certificate of
incorporation, or bylaws; or any action asserting a claim against the Company that is governed by the internal affairs doctrine. This
choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes
with the Company or its directors, officers, or other employees, which may discourage these lawsuits against the Company and its directors,
officers, and other employees. If a court were to find the choice of forum provision contained in the Company’s certificate of
incorporation to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving the
action in other jurisdictions, which could harm business and financial condition.
If the Company fails to maintain proper
and effective internal controls, the Company’s ability to produce accurate and timely financial statements could be impaired and
investors’ views of the Company or its business could be harmed, resulting in a decrease in value of the Company’s common
stock.
As a public company, the Company is required
to maintain internal control over financial reporting and to report any material weaknesses in the Company’s internal controls.
In addition, the Company is required to furnish a report by management on the effectiveness of the internal control over financial reporting
pursuant to Section 404 of the Sarbanes-Oxley Act. In addition, the Company’s independent registered public accounting firm will
be required to attest to the effectiveness of the internal control over financial reporting beginning with the Company’s annual
report on Form 10-K following the date on which the Company no longer qualifies as a smaller reporting company. Compliance with Section
404 of the Sarbanes-Oxley Act will require the Company to incur substantial accounting expense and expend significant management efforts.
If the Company is unable to comply with the requirements of Section 404 in a timely manner, or the Company and the independent registered
public accounting firm identify deficiencies in the internal control over financial reporting that are deemed to be material weaknesses,
the market price of the Company’s common stock could decline and the Company could be subject to sanctions or investigations by
Nasdaq, the SEC, or other regulatory authorities, which would require additional financial and management resources.
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Item 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved comments from the
SEC staff relating to the Company’s periodic or current reports filed with the SEC pursuant to the Securities Exchange Act of 1934,
as amended.
Item 2. PROPERTIES
The Company’s corporate headquarters is
located in Boca Raton, Florida and occupies approximately 8,926 square feet of space under a lease that currently expires in September
2027. The Company believes that the current facilities are suitable and adequate to meet the Company’s current needs and
that suitable additional space will be available as and when needed. The Company’s main manufacturing function is physically located
at our third-party manufacturer’s facility in Oak Ridge, Tennessee. Additional disclosures have been included within Note 8, Commitments
and Contingencies, of the consolidated financial statements.
Item 3. LEGAL PROCEEDINGS
From time to time, Sensus is party to certain
legal proceedings in the ordinary course of business. Management, after consultation with legal counsel, currently does not anticipate
that the aggregate liability arising out of certain legal proceedings will have a material effect on Sensus’s results of operations,
financial position, or cash flows and have assessed that there is no need to record a liability for these legal proceedings and related
contingencies. Additional disclosures have been included within Note 8, Commitments and Contingencies of the consolidated financial
statements.
Item 4. MINE SAFETY DISCLOSURE
Not applicable.
18
PART II.
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s Class A common stock
is publicly traded on the NASDAQ Capital Market under the symbol “SRTS.”
Holders
At the close of business on March 1, 2023, there
were 20 common stockholders of record. This does not include “street name” or beneficial owners, whose shares are held of
record by banks, brokers, and other financial institutions.
Dividends
The Company has never declared or paid any dividends
on its common stock and anticipates that for the foreseeable future all earnings will be retained for use rather than paid out as dividends.
Any future payment of cash dividends will be dependent upon the Company’s financial condition, results of operations, current and
anticipated cash requirements, and plans for expansion, as well as other factors that the Board of Directors deems relevant. Additionally,
certain contractual agreements and provisions of Delaware law impose restrictions on our ability to pay dividends. For example, the Company’s
current revolving line of credit restricts the ability to pay dividends or make any distributions or payments or redeem, retire, or purchase
any capital stock without the prior written consent of the lender, provided that the Company may pay dividends solely in common stock
without prior consent. Should the Company enter into a new credit facility or facilities, any such facility may contain similar or additional
restrictions on the payment of dividends or may prohibit the payment of dividends altogether (see “Risk Factors -- Sensus may
be required to obtain additional funds in the future, and these funds may not be available on acceptable terms or at all” for
additional information). Additionally, Section 170(a) of the DGCL only permits dividends to be paid out of two legally available sources:
(1) out of surplus, or (2) if there is no surplus, out of net profits for the year in which the dividend is declared or the preceding
year (so-called “nimble dividends”). However, dividends may not be declared or paid out of net profits if “the capital
of the corporation, computed in accordance with [sections] 154 and 244 [of the DGCL], shall have been diminished by depreciation in the
value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution of assets.” Contractual obligations and applicable
law will restrict the ability to declare and pay dividends in the future.
Unregistered Sales of Securities
There were no unregistered sales of securities
during the year ended December 31, 2022.
Purchases of Equity Securities by the Registrant
and Affiliated Purchasers
In March 2022, the Company announced that its
Board of Directors had authorized a program to purchase up to $3,000,000 of shares of its common stock. Purchases may be made in
a variety of methods, including open market, from time to time, depending upon market conditions, including the market price of the common
stock, and other factors. The program has no time limit and may be modified, suspended, or discontinued at any time.
During the three months ended December 31, 2022,
the following repurchases were made:
Item 6. RESERVED
19
Item 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following management’s
discussion and analysis (“MD&A”) in conjunction with the information set forth within the financial statements and related
notes included in this Annual Report on Form 10-K.
Overview
As discussed elsewhere in this Report, Sensus
achieved profitability for the first time in 2021 and increased profitability in 2022, and seeks to maintain and increase profitability
by, among other things, increasing sales and managing operational expenses where necessary in order to continue to invest in research
and development of new products and marketing initiatives to promote the Company’s products. However, Sensus faces a number of
uncertainties in 2023 that could impact our ability to achieve this goal. These include inflation and international trade issues. Either
of these matters could adversely affect the Company’s ability to do business in a number of countries and geographic regions, including
China.
Components of our results of operations
Sensus manages our business globally within one
reportable segment, which is consistent with how management views the business, prioritizes investment and resource allocation decisions,
and assesses operating performance.
Results of Operations
For the Years Ended December 31,
(in thousands, except shares and per share data) 2022 2021
Operating expenses
Other income (expense):
Gain (loss) on sale of assets 12,779 (1 )
Interest income 382 2
Interest expense (2 ) (2 )
Other income (expense), net 13,159 (1 )
Provision for income taxes 3,746 -
Net income per share – basic $ 1.47 $ 0.25
Weighted average number of shares used in
20
2022 Compared with 2021
Revenues of $44.5 million in 2022 increased
$17.5 million, or 65%, from $27.0 million in 2021. The 65% increase was driven by a higher number of units sold in 2022 in response to
increased demand.
Cost of sales of $14.9 million in 2022
increased by $4.8 million, or 48%, from $10.1 million in 2021, reflecting the higher number of units sold.
Gross profit of $29.6 million, or 66.5%
of revenue, in 2022 increased by $12.6 million, or 74%, from $17.0 million, or 62.8% of revenue, in 2021. The increases were driven by
a higher number of units sold in 2022 and service revenue on installed units.
Selling and marketing expenses of $6.3
million in 2022 increased by $1.5 million, or 31%, from $4.8 million in 2021. The increase was primarily attributable to higher spending
on marketing activities, and an increase in headcount.
General and administrative expenses of
$5 million in 2022 increased by $0.4 million, or 9%, from $4.6 million in 2021, due primarily to higher compensation and bad debt expense.
Research and development expenses of $3.5
million in 2022 increased by $0.1 million, or 3%, from $3.4 million in 2021. The Company expects research and development expenses in
2023 to be generally consistent with 2022.
Other income (expense), net of $13.2 million
in 2022 increased by $13.3 million from $0.1 million in 2021 and is primarily attributable to the gain on sale of assets of $12.8 million
(See Note 2, Disposition, to the consolidated financial statements) and an interest income of $0.4 million.
Financial Condition
The Company’s cash, cash equivalent, and
investment balance increased to $25.5 million at December 31, 2022 from $14.5 million at December 31, 2021, primarily due to cash received
in investing activities.
There were no borrowings under the revolving line
of credit at December 31, 2022 and December 31, 2021.
The Company continued to take proactive steps
during 2022 to manage costs and preserve liquidity. These steps included maintaining borrowing availability as a precautionary measure
to preserve financial flexibility in view of the uncertainty in global markets. In 2022, the Company paid the outstanding balance ($51,021)
of its 2020 loan under the Small Business Administration Paycheck Protection Program (“PPP”) enabled by the Coronavirus Aid,
Relief, and Economic Security Act of 2020 (the “CARES Act”).
Liquidity and Capital Resources
Overview
In general terms, the liquidity is a measurement
of the Company’s ability to meet its cash needs. For the year ended December 31, 2022, funding was derived primarily from the sale
of the Sculptura assets for $15 million in cash . The Company believes that cash generated by operations and proceeds from maturing investments,
as well as borrowing capacity and access to capital resources are sufficient to meet operating capital and funding requirements for the
next 12 months from the date of this annual report. Based upon information available to us, we believe that the Bridge Bank has assumed
all contracts of SVB in effect at the time of its failure (including our line of credit) and that the Bridge Bank is expected to continue
to perform under those contracts. Accordingly, we have not yet determined whether to seek to replace the current line of credit with
the Bridge Bank. (For additional information, see “Risk Factors -- Sensus may be required to obtain additional funds in the
future, and these funds may not be available on acceptable terms or at all”). The Company’s liquidity position and capital
requirements may also be impacted by a number of factors, including the following:
● ability to generate and increase revenue;
● fluctuations in gross margins, operating expenses, and net results; and
The Company’s primary short-term capital
needs, which are subject to change, include expenditures related to:
● expansion of sales and marketing activities; and
● expansion of research and development activities.
Sensus’s management regularly evaluates
cash requirements for current operations, commitments, capital requirements, and business development transactions, and may seek to raise
additional funds for these purposes in the future. However, there can be no assurance that it will be able to raise such funds or the
terms on which such funds may be raised, if at all.
As of December 31, 2022, a substantial portion
of our cash was deposited with or invested through SVB. Subsequent to the closing of SVB in March 2023, we opened a new operating account
with a different bank, and we may open additional accounts from time to time in the future. However, in light of various factors, including
the actions taken by the FDIC following the closing of SVB, the amount deposited in the new bank account is not, and any amounts deposited
in or invested through other banks in the future are not expected to be, significant compared to the amounts deposited with and invested
through SVB (now the Bridge Bank).
21
Cash flows
The following table provides a summary of the
Company’s cash flows for the periods indicated:
For the Years Ended
December 31
Net cash provided by (used in):
Operating activities $ (1,412 ) $ (286 )
Financing activities (2,428 ) (231 )
Cash flows from operating activities
Net cash used in operating activities was $1.4
million for the year ended December 31, 2022, consisting of net income of $24.2 million partially offset by an increase in net operating
assets of $12.7 million, gain on sale of assets of $12.8 million and deferred income taxes of $1.7 million, and non-cash charges of $1.6
million. Non-cash charges consisted of depreciation and amortization, stock base compensation and product warranty charges. Net cash used
in operating activities was $0.3 million for the year ended December 31, 2021, consisting of net income of $4.1 million partially offset
by an increase in net operating assets of $6.1 million and non-cash charges of $1.7 million. Non-cash charges consisted of depreciation
and amortization, stock base compensation and product warranty charges.
Cash flows from investing activities
Net cash provided by investing activities was
$14.8 million during the year ended December 31, 2022, primarily due to proceeds from sale of assets, particularly the sale of the Sculptura
assets for $15 million in cash, partially offset by acquisition of property and equipment. Net cash provided by investing activities was
$0.1 million during the year ended December 31, 2021, primarily due to proceeds from sale of equipment, partially offset by acquisition
of property and equipment.
Cash flows from financing activities
Net cash used in financing activities was $2.4
million during the year ended December 31, 2022, primarily due to purchases of common stock and principal payments on our PPP loan, partially
offset by proceeds from exercises of stock options. Net cash used in financing activities was $0.2 million during the year ended December
31, 2021, primarily due to principal payments on our PPP loan.
Inflation
Increases in commodity and shipping prices and
energy and labor costs have resulted in inflationary pressures across various parts of our business and operations, including our partners
and supply chain. We continue to monitor the impact of inflation in order to minimize its effects on our product cost and sales.
Indebtedness
Please see Note 5, Debt, to the consolidated
financial statements.
Contractual Obligations and Commitments
Please see Note 8, Commitments and Contingencies,
to the consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue
and expense during the reporting periods. Management has identified certain accounting policies as critical to understanding the financial
condition and results of operations. For a detailed discussion on the application of these and other accounting policies, see the notes
to the financial statements included in this Annual Report on Form 10-K.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
22
FINANCIAL STATEMENTS OF SENSUS HEALTHCARE, INC.
CONTENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 688) F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3
Notes to the Consolidated Financial Statements F-7
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and Board of Directors of
Sensus
Healthcare, Inc.
Opinion
on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensus
Healthcare, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, stockholders’
equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion