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.
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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.
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, 2023, 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, including products or treatments developed by our significant
customers, 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’s customers, including
one U.S. customer accounting for a significant portion of our sales, are concentrated in the U.S., 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. (91% and 94% in the years ended December 31, 2023 and 2022, respectively). Additionally, a single customer
in the U.S. accounted for approximately 61% and 73% of revenues for the years ended December 31, 2023, and December 31, 2022, respectively.
Because of these concentrations, revenue could fluctuate significantly due to changes in economic conditions, competitive products (including
any developed by our significant customers), 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.
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.
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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.
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. Sensus may need to seek additional capital, as our existing financial resources including our revolving
line of credit (which restricts the ability to incur certain indebtedness or permit certain encumbrances on assets without the prior written
consent of the lender), may not allow us to conduct all of the activities that would be beneficial for future growth. If Sensus is unable
to raise funds on favorable terms, or at all, it 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.
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.
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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.
Pandemics, natural disasters, global climate
change, acts of terrorism and global conflicts may have a negative impact on our business and operations.
Pandemics (such as the COVID-19 pandemic), natural
disasters, global climate change, acts of terrorism, global conflicts or other similar events have in the past, and may in the future
have, a negative impact on our business and operations. These events impact us negatively to the extent that they result in disruptions
in the global and national economies and certain industries and geographies in which we operate. In addition, these or similar events
may impact economic growth negatively, which could have an adverse effect on our business and operations and may have other adverse effects
on us in ways that we are unable to predict.
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.
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.
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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 three 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.
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.
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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, 2021 totaled approximately $17.8 million. The Company reported net income of $0.5 million and
$24.2 million, respectively, during the years ended December 31, 2023 and 2022. The accumulated net loss was mainly related to the research
and development expenses in the early stage of the Company. The Company is continuously managing 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 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 and, so long as no default has occurred under the line of credit, the Company may make certain
redemptions of its common stock and pay certain tax distributions to its shareholders. 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, 2024.
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 1C. CYBERSECURITY
Cybersecurity Risk Management and Processes
Sensus is actively working towards the integration
of a cybersecurity risk management program into its comprehensive risk management framework to protect the confidentiality, integrity,
and availability of its critical systems and information.
Our cybersecurity risk management program is
being designed based on various cybersecurity frameworks, including National Institute of Standards and Technology and the Center for
Internet Security, as well as information security standards issued by the International Organization for Standardization, including
ISO 27001 and ISO 27002. The Company uses these frameworks and information
security standards as a guide to identify, assess, and management cybersecurity risks relevant to the business.
The
Company has implemented or is implementing the following key elements into the cybersecurity risk management program:
● Formalization and implementation of robust IT security policies;
● Conducting vulnerability assessments;
● Thorough review of the accuracy and completeness of user listings and access;
● Preservation of evidence related to system modifications; and
In
addition, the Company has a strategic plan, which encompasses the following key elements:
● Establishment of a dedicated cybersecurity governance committee;
● Standardization of cybersecurity incident response procedures and formats;
● Conducting penetration tests on a quarterly basis;
The
Company has not identified any risks from known cybersecurity threats and did not have any cybersecurity incidents that have materially
affected or are reasonably likely to materially affect the Company. For a discussion of whether and how any risks from cybersecurity
threats are reasonably likely to materially affect us, refer to Item 1A. Risk Factors – “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,”
which is incorporated by reference into this Item 1C.
Cybersecurity Governance
The Board of Directors
actively collaborates with management to supervise cybersecurity risks. The Chief Technology Officer (“CTO”), with over 10
years’ experience in cybersecurity, leads the Company’s overall cybersecurity function and monitors cybersecurity risks. The
CTO works with internal personnel and third-party consultants to design and implement the controls on the prevention, detection, mitigation,
and remediation of cybersecurity risks. The CTO maintains regular communication with the Board on matters related to cybersecurity and
provides updates to management on a quarterly basis. In the event of a cybersecurity incident, the Board is to be promptly notified.
Management considers
cybersecurity risk as part of its risk oversight function and is in the process of establishing a cybersecurity governance committee.
The cybersecurity governance committee will oversee the management’s implementation of the cybersecurity risk management program.
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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 7, 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 these 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 7, Commitments and Contingencies of the consolidated financial
statements.
Item 4. MINE SAFETY DISCLOSURE
Not applicable.
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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 7, 2024, 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. 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, 2023.
Purchases of Equity Securities by the Registrant
and Affiliated Purchasers
In August 2023, 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.
Item 6. RESERVED
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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, maintained profitability in 2022 and 2023, and seeks to maintain and increase profitability
in 2024 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 2024 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) 2023 2022
Operating expenses
Income (loss) from operations (382 ) 14,831
Other income:
Provision for income taxes 167 3,746
Net income per share – basic $ 0.03 $ 1.47
22
2023 Compared with 2022
Revenues of $24.4
million in 2023 decreased by $20.1 million, or 45%, from $44.5 million in 2022. The decrease was primarily driven by the lower number
of SRT units sold, as our customers continued to defer purchases of our product due to the inflationary pressures impacting the healthcare
market.
Cost of sales of $10.3 million in 2023
decreased by $4.6 million, or 31%, from $14.9 million in 2022. The decrease in cost of sales was primarily related to the decrease in
sales in 2023.
Gross profit of $14.1 million, or 57.6%
of revenue, in 2023 decreased by $15.5 million, or 52%, from $29.6 million, or 66.5% of revenue, in 2022. The decrease in gross profit
was primarily driven by the lower number of units sold and higher costs charged by vendors in 2023.
Selling and marketing expenses of $5.6
million in 2023 decreased by $0.7 million, or 11%, from $6.3 million in 2022. The decrease was primarily attributable to lower compensation
expense offset by an increase in tradeshow expenses.
General and administrative expenses of
$5.2 million in 2023 increased by $0.2 million, or 4%, from $5.0 million in 2022, due primarily to an increase in professional fees and
offset by a decrease in compensation expenses.
Research and development expenses of $3.7
million in 2023 increased by $0.2 million, or 6%, from $3.5 million in 2022. The increase was primarily due to expenses related to a project
to develop a drug delivery system for an aesthetic project during 2023.
Other income, net of $1.0 million in 2023
decreased by $12.2 million from $13.2 million in 2022 and is primarily attributable to the gain on sale of assets of $12.8 million in
2022 (See Note 2, Disposition, to the consolidated financial statements) and offset by an increase in interest income of $0.6 million
in 2023.
Cash and cash equivalents
at December 31, 2023 decreased $2.4 million from December 31, 2022. See Cash flows for details on the change in cash
and cash equivalents during the year ended December 31, 2023.
Accounts receivable,
net at December 31, 2023 decreased $6.7 million from December 31, 2022, primarily due to collections of receivables and the decrease in
sales during the year ended December 31, 2023.
Inventories at
December 31, 2023 increased $8.4 million from December 31, 2022, primarily due to an increase in completion of finished goods offset by
shipments of units sold during the year ended December 31, 2023.
Prepaid inventory
at December 31, 2023 decreased $3.3 million from December 31, 2022, primarily due to the completion of finished goods from inventory deposits
paid to a manufacturer during the year ended December 31, 2023.
Liabilities
There were no borrowings
under our revolving lines of credit at December 31, 2023 or December 31, 2022. See Note 4, Debt, to the consolidated financial
statements for further discussion.
23
Liquidity and Capital Resources
Overview
In general terms, liquidity is a measurement of the Company’s
ability to meet its cash needs. For the year ended December 31, 2023, funding was derived primarily from cash generated by the sale of
equipment to our customers in the ordinary course of business. The Company believes that proceeds from maturing cash equivalents, as well
as the Company’s borrowing capacity under its existing line of credit 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. Please see Note 4, Debt, to the consolidated
financial statements for a discussion regarding the Company’s revolving credit facility with Comerica Bank. The Company’s
liquidity position and capital requirements may be impacted by a number of factors, including the following:
● ability to generate and increase revenue; and
● fluctuations in gross margins, operating expenses, and net results.
The Company’s primary short-term capital
needs, which are subject to change, include expenditures related to:
● expansion of sales and marketing activities; and
● continuation 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.
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 $ (2,145 ) $ (1,412 )
Financing activities (40 ) (2,428 )
Cash flows from operating activities
Net cash used in operating activities was $2.1
million for the year ended December 31, 2023, consisting of net income of $485 thousand partially offset by a decrease in net operating
liabilities of $2.7 million and non-cash charges of $0.1 million. Non-cash charges consisted of depreciation and amortization, stock-based
compensation, and product warranty charges. 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 $12.9 million, gain on sale of assets
of $12.8 million, deferred income taxes of $1.7 million, and non-cash charges of $1.8 million. Non-cash charges consisted of depreciation
and amortization, stock-based compensation and product warranty charges.
Cash flows from investing activities
Net cash used in investing activities was $0.2
million during the year ended December 31, 2023, primarily consisting of cash used in the acquisition of property and equipment of $0.2
million. 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 the cash used in acquisition
of property and equipment of $0.2 million.
24
Cash flows from financing activities
Net cash used in financing activities was $40
thousand during the year ended December 31, 2023, primarily due to repurchases of common stock and withholding taxes on stock-based compensation,
partially offset by proceeds from exercises of stock options. 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.
Inflation
During 2023, increased commodity and shipping
prices and energy and labor costs resulted in inflationary pressures across various parts of our business and operations, including on
our customers, partners, and suppliers. We continue to monitor the impact of inflation and we are taking actions, such as ordering inventory
in advance, to minimize its effects on our product cost and sales.
Indebtedness
Please see Note 4, Debt, to the consolidated
financial statements.
Contractual Obligations and Commitments
Please see Note 7, Commitments and Contingencies,
to the consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of the 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 consolidated financial statements included in this Annual Report on Form 10-K.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not applicable.
25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
FINANCIAL STATEMENTS OF SENSUS HEALTHCARE,
INC.