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ASENSUS SURGICAL, INC. - Quarter Report: 2023 September (Form 10-Q)

asxc20230930_10q.htm
 

 

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________

FORM 10-Q

_________________________________________________

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

 

For the quarterly period ended September 30, 2023

 

OR

 

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

 

For the transition period from                      to

 

Commission File Number 0-19437

_________________________________________________

ASENSUS SURGICAL, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________

Delaware

 

11-2962080

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1 TW Alexander Drive, Suite 160, Durham, NC 27703

(Address of principal executive offices) (Zip Code)

 

Registrants telephone number, including area code: (919) 765-8400

 

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

 

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

 

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

 

Large accelerated filer

 

Accelerated Filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging Growth Company

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Common Stock
$0.001 par value per share

 

ASXC

 

NYSE American

 

The number of shares outstanding of the registrant’s common stock, as of November 10, 2023 was 264,316,749.

 

 

 

 

 

ASENSUS SURGICAL, INC.

 

TABLE OF CONTENTS FOR FORM 10-Q

 

PART I.

FINANCIAL INFORMATION

2
     

Item 1.

Financial Statements

2
 

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)

2
 

Condensed Consolidated Balance Sheets (unaudited)

3
 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

4
 

Condensed Consolidated Statements of Cash Flows (unaudited)

5
 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

24
     

PART II.

OTHER INFORMATION

24
     

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

26
     
 

SIGNATURES

27

 

 

 

PART 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Asensus Surgical, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(unaudited)

 

 
  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Revenue:

                

Product

 $301  $1,964  $892  $2,565 

Service

  295   335   779   1,067 

Lease

  493   264   1,475   991 

Total revenue

  1,089   2,563   3,146   4,623 
                 

Cost of revenue:

                

Product

  1,171   3,057   4,008   4,316 

Service

  581   365   1,849   1,506 

Lease

  1,117   982   3,033   2,752 

Total cost of revenue

  2,869   4,404   8,890   8,574 

Gross loss

  (1,780)  (1,841)  (5,744)  (3,951)
                 

Operating expenses:

                

Research and development

  9,290   6,741   28,409   20,422 

Sales and marketing

  4,138   3,615   13,140   10,936 

General and administrative

  4,571   4,853   15,163   15,378 

Amortization of intangible assets

  114   2,398   340   7,601 

Change in fair value of contingent consideration

  366   (416)  674   (1,168)

Impairment of property and equipment

  -   -   -   432 

Total operating expenses

  18,479   17,191   57,726   53,601 

Operating loss

  (20,259)  (19,032)  (63,470)  (57,552)
                 

Other income (expense), net

                

Change in fair value of warrant liabilities

  2,278   -   2,278   - 

Interest income

  406   291   1,276   806 

Interest expense

  -   (99)  -   (440)

Other expense, net

  (686)  (29)  (1,146)  (261)

Total other income, net

  1,998   163   2,408   105 
                 

Loss before income taxes

  (18,261)  (18,869)  (61,062)  (57,447)

Income tax expense

  57   55   136   224 

Net loss

  (18,318)  (18,924)  (61,198)  (57,671)
                 

Net loss per common share attributable to common stockholders - basic and diluted

 $(0.07) $(0.08) $(0.25) $(0.24)

Weighted average number of shares used in computing net loss per common share - basic and diluted

  256,184   236,713   244,744   236,373 
                 

Comprehensive loss:

                

Net loss

  (18,318)  (18,924)  (61,198)  (57,671)

Foreign currency translation (loss) gain

  (640)  (1,655)  84   (4,018)

Unrealized gain (loss) on available-for-sale investments

  67   86   473   (610)

Comprehensive loss

 $(18,891) $(20,493) $(60,641) $(62,299)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Asensus Surgical, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share data)

(unaudited)

 

 
  

September 30, 2023

  

December 31, 2022

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $21,669  $6,329 

Short-term investments, available-for-sale

  11,420   64,195 

Accounts receivable, net

  662   2,256 

Inventory, net

  6,683   8,284 

Prepaid expenses

  4,174   3,584 

Employee retention tax credit receivable

  -   554 

Other current assets

  1,324   1,671 

Total Current Assets

  45,932   86,873 
         

Restricted cash

  1,615   1,141 

Long-term investments, available-for-sale

  -   3,865 

Inventory, net of current portion

  5,640   5,469 

Property and equipment, net

  9,237   9,542 

Intellectual property, net

  1,278   1,576 

Deferred tax assets, net

  150   174 

Operating lease right-of-use assets, net

  5,004   4,950 

Other noncurrent assets

  1,871   2,463 

Total Assets

 $70,727  $116,053 
         

Liabilities and Stockholders' Equity

        

Current Liabilities:

        

Accounts payable

 $4,526  $3,348 

Accrued employee compensation and benefits

  4,967   4,508 

Accrued expenses and other current liabilities

  1,258   1,293 

Operating lease liabilities, current

  916   800 

Deferred revenue

  456   465 

Total Current Liabilities

  12,123   10,414 
         

Long-Term Liabilities:

        

Warrant liabilities

  4,842   - 

Contingent consideration

  1,930   1,256 

Operating lease liabilities, noncurrent

  4,579   4,738 

Total Liabilities

  23,474   16,408 
         

Stockholders' Equity:

        

Common stock $0.001 par value, 750,000,000 shares authorized at September 30, 2023 and December 31, 2022; 264,111,257 and 236,895,440 issued and outstanding at September 30, 2023 and December 31, 2022, respectively

  264   237 

Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at September 30, 2023 and December 31, 2022

  -   - 

Additional paid-in capital

  970,952   962,731 

Accumulated deficit

  (922,133)  (860,935)

Accumulated other comprehensive loss

  (1,830)  (2,388)

Total Stockholders' Equity

  47,253   99,645 

Total Liabilities and Stockholders' Equity

 $70,727  $116,053 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Asensus Surgical, Inc.

Condensed Consolidated Statements of Changes in Stockholders Equity

(in thousands)

(unaudited)

 

 
  

Common Stock

  

Treasury Stock

  

Additional Paid-

  

Accumulated

  

Accumulated Other Comprehensive Income

  

Total Stockholders'

 
  

Shares

  

Amount

  

Shares

  

Amount

  in Capital  Deficit  (Loss)  Equity 

Balance, December 31, 2022

  236,895  $237   -  $-  $962,731  $(860,935) $(2,388) $99,645 

Stock-based compensation

  -   -   -   -   1,916   -   -   1,916 

Exercise of stock options

  13   -   -   -   5   -   -   5 

Issuance of common stock related to vesting of restricted stock units

  2,434   2   -   -   -   -   -   2 

Shares withheld related to net share settlement of equity awards

  -   -   649   1   (490)  -   -   (489)

Cancellation of treasury stock

  -   -   (649)  (1)  -   -   -   (1)

Other comprehensive income

  -   -   -   -   -   -   857   857 

Net loss

  -   -   -   -   -   (22,218)  -   (22,218)

Balance, March 31, 2023

  239,342   239   -  $-  $964,162  $(883,153) $(1,531) $79,717 

Stock-based compensation

  -   -   -   -   1,978   -   -   1,978 

Issuance of common stock related to vesting of restricted stock units

  273   -   -   -   -   -   -   - 

Issuance of common stock, net of issuance costs

  355   1   -   -   195   -   -   196 

Other comprehensive income

  -   -   -   -   -   -   274   274 

Net loss

  -   -   -   -   -   (20,662)  -   (20,662)

Balance, June 30, 2023

  239,970  $240   -  $-  $966,335  $(903,815) $(1,257) $61,503 

Stock-based compensation

  -   -   -   -   2,019   -   -   2,019 

Issuance of common stock related to vesting of restricted stock units

  253   -   -   -   -   -   -   - 

Shares withheld related to net share settlement of equity awards

  -   -   8   -   (7)  -   -   - 
cancellation of treasury stock  -   -   (8)  -   -   -   -   - 

Issuance of common stock, net of issuance costs

  23,888   24   -   -   2,598   -   -   2,622 

Other comprehensive income

  -   -   -   -   -   -   (573)  (573)

Net loss

  -   -   -   -   -   (18,318)  -   (18,318)

Balance, September 30, 2023

  264,111  $264   -  $-  $970,952  $(922,133) $(1,830) $47,253 
                                 

Balance, December 31, 2021

  235,219  $235   -  $-  $954,649  $(785,374) $(264) $169,246 

Stock-based compensation

  -   -   -   -   2,245   -   -   2,245 

Exercise of stock options

  30   -   -   -   12   -   -   12 

Issuance of common stock related to vesting of restricted stock units

  1,166   1   -   -   -   -   -   1 

Shares withheld related to net share settlement of equity awards

  -   -   436   -   (349)  -   -   (349)

Cancellation of treasury stock

  -   -   (436)  -   -   -   -   - 

Other comprehensive loss

  -   -   -   -   -   -   (1,202)  (1,202)

Net loss

  -   -   -   -   -   (19,128)  -   (19,128)

Balance, March 31, 2022

  236,415  $236   -  $-  $956,557  $(804,502) $(1,466) $150,825 

Stock-based compensation

  -   -   -   -   2,083   -   -   2,083 

Exercise of stock options

  13   -   -   -   6   -   -   6 

Issuance of common stock related to vesting of restricted stock units

  192   1   -   -   -   -   -   1 

Other comprehensive loss

  -   -   -   -   -   -   (1,857)  (1,857)

Net loss

  -   -   -   -   -   (19,619)  -   (19,619)

Balance, June 30, 2022

  236,620  $237   -  $-  $958,646  $(824,121) $(3,323) $131,439 

Stock-based compensation

  -   -   -   -   2,033   -   -   2,033 

Issuance of common stock related to vesting of restricted stock units

  163   -   -   -   -   -   -   - 

Shares withheld related to net share settlement of equity awards

  -   -   7   -   (3)  -   -   (3)

Cancellation of treasury stock

  -   -   (7)  -   -   -   -   - 

Other comprehensive loss

  -   -   -   -   -   -   (1,569)  (1,569)

Net loss

  -   -   -   -   -   (18,924)  -   (18,924)

Balance, September 30, 2022

  236,783  $237   -  $-  $960,676  $(843,045) $(4,892) $112,976 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Asensus Surgical, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 
   

Nine Months Ended September 30,

 
   

2023

   

2022

 

Cash Flows from Operating Activities:

               

Net loss

  $ (61,198 )   $ (57,671 )

Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:

               

Depreciation

    2,405       2,481  

Amortization of intangible assets

    340       7,601  

Amortization of discounts and premiums on investments, net

    (454 )     556  

Stock-based compensation

    5,913       6,361  

Deferred tax expense

    136       224  

Bad debt expense

          9  

Change in inventory reserves

    297       386  

Property and equipment impairment

            432  

Loss on disposal of property and equipment

          97  

Change in fair value of warrant liabilities

    (2,278 )        

Change in fair value of contingent consideration

    674       (1,168 )
                 

Changes in operating assets and liabilities:

               

Accounts receivable

    1,587       (1,735 )

Inventory

    536       (535 )

Operating lease right-of-use assets

    (142 )     237  

Prepaid expenses

    (590 )     (693 )

Employee retention tax credit receivable

    554       164  

Other current and long-term assets

    310       (2,123 )

Accounts payable

    1,236       449  

Accrued employee compensation and benefits

    566       236  

Accrued expenses and other current liabilities

    (97 )     -  

Deferred revenue

    (5 )     (139 )

Operating lease liabilities

    (43 )     (53 )

Net cash and cash equivalents used in operating activities

    (50,253 )     (44,884 )
                 

Cash Flows from Investing Activities:

               

Purchase of available-for-sale investments

    (12,268 )     (25,588 )

Proceeds from maturities of available-for-sale investments

    69,835       67,702  

Purchase of property and equipment

    (488 )     (904 )

Net cash and cash equivalents provided by investing activities

    57,079       41,210  
                 

Cash Flows from Financing Activities:

               

Proceeds from issuance of common stock and warrants, net of issuance costs

    9,946       -  

Taxes paid related to net share settlement of vesting of restricted stock units

    (497 )     (350 )

Proceeds from exercise of stock options

    5       18  

Net cash and cash equivalents provided by (used in) financing activities

    9,454       (332 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (466 )     (300 )

Net increase (decrease) in cash, cash equivalents and restricted cash

    15,814       (4,306 )

Cash, cash equivalents and restricted cash, beginning of period

    7,470       19,283  

Cash, cash equivalents and restricted cash, end of period

  $ 23,284     $ 14,977  
                 

Supplemental Disclosure for Cash Flow Information

               

Cash paid for leases

  $ 1,067     $ 729  

Cash paid for taxes

 

230

    $ 79  
                 

Supplemental Schedule of Non-cash Investing and Financing Activities:

               

Transfer of inventory to property and equipment

  $ 2,227     $ 1,293  

Lease liabilities arising from obtaining right-of-use assets

  $ 796     $ 316  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Asensus Surgical, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

1.

Description of Business

 

Asensus Surgical, Inc. (the "Company") is a medical device company that is digitizing the interface between the surgeon and the patient to pioneer a new era of Performance-Guided Surgery™ by unlocking clinical intelligence for surgeons to enable consistently superior outcomes and a new standard of surgery. Based upon the foundations of digital laparoscopy and the Senhance® Surgical System, the Company is developing the LUNA™ Surgical System, a next generation robotic and instrument system as a foundation of its digital surgery solution. These systems will be powered by the Intelligent Surgical Unit™ (ISU™) to increase surgeon’s control and reduce variability of surgical outcomes. With the addition of machine vision, augmented intelligence, and deep learning capabilities throughout the surgical experience, the Company intends to holistically address the current clinical, cognitive, and economic shortcomings that drive surgical outcomes and value-based healthcare. The Company continues market development for and commercialization of the Senhance System, which digitizes laparoscopic minimally invasive surgery, or MIS. The Senhance System is the first and only digital, multi-port laparoscopic platform designed to maintain laparoscopic MIS standards while providing digital benefits such as haptic feedback, robotic precision, comfortable ergonomics, advanced instrumentation including 3mm microlaparoscopic instruments, 5mm articulating instruments, eye-sensing camera control and fully reusable standard instruments to help maintain per-procedure costs similar to traditional laparoscopy.

 

 

2.

Summary of Significant Accounting Policies

 

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The results reported in these unaudited interim condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Fiscal Year 2022 Form 10-K. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in the accompanying interim condensed consolidated financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, except as otherwise indicated, necessary for a fair statement of its financial position, results of operations, and cash flows of the Company for all periods presented.

 

Going Concern

The Company's condensed consolidated financial statements are prepared using U.S. GAAP applicable to a going concern basis of accounting, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of $922.1 million and working capital of $33.8 million as of September 30, 2023. The Company has not established sufficient sales revenues to cover its operating costs and requires additional capital to proceed with its operating plan. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable.

 

The Company will need to obtain additional financing to execute its business plan. Management's plans to obtain additional resources for the Company may include additional sales of equity, traditional financing, such as loans, entry into strategic collaborations, entry into an out-licensing arrangement or provision of additional distribution rights in some or all of its markets. However, management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to meet its existing obligations, and to continue as a going concern for one year from the date that these financial statements are issued. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

 

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, Asensus Surgical US, Inc., Asensus International, Inc., Asensus Surgical Italia S.r.l., Asensus Surgical Europe S.à r.l., Asensus Surgical Taiwan Ltd., Asensus Surgical Japan K.K., Asensus Surgical Israel Ltd., Asensus Surgical Netherlands B.V., and Asensus Surgical Canada, Inc. All inter-company accounts and transactions have been eliminated in consolidation.

 

6

 

Risk and Uncertainties

The Company is subject to risks similar to other similarly sized companies in the medical device industry. These risks include, without limitation: the historical lack of profitability; the Company’s ability to raise additional capital; its ability to successfully develop, clinically test, obtain regulatory clearance for and commercialize its products and products in development; negative impacts on the Company's operations caused by the hostilities in the Middle East, the COVID-19 pandemic and other geopolitical factors; the success of its market development efforts; the timing and outcome of the regulatory review process for its products in development; changes in the healthcare regulatory environments of the United States, the European Union, Japan, Taiwan, and other countries in which the Company operates or intends to operate; its ability to attract and retain key management, marketing and scientific personnel; its ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights; its ability to successfully transition from a research and development company to a marketing, sales and distribution company; competition in the market for robotic surgical devices; and its ability to identify and pursue development of additional products.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include impairment considerations for long-lived assets, fair value estimates related to contingent consideration, stock-based compensation expense, revenue recognition, short-term and long-term investments, excess and obsolete inventory reserves, inventory classification between current and non-current, measurement of lease liabilities and corresponding right-of-use (“ROU”) assets, measurement of warrant liabilities and deferred tax asset valuation allowances.

 

Significant Accounting Policies

With the exception of the Company’s warrant policy (please see next section), there have been no new or material changes to the significant accounting policies discussed in the Company’s audited financial statements and the notes thereto included in the Fiscal Year 2022 Form 10-K.

 

Warrant Liabilities

The Company’s warrants (see Note 12) are measured at fair value using a simulation model which takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock, its expected volatility, holding cost and the risk-free interest rate for the term of the warrant (see Note 4). The warrant liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss. The selection of the appropriate valuation model and the inputs and assumptions that are required to determine the valuation requires significant judgment and requires management to make estimates and assumptions that affect the reported amount of the related liability and reported amounts of the change in fair value. Actual results could differ from those estimates, and changes in these estimates are recorded when known.

 

Impact of Recently Issued Accounting Standards

The Company has evaluated issued Accounting Standards Updates (“ASUs”) not yet adopted and believes the adoption of these standards will not have a material impact on its consolidated financial statements.

 

 

3.

Revenue Recognition

 

The following table presents revenue disaggregated by type and geography:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

(In thousands)

 

2023

  

2022

  

2023

  

2022

 

U.S.

                

Systems

 $-  $-  $-  $- 

Instruments and accessories

  71   60   169   142 

Services

  77   75   228   225 

Leases

  40   46   130   211 

Total U.S. revenue

  188   181   527   578 
                 

Outside of U.S. ("OUS")

                

Systems

  -   1,227   -   1,228 

Instruments and accessories

  230   677   723   1,195 

Services

  218   260   551   842 

Leases

  453   218   1,345   780 

Total OUS revenue

  901   2,382   2,619   4,045 
                 

Total

                

Systems

  -   1,227   -   1,228 

Instruments and accessories

  301   737   892   1,337 

Services

  295   335   779   1,067 

Leases

  493   264   1,475   991 

Total revenue

 $1,089  $2,563  $3,146  $4,623 

 

7

 

Remaining Performance Obligations

The transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which the revenue has not yet been recognized. A significant portion of this amount relates to service obligations performed under the Company's system sales contracts that will be invoiced and recognized as revenue in future periods. The transaction price allocated to remaining performance obligations as of September 30, 2023 was $0.7 million, which is expected to be recognized over one to four years. 

 

Contract Assets and Liabilities

Deferred revenue for the periods presented was primarily related to service obligations, for which the service fees are billed up-front, generally annually. The associated deferred revenue is generally recognized ratably over the service period. The Company did not have any significant impairment losses on its contract assets (included in accounts receivable, net in the condensed consolidated balance sheets) for the periods presented.

 

Revenue recognized for the three months ended September 30, 2023 and 2022 that was included in the deferred revenue balance at the beginning of each reporting period was $0.2 million. Revenue recognized for the nine months ended September 30, 2023 and 2022 that was included in the deferred revenue balance at the beginning of each reporting period was $0.5 million and $0.7 million, respectively.

 

The following information summarizes the Company’s contract assets and liabilities:

 

  

September 30, 2023

  

December 31, 2022

  December 31, 2021 

(In thousands)

            

Contract Assets

 $54  $116  $91 

Deferred Revenue

 $456  $465  $543 

 

Senhance System Leasing

The Company enters into lease arrangements with certain qualified customers. Revenue related to arrangements including lease elements are allocated to lease and non-lease elements based on their relative standalone selling prices. Lease elements generally include a Senhance System, while non-lease elements generally include instruments, accessories, and services. For some lease arrangements, the customers are provided with the right to purchase the leased Senhance System at some point during and/or at the end of the lease term. In some arrangements, lease payments are based on the usage of the Senhance System. For the three and nine months ended September 30, 2023, and 2022, variable lease revenue related to usage-based arrangements was not material.

 

Accounts Receivable

Accounts receivable are recorded at net realizable value, which includes an allowance for expected credit losses. The allowance for expected credit losses is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The allowance for expected credit losses was $1.6 million as of September 30, 2023 and December 31, 2022. The Company recorded immaterial amounts for expected credit losses during the three and nine months ended September 30, 2023 and 2022.

 

The Company had four customers that accounted for 18%, 16%, 15% and 14%, respectively, of the Company’s net accounts receivable as of September 30, 2023. The Company had one customer that accounted for 69% of the Company’s net accounts receivable as of December 31, 2022.

 

 

4.

Fair Value Measurements

 

The Company records certain assets and liabilities at fair value. Accounting Standards Codification (“ASC”) 820 – Fair Value Measurement states that fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. As such, the fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tiered fair value hierarchy that prioritizes the inputs used in measuring fair value, is comprised of:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities;

Level 2 - Inputs other than Level 1, that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities;

Level 3 - Unobservable inputs that are supported by little or no market data, and that are significant to the fair value of the assets and liabilities.

 

8

 

As of September 30, 2023 and December 31, 2022, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

 

   

September 30, 2023

 

(In thousands)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Cash and cash equivalents (1)

  $ 21,669     $ -     $ -     $ 21,669  

Restricted cash

    1,615       -       -       1,615  

Short-term investments

    -       11,420       -       11,420  

Total assets

  $ 23,284     $ 11,420     $ -     $ 34,704  

Liabilities:

                               

Contingent consideration

  $ -     $ -     $ 1,930     $ 1,930  

Warrant liabilities

    -       -       4,842       4,842  

Total liabilities

  $ -     $ -     $ 6,772     $ 6,772  

 

(1) Includes investments that are readily convertible to cash with original maturities of 90 days or less.

 

   

December 31, 2022

 

(In thousands)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Cash and cash equivalents (1)

  $ 6,329     $ -     $ -     $ 6,329  

Restricted cash

    1,141       -       -       1,141  

Short-term investments

    -       64,195       -       64,195  

Long-term investments

    -       3,865       -       3,865  

Total assets

  $ 7,470     $ 68,060     $ -     $ 75,530  

Liabilities:

                               

Contingent consideration

  $ -     $ -     $ 1,256     $ 1,256  

Total liabilities

  $ -     $ -     $ 1,256     $ 1,256  

 

(1) Includes investments that are readily convertible to cash with original maturities of 90 days or less.

 

As of September 30, 2023 and December 31, 2022, carrying amounts reported on the Company’s balance sheet for cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, employee retention tax credit receivable, other current assets, accounts payable, accrued employee compensation and benefits, accrued expenses and other current liabilities, and deferred revenue approximate their respective fair value due to liquidity and short-term nature of these items.

 

At September 30, 2023, the Company’s financial liabilities consisted of contingent consideration and warrant liability:

 

Contingent Consideration

Contingent consideration represents a liability related to the Company’s 2015 acquisition of the Senhance System (the “Senhance Acquisition”). Adjustments associated with changes in fair value of contingent consideration are included in the Company’s condensed consolidated statements of operations and comprehensive loss. The following table summarizes changes in estimated fair value of the contingent consideration for the nine months ended September 30, 2023:

 

(In thousands)

 

Fair Value

 

Balance at December 31, 2022

  $ 1,256  

Change in fair value

    105  
Balance at March 31, 2023     1,361  
Change in fair value     203  
Balance at June 30, 2023     1,564  
Change in fair value     366  

Balance at September 30, 2023

  $ 1,930  

 

The following table presents quantitative information about the inputs and valuation methodologies used for fair value measurement of contingent consideration liability utilizing a Monte-Carlo simulation method as of September 30, 2023 and December 31, 2022:

 

   

Valuation

Methodology

 

Significant Unobservable

Inputs

 

September 30, 2023

   

December 31, 2022

 
                         

Contingent consideration

 

Probability weighted income approach

 

Milestone date

 

2032

   

2032

 
       

Revenue discount rate

    11.0%       16.5%  
       

Revenue volatility

    37.5%       45.0%  
       

EUR-to-USD exchange rate

    1.06       1.07  

 

9

 

Warrant Liabilities

During the three months ended September 30, 2023, the Company recorded warrant liabilities related to common stock warrants issued in the registered direct offering in July 2023 (for additional information about the offering, please refer to Note 12 -Equity Offerings).

 

Warrant liabilities were recorded at their initial estimated fair value. Adjustments associated with changes in fair value of the warrant liabilities are included in the Company’s condensed consolidated statements of operations and comprehensive loss. The following table summarizes changes in estimated fair value of the warrant liabilities for the warrants issued in July 2023 as of September 30, 2023:

 

(In thousands)

 

Fair Value

 

Balance at June 30, 2023

  $ -  

Issuance of warrants

    7,120  

Change in fair value

    (2,278 )

Balance at September 30, 2023

  $ 4,842  

 

The fair value of the warrant liabilities were estimated using the Black-Scholes option pricing model, which is based on unobservable inputs and is designated as Level 3 in the fair value hierarchy. The following table summarizes the assumptions used in determining fair value of warrant liabilities:

 

  

As of July 31,

2023

  

As of September 30,

2023

 

Expected volatility

  115%  115%

Risk-free interest rate

  4.2%  4.6%

Expected life (in years)

  5.0   4.8 

Expected dividend yield

  0%  0%

 

During the nine months ended September 30, 2023, there were no transfers of assets or liabilities between Level 1, Level 2, or Level 3 fair value categories.

 

 

5.

Investments, Available for Sale

 

The aggregate fair values of investment securities along with cumulative unrealized gains and losses determined on an individual investment security basis and included in accumulated other comprehensive loss in the condensed consolidated balance sheets are as follows:

 

  

September 30, 2023

 
                  

Balance Sheet Classification

 

(In thousands)

 

Amortized

Cost

  

Unrealized

Gain

  

Unrealized

Loss

  

Fair Value

  

Short-term investments

  

Long-term investments

 

Commercial Paper

 $-  $-  $-  $-  $-  $- 

Corporate Bonds

  4,960   -   (28)  4,932   4,932   - 

US Treasuries

  5,491   -   -   5,491   5,491   - 

U.S. Government Agencies

  1,000   -   (3)  997   997   - 

Total Investments

 $11,451  $-  $(31) $11,420  $11,420  $- 

 

  

December 31, 2022

 
                  

Balance Sheet Classification

 

(In thousands)

 

Amortized

Cost

  

Unrealized

Gain

  

Unrealized

Loss

  

Fair Value

  

Short-term investments

  

Long-term investments

 

Commercial Paper

 $12,364  $-  $(49) $12,315  $12,315  $- 

Corporate Bonds

  55,201   -   (447)  54,754   50,889   3,865 

U.S. Government Agencies

  999   -   (8)  991   991   - 

Total Investments

 $68,564  $-  $(504) $68,060  $64,195  $3,865 

 

As of September 30, 2023, contractual maturities of available-for-sale investments were one year or less. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations. There were no sales of investments or gross realized gains or losses for the three or nine months ended September 30, 2023 or 2022.

 

10

 

 

6.

Inventory

 

The components of inventory are as follows:

 

  

September 30, 2023

 

(In thousands)

 

Gross

Carrying

Amount

  

Reserve

Balance

  

Net Carrying

Amount

 

Finished goods

 $11,750  $(2,324) $9,426 

Raw materials

  5,308   (2,411)  2,897 

Total inventories

 $17,058  $(4,735) $12,323 
             

Current portion

 $7,380  $(697) $6,683 

Long-term portion

  9,678   (4,038)  5,640 

Total inventories

 $17,058  $(4,735) $12,323 

 

  

December 31, 2022

 

(In thousands)

 

Gross

Carrying

Amount

  

Reserve

Balance

  

Net Carrying

Amount

 

Finished goods

 $15,337  $(4,129) $11,208 

Raw materials

  4,718   (2,173)  2,545 

Total inventory

 $20,055  $(6,302) $13,753 
             

Current portion

 $9,399  $(1,115) $8,284 

Long-term portion

  10,656   (5,187)  5,469 

Total inventory

 $20,055  $(6,302) $13,753 

 

 

7.

Intellectual Property

 

The components of gross intellectual property, accumulated amortization, and net intellectual property are as follows:

 

  

September 30, 2023

 

(In thousands)

 

Gross

Carrying

Amount

  

Accumulated Amortization

  

Foreign

Currency

Translation

Impact

  

Net

Carrying

Amount

 

Developed technology

 $68,838  $(66,872) $(830) $1,136 

Technology and patents purchased

  400   (269)  11   142 

Total intellectual property

 $69,238  $(67,141) $(819) $1,278 

 

  

December 31, 2022

 

(In thousands)

 

Gross

Carrying

Amount

  

Accumulated Amortization

  

Foreign

Currency

Translation

Impact

  

Net

Carrying

Amount

 

Developed technology

 $68,838  $(66,562) $(874) $1,402 

Technology and patents purchased

  400   (239)  13   174 

Total intellectual property

 $69,238  $(66,801) $(861) $1,576 

 

The weighted average remaining useful life of the developed technology and technology and patents purchased was 3.4 years and 3.6 years, respectively, as of September 30, 2023. The weighted average remaining useful life of the developed technology and technology and patents purchased was 4.2 years and 4.3 years, respectively as of December 31, 2022.

 

11

 

 

8.

Leases

 

Lessee Information

Components of operating lease expense recorded in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss were as follows (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Long-term Operating

  $ 494     $ 408     $ 1,424     $ 1,192  

 

Supplemental balance sheet information related to operating leases was as follows:

 

   

September 30, 2023

   

December 31, 2022

 

Weighted-average remaining lease term (in years)

    6.1       6.8  

Weighted-average discount rate

    8.4 %     8.4 %

 

Maturities of operating lease obligations as of September 30, 2023 were as follows (in thousands):

 

Fiscal Year

       

Remainder of 2023

  $ 309  

2024

    1,329  

2025

    1,251  

2026

    936  

2027

    954  

2028 and thereafter

    2,227  

Total minimum lease payments

  $ 7,006  

Less: Amount of lease payments representing interest

    (1,511 )

Present value of future minimum lease payments

  $ 5,495  

 

 

9.

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following:

 

(In thousands)

 

September 30, 2023

   

December 31, 2022

 

Income and other taxes payable

  $ 694     $ 839  

Legal and professional fees

    374       275  

Royalties

    23       24  

Consulting services

    167       155  

Total accrued expenses and other current liabilities

  $ 1,258     $ 1,293  

 

 

10.

Income Taxes

 

Income taxes have been accounted for using the asset and liability method in accordance with ASC 740 “Income Taxes”. The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate method. The Company estimates an annual effective tax rate of (0.3)% for the year ending December 31, 2023. This rate does not include the impact of any discrete items. The Company’s effective tax rate for the three months ended September 30, 2023 and 2022 was (0.3)% and (0.3)%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2023 and 2022 was (0.2)% and (0.4)%, respectively.

 

The Company incurred losses for the three and nine months ended September 30, 2023, and is forecasting additional losses through the year, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2023. Due to the Company’s history of losses, there is not sufficient evidence to record a net deferred tax asset associated with the U.S., Luxembourg, Swiss, Italian, Taiwanese, and Canadian operations. Accordingly, a full valuation allowance has been recorded related to the net deferred tax assets in those jurisdictions.

 

The total tax expense during the three months ended September 30, 2023 and 2022 was approximately $57,000 and $55,000, respectively. The total tax expense during the nine months ended September 30, 2023 and 2022 was approximately $136,000 and $224,000, respectively.

 

At September 30, 2023 the Company had no unrecognized tax benefits that would affect the Company’s effective tax rate.

 

12

 

The Financial Accounting Standards Board (“FASB”) Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI as a period expense in the year the tax is incurred. The Company does not expect a GILTI inclusion for 2023; no GILTI tax has been recorded for the nine months ended September 30, 2023 or 2022, respectively.

 

 

11.

Stock-Based Compensation

 

Incentive Compensation Plan Information

 

On June 6, 2023, at the 2023 Annual Meeting of Stockholders, the Company’s stockholders voted to approve an amendment and restatement of the Company’s Incentive Compensation Plan (“the Plan”) to increase the number of shares reserved for issuance under the Plan by 22,000,000 shares. As a result of this amendment, shares authorized for issuance under the Plan increased to 54,072,307 shares.

 

Stock Options

 

The following table summarizes options outstanding as of September 30, 2023, as well as activity, including grants to employees and non-employees, for the nine months ended September 30, 2023:

 

  

Number of Shares

  

Weighted-Average Exercise Price

  

Weighted-Average Remaining Contractual Term (Years)

  

Aggregate

Intrinsic Value

(Millions)

 

Outstanding at December 31, 2022

  7,584,967  $4.22   5.31     

Granted

  3,047,615  $0.71         

Exercised

  (13,300) $0.38         

Cancelled

  (21,116) $25.79         

Forfeited

  (106) $15.86         

Outstanding at September 30, 2023

  10,598,060  $3.17   5.10  $- 

Vested or expected to vest at September 30, 2023

  10,132,754  $3.29   5.05  $- 

Exercisable at September 30, 2023

  5,591,291  $5.15   4.37  $- 

 

The fair value of options granted were estimated using the Black-Scholes-Merton option pricing model based on the assumptions in the table below:

 

  

Nine Months Ended September 30,

 
  

2023

  

2022

 

Expected volatility

  124% - 130%   128% - 133% 

Risk-free interest rate

  3.53% - 4.14%   1.25% - 2.98% 

Expected life (in years)

  3.8 - 4.5   3.8 - 4.5 

Expected dividend yield

  0%   0% 

Weighted average grant date fair value

  $0.59   $0.60 

 

Restricted Stock Units

 

The following table summarizes information about restricted stock units outstanding as of September 30, 2023, as well as activity, including performance restricted stock units, for the nine months ended September 30, 2023:

 

  

Number of Shares

  

Weighted-Average

Grant Date Fair

Value

 

Outstanding at December 31, 2022

  8,483,491  $1.04 

Granted

  8,482,315  $0.71 

Vested

  (3,623,411) $1.14 

Forfeited

  (539,448) $0.76 

Outstanding at September 30, 2023

  12,802,947  $0.82 

 

13

 

Performance-Based Restricted Stock Units

 

In 2023 and 2022, the Company granted performance-based restricted stock units. In particular, the number of shares earnable under the 2023 and 2022 awards is based on achieving certain operational targets by December 31, 2023 and October 1, 2023, respectively. These operational targets have been achieved for the awards granted in 2022, therefore the 2022 performance-based restricted stock units are fully earned and remain subject to three-year time-based vesting requirements. The Company has not yet achieved the operational targets required for the awards granted in 2023.

 

Stock-Based Compensation Expense

 

The following table summarizes non-cash stock-based compensation expense by award type for the three and nine months ended September 30, 2023 and 2022:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

(In thousands)

 

2023

  

2022

  

2023

  

2022

 

Stock options

 $552  $913  $1,808  $2,812 

Restricted stock units

  1,037   772   2,873   2,480 

Performance restricted stock units

  430   348   1,232   1,069 
  $2,019  $2,033  $5,913  $6,361 

 

As of September 30, 2023, the unrecognized stock-based compensation expense related to stock options was approximately $2.2 million, which is expected to be recognized over a weighted average period of 1.7 years. As of September 30, 2023, the unrecognized stock-based compensation expense related to unvested restricted stock units and performance restricted stock units was approximately $6.0 million, which is expected to be recognized over a weighted average period of 1.4 years.

 

 

12.

Equity Offerings

 

2022 At-The-Market Offering

 

On  March 18, 2022, the Company entered into a Controlled Equity Offering Sales Agreement (the “2022 Sales Agreement”) with Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc., collectively, “the Agents”. The Company commenced an at-the-market offering (the “2022 ATM Offering”) pursuant to which the Company could offer and sell, from time to time, at its option, shares of its common stock for an aggregate offering price of up to $100.0 million. The aggregate compensation payable to the Agents was 3.0% of the aggregate gross proceeds from each sale of the Company’s common stock.

 

The following table presents details about common stock issued pursuant to the 2022 ATM Offering (in thousands, except share and per share amounts):

 

  

Three Months Ended September 30, 2023

  

Nine Months Ended September 30, 2023

 

Shares of common stock issued

  78,600   433,672 

Average price per share

 $0.31  $0.52 

Gross proceeds

 $25  $227 

Commission paid to Agents

 $(1) $(7)

Net proceeds

 $24  $220 

 

2023 Registered Equity Offering

 

On July 27, 2023, the Company sold, in a registered direct offering, an aggregate of 23,809,524 shares of common stock, and warrants to purchase 23,809,524 of the Company’s common stock shares at an exercise price of $0.42 per common share (“the warrants”), for an aggregate purchase price of $10.0 million. The warrants are exercisable at any time on or after the date of issuance and will expire five years after the date of issuance. Based on the assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 – Distinguishing Liabilities from Equity and ASC 815 – Derivatives and Hedging, the Company determined that warrants did not meet the requirements for equity classification. Accordingly, the warrants were recorded as a liability on the Company’s balance sheet at their initial estimated fair value on the date of issuance. For additional information regarding the fair value of warrant liabilities, please refer to Note 4 – Fair Value Measurements.

 

The Company allocated $7.1 million of the aggregate proceeds to warrants based on their estimated fair value, with the residual amount of $2.9 million allocated to common stock. Offering related issuance costs were approximately $1.0 million and consisted primarily of placement agent’s fees and legal expenses. Issuance costs were allocated to common stock and warrant liability proportionally to the allocation of the purchase price. For the three and nine months ended September 30, 2023, the Company recorded $0.7 million of Other expense, net, in the condensed consolidated statement of operations related to issuance costs allocated to warrant liabilities.

 

14

 

 

13.

Basic and Diluted Net Loss per Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed giving effect to all potential dilutive common shares that were outstanding during the period. Potential dilutive common shares consist of incremental shares issuable upon exercise of stock options, restricted stock units, and warrants. No adjustments have been made to the basic weighted average outstanding common shares figures for the three and nine months ended September 30, 2023 or 2022 as the assumed exercise of outstanding options, warrants and restricted stock units would be anti-dilutive.

 

Potential common shares not included in the computation of diluted net loss per share are as follows:

 

   

September 30,

 
   

2023

   

2022

 

Stock options

    10,598,060       7,404,858  

Nonvested restricted stock units

    12,802,947       8,038,575  

Stock warrants

    24,830,500       1,021,076  

Total

    48,231,507       16,464,509  

 

 

14.

Commitments and Contingencies

 

License and Supply Agreements

The Company has purchase orders with various suppliers for certain tooling, supplies, contract engineering and research services. Commitments related to these agreements and purchase orders are as follows (in thousands):

 

Fiscal Year

    

2023 (remaining three months)

 $4,223 

2024

  1,543 

2025

  314 

2026

  303 

Total commitments

 $6,383 

 

 

15.

Segments and Geographic Areas

 

The Company operates in one business segment—the research, development, and sale of medical devices to improve minimally invasive surgery. The Company’s chief operating decision maker (determined to be the Chief Executive Officer) does not manage any part of the Company separately, and the allocation of resources and assessment of performance are based on the Company’s consolidated operating results.

 

The following table presents long-lived assets (which include property and equipment and operating lease assets) by geographic area:

 

  

September 30, 2023

  

December 31, 2022

 

U.S.

  37%  39%

EMEA

  57%  57%

Asia

  6%  4%

Total

  100%  100%

 

The following table presents revenue by geographic area based on the country in which the customer is based:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 
                 
                 

US

  17%  7%  17%  13%

EMEA

  64%  86%  62%  72%

Asia

  19%  7%  21%  15%

Total

  100%  100%  100%  100%

 

For the three months ended September 30, 2023, one customer accounted for more than 10% of revenue. For the nine months ended September 30, 2023, no customers accounted for more than 10% of revenue. For the three and nine months ended September 30, 2022, the Company had one customer who accounted for more than 10% of revenue.

 

 

16.

Related Party Transactions

 

In March 2018, Asensus Surgical Europe S.à r.l. entered into a Service Supply Agreement with 1 Med S.A. for certain regulatory consulting services. Andrea Biffi, a current member of the Company’s Board of Directors, owns a non-controlling interest in 1 Med S.A. Expenses under the Service Supply Agreement were approximately $2,000 and $67,000 for the three months ended September 30, 2023 and 2022, respectively, and $73,000 and $208,000 for the nine months ended September 30, 2023 and 2022, respectively.

 

15

 

 

FORWARD-LOOKING STATEMENTS

In addition to historical financial information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “in the event that,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements, including our historical lack of profitability; our ability to continue as a going concern within one year from the date that these financial statements are issued as a result of anticipated capital needs, in conjunction with past recurring losses and a significant accumulated deficit; our ability to grow placements and increase utilization of the Senhance System by customers, our ability to raise additional capital; our ability to successfully develop, clinically test, seek regulatory clearance for and commercialize our products and products in development; negative impacts on our operations caused by the hostilities in the Middle East, the COVID-19 pandemic and other geopolitical factors; the success of our market development efforts; the timing and outcome of the regulatory review process for our products; changes in the healthcare regulatory environments of the United States, the European Union, Japan, Taiwan and other countries in which we operate or intend to operate; our ability to attract and retain key management, marketing and scientific personnel; our ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights; our ability to successfully transition from a research and development company to a marketing, sales and distribution concern; and competition in the market for robotic and digital surgical devices;. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including, without limitation, the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Financial Statements,” “Notes to Condensed Consolidated Financial Statements “and “Risk Factors” in this report, as well as the disclosures made in the Asensus Surgical, Inc. Annual Report on Form 10-K for the year ended December 31, 2022 (the “Fiscal Year 2022 Form 10-K”), and other filings we make with the Securities and Exchange Commission (the “SEC”). Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law. References in this report to “we,” “our,” “us,” or the “Company” refer to Asensus Surgical, Inc., including its subsidiaries Asensus Surgical US, Inc., Asensus International, Inc., Asensus Surgical Italia S.r.l., Asensus Surgical Europe S.à r.l., Asensus Surgical Taiwan Ltd., Asensus Surgical Japan K.K., Asensus Surgical Israel Ltd., Asensus Surgical Netherlands B.V., and Asensus Surgical Canada, Inc.

 

Any disclosure in this report regarding the receipt of CE Mark or Section 510(k) clearance for any of the Company’s products does not mean or infer any endorsement of the Company’s products by any government agency including, without limitation, the U.S. Food and Drug Administration, or FDA.

 

Item 2.          Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed unaudited consolidated financial statements and the related notes to our condensed unaudited consolidated financial statements included in this report. The following discussion contains forward-looking statements. See cautionary note regarding Forward-Looking Statements above.

 

Overview

 

We are a medical device company that is digitizing the interface between the surgeon and patient to pioneer a new era of what we call “Performance-Guided Surgery™” by unlocking clinical intelligence for surgeons to enable consistently superior outcomes and a new standard of surgery. Based upon the foundations of digital laparoscopy and the Senhance® Surgical System, the Company is developing the LUNA™ Surgical System, a next generation robotic and instrument system as a foundation of its digital surgery solution. These systems will be powered by the Intelligent Surgical Unit™ (ISU™) to increase surgeon control and reduce surgical variability. With the addition of machine vision, augmented intelligence, and deep learning capabilities throughout the surgical experience, we intend to holistically address the current clinical, cognitive, and economic shortcomings that drive surgical outcomes and value-based healthcare.

 

 

Our strategy is to focus on the realization of Performance-Guided Surgery through the continued collection of surgical data via the ISU and Asensus Cloud leveraging the Senhance System and by other means of non-robotic laparoscopic surgery, while completing the design and development of the LUNA System and its capabilities.

 

We continue market development for and commercialization of the Senhance System, which digitizes laparoscopic minimally invasive surgery, or MIS. The Senhance System is the first and only digital, multi-port laparoscopic platform designed to maintain laparoscopic MIS standards while providing digital benefits such as haptic feedback, robotic precision, comfortable ergonomics, advanced instrumentation including 3mm microlaparoscopic instruments, 5mm articulating instruments, eye-sensing camera control and fully-reusable standard instruments to help maintain per-procedure costs similar to traditional laparoscopy.

 

The Senhance System is available for sale in Europe, the United States, Japan, Taiwan, Russia (to the extent lawful), and select other countries.

 

 

The Senhance System has a CE Mark in Europe for adult and pediatric laparoscopic abdominal and pelvic surgery, as well as limited thoracic surgeries excluding cardiac and vascular surgery.

 

 

In the United States, the Company has received 510(k) clearance from the FDA for use of the Senhance System in general laparoscopic surgical procedures and laparoscopic gynecologic surgery in a total of 31 indicated procedures, including benign and oncologic procedures, laparoscopic inguinal, hiatal and paraesophageal hernia, sleeve gastrectomy and laparoscopic cholecystectomy surgery.

 

 

In Japan, the Company has received regulatory approval and reimbursement for 124 laparoscopic procedures.

 

 

The Senhance System received its registration certificate by the Russian medical device regulatory agency, Roszdravnadzor, in December 2020, allowing for its sale and utilization throughout the Russian Federation.

 

We also enter into lease arrangements with certain qualified customers. For some lease arrangements, the customers are provided with the right to purchase the leased Senhance System during or at the end of the lease term ("Lease Buyout").

 

We received FDA clearance in March 2020 for our ISU. We believe it is the only FDA cleared device for machine vision technology in abdominal robotic surgery. On September 23, 2020, we announced the first surgical procedures successfully completed using the ISU. In January 2021, we received CE Mark for the ISU. In 2022, we received FDA clearance for advanced features of the ISU and received CE Mark for such enhancements in January 2023.

 

In February 2020, we received CE Mark for the Senhance System and related instruments for pediatric use indications in CE Mark territories. We received FDA clearance in March 2023 for the pediatric indication for the Senhance System. The expanded indication allows accessibility to more surgeons and patients, as well as expanding our potential market to include pediatric hospitals. We anticipate the robotic precision provided by the Senhance System, coupled with the already available 3mm instruments and haptic feedback will prove to be an effective tool in surgery with smaller patients.

 

In 2020, we obtained regulatory clearance for the Senhance ultrasonic system in both Taiwan and Japan. We also received clearance for the ISU in Japan.

 

On July 28, 2021, the Company announced that it received FDA clearance for 5mm diameter articulating instruments, offering better access to difficult-to-reach areas of the anatomy by providing two additional degrees of freedom. These instruments have previously received CE Mark for use in the EU.

 

On February 21, 2023, we held an investor day to describe our focus on developing a next generation robotic system we call the LUNA Surgical System and the ongoing developments in our Performance-Guided Surgery platform. Performance-Guided Surgery is comprised of three strategic pillars:

 

enhanced robotic precision and manipulation capabilities, via the Senhance System today and, when developed and approved, the LUNA System;

 

expanded intra-operative augmented intelligence clinical decision support guidance for the surgeon via the ISU; and

 

integration of cloud and big data to harness best practices across pre-, intra-, and post-operative settings, and make it available to surgeons around the world via the Asensus Cloud.

 

The Company believes that future outcomes of minimally invasive laparoscopic surgery will be enhanced through its combination of more advanced tools and robotic functionality, which are designed to: (i) empower surgeons with improved precision, dexterity and visualization; (ii) improve patient satisfaction and enable a desirable post-operative recovery; and (iii) provide a cost-effective robotic system, as compared to existing alternatives today, for a wide range of clinical indications.

 

 

From our inception, we devoted a substantial percentage of our resources to research and development and start-up activities, consisting primarily of product design and development, clinical studies, manufacturing, recruiting qualified personnel and raising capital. We are a data driven company that expects to continue to invest in research and development, market development, and generation and analysis of clinical evidence as we implement our strategy. As a result, we will need to generate significant revenue in order to achieve profitability. We expect to continue to invest in research and development and market development as we implement our strategy.

 

Since inception, we have incurred substantial losses from operations and had negative cash flows from operating activities. As of September 30, 2023, we had an accumulated deficit of $922.1 million, and there is substantial doubt about our ability to continue as a going concern. We operate in one business segment.

 

Recent Financing Transactions

 

2022 At-The-Market Offering

 

On March 18, 2022, the Company entered a Controlled Equity Offering Sales Agreement (the “2022 Sales Agreement”), with Cantor Fitzgerald & Co., and Oppenheimer & Co. Inc., collectively, “the Agents”. The Company commenced an at-the-market offering (the “2022 ATM Offering”) pursuant to which the Company could offer and sell, from time to time, at its option, shares of its common stock for an aggregate offering price of up to $100.0 million. During the nine months ended September 30, 2023, the Company sold 433,672 shares of common stock for aggregate net proceeds of $0.2 million.

 

2023 Registered Direct Offering

 

On July 27, 2023, the Company sold, in a registered direct offering, an aggregate of 23,809,524 shares of common stock, and warrants to purchase 23,809,524 of the Company’s common stock shares at an exercise price of $0.42 per common share (“the warrants”), for an aggregate purchase price of $10.0 million. Warrants are exercisable at any time on or after the date of issuance and will expire five years after the date of issuance. Based on the assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815, the Company determined that warrants did not meet the requirements for equity classification. Accordingly, warrants were recorded as a liability on the Company’s balance sheet at their initial estimated fair value on the date of issuance. For additional information regarding the fair value of warrant liability, please refer to Note 4 – Fair Value Measurements.

 

The Company allocated $7.1 million of the aggregate proceeds to warrants based on their estimated fair value, with the residual amount of $2.9 million allocated to common stock. Offering related issuance costs were approximately $1.0 million and consisted primarily of placement agent’s fees and legal expenses. Issuance costs were allocated to common stock and warrant liability proportionally to the allocation of the purchase price. For the three and nine months ended September 30, 2023, the Company recorded $0.7 million of other expense in the statement of operations related to issuance costs allocated to warrant liability.

 

Results of Operations - Comparison of Three Months Ended September 30, 2023 and 2022

 

Revenue

In the third quarter of 2023, our revenue consisted of ongoing Senhance Systems’ leasing payments, sales of instruments and accessories, and services revenue for Senhance Systems sold in Europe, Asia, and the U.S. in prior periods. In the third quarter of 2022, our revenue consisted of the sale of a Senhance System, ongoing Senhance Systems’ leasing payments, sales of instruments and accessories, and services revenue for Senhance Systems sold or placed in Europe, Asia, and the U.S. in prior periods.

 

Product revenue for the three months ended September 30, 2023 was $0.3 million compared to $2.0 million for the three months ended September 30, 2022. The decrease was primarily due to the prior period sale of a Senhance System, and more instruments and accessories sold outside of leased Senhance Systems in the third quarter of 2022.

 

Service revenue for the three months ended September 30, 2023 and 2022 remained consistent at $0.3 million.

 

Lease revenue for the three months ended September 30, 2023 increased to $0.5 million compared to $0.3 million for the three months ended September 30, 2022. The $0.2 million increase relates to an increase in the number of lease placements.

 

Cost of Revenue

Cost of revenue consists of contract manufacturing, materials, labor, and manufacturing overhead incurred internally to produce the products. Shipping and handling costs incurred by the Company are included in cost of revenue. We expense all inventory excess and obsolescence provisions as cost of revenue. The manufacturing overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment depreciation and operations supervision and management.

 

 

Product cost for the three months ended September 30, 2023 were $1.2 million as compared to $3.1 million for the three months ended September 30, 2022. The $1.9 million decrease primarily consists of a $1.5 million prior period inventory obsolescence charge and direct cost related to a prior period system sale of $0.6 million, partially offset by an increase  in personnel costs of $0.2 million.

 

Service cost for the three months ended September 30, 2023 was $0.6 million as compared to $0.4 million for the three months ended September 30, 2022, primarily as a result of increased personnel costs of $0.1 million and other costs of $0.1 million.

 

Lease cost for the three months ended September 30, 2023 was $1.1 million as compared to $1.0 million for the three months ended September 30, 2022. The $0.1 million increase was driven by an increase in the number of lease placements.

 

Research and Development

Research and development, or R&D, expenses primarily consist of engineering, product development and regulatory expenses incurred in the design, development, testing and enhancement of our products and legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products. In future periods, we expect R&D expenses to continue to substantially increase as we invest in the LUNA System and our digital laparoscopy platform. R&D expenses are expensed as incurred.

 

R&D expenses for the three months ended September 30, 2023 increased 39% to $9.3 million as compared to $6.7 million for the three months ended September 30, 2022 as we continue to invest in basic research, clinical evaluations, and product development in the areas of robotics and digital technologies supporting the LUNA System, the ISU and our digital laparoscopy platform. All activities are part of our effort to build the future for Performance-Guided Surgery. The $2.6 million increase primarily relates to increased expenses related to contract engineering services, consulting, and other outside services of $1.0 million, increased personnel costs of $0.7 million, increased supplies costs of $0.3 million, increased IT costs of $0.3 million and increases in other expenses of $0.3 million.

 

Sales and Marketing

Sales and marketing expenses include costs for sales and marketing and clinical support personnel, travel, demonstration product, market development, physician training, tradeshows, marketing clinical evaluations and consulting expenses.

 

Sales and marketing expenses for the three months ended September 30, 2023 increased 14% to $4.1 million compared to $3.6 million for the three months ended September 30, 2022. The $0.5 million increase was primarily related to $0.6 million increase in employee-related costs, and other costs of $0.2 million, partially offset by savings in consulting and freight of $0.3 million.

 

General and Administrative

General and administrative expenses consist of personnel costs related to the executive, finance, legal, IT and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs, and general corporate expenses.

 

General and administrative expenses for the three months ended September 30, 2023 decreased by 6% to $4.6 million compared to $4.9 million, primarily due to a reduction in IT and facility expenses of $0.3 million.

 

Amortization of Intangible Assets

Amortization of intangible assets for the three months ended September 30, 2023 decreased to $0.1 million compared to $2.4 million for the three months ended September 30, 2022. The $2.3 million decrease is primarily related to the reduction in the amortizable intangible assets base as two developed technologies intangible assets were fully amortized during the year ended December 31, 2022.

 

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration in connection with the Senhance Acquisition was a $0.4 million increase for the three months ended September 30, 2023 compared to a $0.4 million decrease for the three months ended September 30, 2022. The increase was primarily due to changes in the market assumptions utilized in the valuation of fair value of the contingent consideration, including the Company’s forecast of future product revenue and the discount rate.

 

 

Other Income, net

Other income for the three months ended September 30, 2023 increased to $2.0 million compared to income of $0.2 million for the three months ended September 30, 2022. The $1.8 million increase primarily relates to unrealized gain on the remeasurement of the fair value of warrant liabilities partially offset by the transaction costs related to the issuance of the warrant liabilities.

 

Income Tax Expense

The Company recorded $0.1 million income tax expense for each of the three months ended September 30, 2023 and September 30, 2022.

 

 

Results of Operations Comparison of Nine Months Ended September 30, 2023 and 2022

 

Revenue

In the nine months ended September 30, 2023 and 2022, our revenue consisted of ongoing Senhance Systems’ leasing payments, sales of instruments and accessories, and services revenue for Senhance Systems sold in Europe, Asia, and the U.S. in prior periods. 2022 revenue also included revenue from the sale of one system.

 

Product revenue for the nine months ended September 30, 2023 was $0.9 million, as compared to $2.6 million for the nine months ended September 30, 2022. The $1.7 million decrease primarily consists of the non-recurrence of both a prior period Senhance system sale.

 

Service revenue for the nine months ended September 30, 2023 was $0.8 million compared to $1.1 million for the nine months ended September 30, 2022. The $0.3 million decrease was due to a decrease in the number of Senhance Systems under service contracts.

 

Lease revenue for the nine months ended September 30, 2023 increased to $1.5 million compared to $1.0 million for the nine months ended September 30, 2022. The $0.5 million increase was the result of additional lease placements in the first nine months of 2023.

 

Cost of Revenue

Cost of revenue consists of contract manufacturing, materials, labor, and manufacturing overhead incurred internally to produce the products. Shipping and handling costs incurred by us are included in cost of revenue. We expense all inventory excess and obsolescence provisions as cost of revenue. The manufacturing overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment depreciation and operations supervision and management.

 

Product cost for the nine months ended September 30, 2023 were $4.0 million compared to $4.3 million for the nine months ended September 30, 2022. The $0.3 million decrease primarily consists of a $1.5 million prior period inventory obsolescence charge and direct costs of a prior period system sale of $0.6 million, partially offset by an increase in supply costs of $1.0 million, an increase in personnel costs of $0.5 million, an increase in freight costs of $0.2 million and $0.1 million of other expense.

 

Service cost for the nine months ended September 30, 2023 were $1.8 million compared to $1.5 million for the nine months ended September 30, 2022. The $0.3 million increase primarily relates to increases in personnel costs.

 

Lease cost for the nine months ended September 30, 2023 and 2022 was $3.0 million and $2.8 million respectively.

 

Research and Development

R&D expenses primarily consist of engineering, product development and regulatory expenses incurred in the design, development, testing and enhancement of our products and legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products. In future periods, we expect R&D expenses to continue to substantially increase as we invest in the LUNA System and our digital laparoscopy platform. R&D expenses are expensed as incurred.

 

R&D expenses for the nine months ended September 30, 2023 increased 39% to $28.4 million as compared to $20.4 million for the nine months ended September 30, 2022 as we continue to invest in basic research, clinical evaluations, and product development in the areas of robotics and digital technologies supporting the LUNA System and our digital laparoscopy platform. All activities are part of our effort to build the future for Performance-Guided Surgery. The $8.0 million increase primarily relates to increased contract engineering services, consulting, and other outside services of $3.8 million, increased personnel costs of $1.9 million, increased IT costs of $1.2 million and increased supplies costs of $1.1 million.

 

 

Sales and Marketing

Sales and marketing expenses include costs for sales, marketing and clinical personnel, travel, demonstration product, market development, physician training, tradeshows, marketing clinical studies and consulting expenses.

 

Sales and marketing expenses for the nine months ended September 30, 2023 increased 20% to $13.1 million compared to $10.9 million for the nine months ended September 30, 2022. The $2.2 million increase was primarily related to $2.0 million of increased employee-related costs and $0.4 million of IT and facility related costs, partially offset by savings in freight and other expenses of $0.2 million.

 

General and Administrative

General and administrative expenses consist of personnel costs related to the executive, finance, legal, IT and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs, and general corporate expenses.

 

General and administrative expenses for the nine months ended September 30, 2023 decreased slightly to $15.2 million compared to $15.4 million for the nine months ended September 30, 2022. The $0.2 million decrease was related to a $0.2 million reduction in employee-related costs.

 

Amortization of Intangible Assets

Amortization of intangible assets for the nine months ended September 30, 2023 was $0.3 million compared to $7.6 million for the nine months ended September 30, 2022. The $7.3 million decrease was primarily related to two developed technologies intangible assets that were fully amortized during the year ended December 31, 2022.

 

Change in Fair Value of Contingent Consideration

A $0.7 million increase in fair value associated with contingent consideration in connection with the Senhance Acquisition was recognized for the nine months ended September 30, 2023 compared to a $1.2 million reduction in fair value for the nine months ended September 30, 2022. The change in fair value was primarily due to changes in market assumptions and the discount rate utilized.

 

Impairment of Property and Equipment

During the nine months ended September 30, 2022, the Company recorded an impairment charge of $0.4 million to reduce the carrying value of property and equipment to its estimated fair value. The property and equipment is associated with operating leases that did not elect to renew their agreements. No impairment charge was recognized for the nine months ended September 30, 2023.

 

Other Income, net

Other income for the nine months ended September 30, 2023 was $2.4 million compared to $0.1 million for the nine months ended September 30, 2022. The change was primarily related to a $2.3 million increasein the fair value of warrant liabilities recorded during the nine months ended September 30, 2023, a $0.5 million increase in interest income and a decrease in interest expense of $0.4 million partially offset by $0.9 million increase in other expenses.

 

Income Tax Expense

The Company recognized $0.1 million income tax expense for the nine months ended September 30, 2023, compared to $0.2 million income tax expense for the nine months ended September 30, 2022.

 

Liquidity and Capital Resources

 

Going Concern

The Company’s consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of $922.1 million and working capital of $33.8 million as of September 30, 2023. The Company has not established sufficient revenues to cover its operating costs and will require additional capital to continue as a going concern. As of September 30, 2023, the Company had cash, cash equivalents, and short-term investments, excluding restricted cash, of approximately $33.1 million. We believe that our existing cash, cash equivalents, and short-term investments, together with cash received from product, service, and lease sales will be sufficient to meet our anticipated cash needs into the late second quarter of 2024.

 

 

The Company will need to obtain additional financing to proceed with its business plan. Management's plans to obtain additional resources for the Company may include additional sales of equity, traditional financing, such as loans, entry into a strategic collaboration, entry into an out-licensing arrangement or provision of additional distribution rights in some or all of our markets. The Company is also seeking to reduce its costs while maintaining the implementation of its strategic plan. However, management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans. If sufficient funds are not received on a timely basis, the Company would then need to reduce costs further and/or pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that these financial statements are issued. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

 

The Company is subject to risks similar to other similarly sized companies in the medical device industry. These risks include, without limitation: the historical lack of profitability; the Company’s ability to grow its placements and increase utilization of the Senhance System by customers, the Company’s ability to raise additional capital; its ability to successfully develop, clinically test, obtain regulatory clearance for and commercialize its products and products in development; negative impacts on the Company's operations caused by the hostilities in the Middle East, the COVID-19 pandemic and other geopolitical factors; the success of its market development efforts; the timing and outcome of the regulatory review process for its products; changes in the healthcare regulatory environments of the United States, the European Union, Japan, Taiwan and other countries in which the Company operates or intends to operate; its ability to attract and retain key management, marketing and scientific personnel; its ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights; its ability to successfully transition from a research and development company to a marketing, sales and distribution concern; competition in the market for robotic and digital surgical devices; and its ability to identify and pursue development of additional products.

 

Sources of Liquidity

Our principal sources of liquidity to date have been cash proceeds from issuance of common stock pursuant to public offerings, incurrence of debt and proceeds from sales and maturities of investments.

 

Our cash flows for the nine months ended September 30, 2023 and 2022 were follows:

 

   

Nine Months Ended September 30,

 

(Unaudited, in millions)

 

2023

   

2022

 

Net cash (used in) provided by

               

Operating activities

  $ (50.2 )   $ (44.9 )

Investing activities

    57.1       41.2  

Financing activities

    9.4       (0.3 )

Effect of exchange rate changes on cash and cash equivalents

    (0.5 )     (0.3 )

Net increase (decrease) in cash, cash equivalents and restricted cash

  $ 15.8     $ (4.3 )

 

Operating Activities

For the nine months ended September 30, 2023, cash used in operating activities of $50.2 million consisted of a net loss of $61.2 million, offset by changes non-cash items of $7.0 million and changes in operating assets and liabilities of $4.0 million. The non-cash items primarily consisted of $5.9 million of stock-based compensation expense, $2.4 million of depreciation, $0.3 million of amortization expense, $0.7 million of change in fair value of contingent consideration, $0.3 million change in inventory reserve and deferred tax expense of $0.1 million, partially offset by $2.3 million change in the fair value of warrant liabilities and $0.5 million in accretion of discounts and premiums on investments. The increase in cash from changes in operating assets and liabilities primarily relates to a $1.6 million decrease in accounts receivable, a $1.2 million increase in accounts payable, a decrease in other current and long term assets of $0.3 million, a decrease in inventory of $0.5 million, a $0.6 million reduction in the employee retention tax credit receivable and a $0.6 million increase in the accrued employee compensation, partially offset by a $0.6 million increase in prepaid expenses, an increase in operating lease right of use assets of $0.1 million and a decrease of $0.1 million in accrued expenses and other current liabilities.

 

For the nine months ended September 30, 2022, cash used in operating activities of $44.9 million consisted of a net loss of $57.7 million, changes in operating assets and liabilities of $4.2 million, offset by non-cash items of $17.0 million. The non-cash items primarily consisted of $7.6 million of amortization of intangible assets, $6.4 million of stock-based compensation expense, $2.5 million of depreciation, $0.6 million of net amortization of discounts and premiums on investments, $0.4 million in impairment of property and equipment, $0.2 million deferred tax expense, $0.4 million change in inventory reserves, offset by $1.2 million of change in fair value of contingent consideration. The decrease in cash from changes in operating assets and liabilities primarily relates to a $2.1 million increase in other current and long-term assets, $1.7 million increase in accounts receivable, $0.5 increase in inventory net of transfers to property and equipment, $0.7 million increase in prepaid expenses, $0.1 million decrease in deferred revenue, $0.1 million decrease in operating lease liabilities, offset by $0.4 million increase in accounts payable, $0.2 million decrease in operating lease right-of-use assets, $0.2 million increase in accrued expenses, and $0.2 million decrease in employee retention tax credit receivable.

 

 

Investing Activities

For the nine months ended September 30, 2023, net cash provided by investing activities was $57.1 million. This amount consists of $69.8 million of proceeds from maturities of available-for-sale investments, offset by $12.3 million of purchases of available-for-sale investments and $0.5 million purchases of property and equipment.

 

For the nine months ended September 30, 2022, net cash provided by investing activities was $41.2 million. This amount consists of $67.7 million of proceeds from maturities of available-for-sale investments, offset by $25.6 million of purchases of available-for-sale investments and $0.9 million purchases of property and equipment.

 

Financing Activities

For the nine months ended September 30, 2023, net cash provided by financing activities was $9.4 million, primarily related to proceeds from issuance of common stock and warrants of $9.9 million, partially offset by $0.5 million in taxes paid for the net share settlement of vesting of restricted stock units.

 

For the nine months ended September 30, 2022, net cash used in financing activities was $0.3 million, related to taxes paid for the net share settlement of vesting of restricted stock units.

 

Operating Capital and Capital Expenditure Requirements

 

We intend to spend substantial amounts on research and development activities, including product development, regulatory and compliance, and clinical studies in support of the development of the LUNA System and our digital solutions platform. We intend to use financing opportunities strategically to continue to strengthen our financial position.

 

Cash and cash equivalents held by our foreign subsidiaries totaled $1.6 million as of September 30, 2023, including restricted cash. We do not intend or currently foresee a need to repatriate cash and cash equivalents held by our foreign subsidiaries. If these funds are needed in the United States, we believe that the potential U.S. tax impact to repatriate these funds would be immaterial.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results of operations set forth above under the headings “Results of Operations” and “Liquidity and Capital Resources” have been prepared in accordance with U.S. GAAP and should be read in conjunction with our consolidated financial statements and notes thereto appearing in this Form 10-Q and in the Fiscal Year 2022 Form 10-K. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting estimates, including identifiable intangible assets, contingent consideration, stock-based compensation, inventory, warrants, revenue recognition and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. A more detailed discussion on the application of these and other accounting policies can be found in Note 2 in the Notes to the condensed consolidated Financial Statements in this Form 10-Q. Actual results may differ from these estimates under different assumptions and conditions. With the exception of our policy on warrants, there have been no new or material changes to the critical accounting estimates discussed in our Fiscal Year 2022 Form 10-K, that are of significance, or potential significance, to us.

 

While all accounting policies impact the consolidated financial statements, certain policies may be viewed as critical. Critical accounting estimates are those that are both most important to the portrayal of financial condition and results of operations and that require management’s most subjective or complex judgments and estimates. Our management believes the policies that fall within this category are the estimates on accounting for identifiable intangible assets, contingent consideration, stock-based compensation, inventory, warrants, revenue recognition and income taxes.

 

Item 3.         Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to changes in foreign currency exchange rates. Operations outside of the United States accounted for 83% and 87% of revenue for the nine months ended September 30, 2023 and 2022, respectively, and are concentrated principally in Europe. We translate the revenue and expenses of our foreign operations using average exchange rates prevailing during the period. The effect of a 10% change in the average foreign currency exchange rates among the U.S. dollar versus the Euro for the nine months ended September 30, 2023, would result in revenue changing by $0.3 million. This change would not be material to our cash flows and our results of operations.

 

 

Item 4.         Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective due to the material weakness in internal control over financial reporting, described below.

 

Changes in Internal Controls Over Financial Reporting

 

Other than the remediation efforts described below, there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Material Weakness in Internal Control over Financial Reporting

 

During the year ended December 31, 2022, management identified a deficiency constituting a material weakness related to the design and implementation of information technology general controls (“ITGCs”) related to the implementation of our new global enterprise resource planning system (“ERP”) utilized in the preparation of our consolidated financial statements. Specifically, we did not design and maintain user access controls to adequately restrict user and privileged access to the financial application and data to appropriate Company personnel.

 

The material weakness identified above did not result in any identified misstatements to our consolidated interim financial statements, and our management has concluded that the consolidated financial statements present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with U.S. GAAP.

 

Remediation Efforts

 

We have commenced measures to remediate the identified material weakness. Management has been and will continue designing and implementing an improved process for requesting, authorizing, and reviewing user access to key systems which impact our financial reporting, including identifying access to roles where manual business process controls may be required. This implementation will include the addition of detection controls which will include the review of user access and activity logs related to systems that were accessed. We will also enhance the training of our personnel regarding their roles and responsibilities within the information technology general controls objectives and activities. The material weakness will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time for management to conclude, through testing, that the controls are operating effectively. The material weakness is not considered remediated as of September 30, 2023 as remediation efforts are ongoing.

 

 

PART II. OTHER INFORMATION

 

Item 1          Legal Proceedings.

 

None.

 

Item 1A         Risk Factors.

 

Reference is made to the Risk Factors included in our Fiscal Year 2022 Form 10-K. Other than the risk factors below, there have been no material changes to our risk factors from those disclosed under “Risk Factors” in Part I, Item 1A of our Fiscal Year 2022 Form 10-K.

 

Our recurring operating losses and negative cash flows raise substantial doubt about our ability to continue as a going concern.  We will need additional financing to execute our business plan and fund our operations. 

Since inception, and continuing during the nine months ended September 30, 2023, we have experienced recurring operating losses and negative cash flows and we expect to continue to generate operating losses and consume significant cash resources in the foreseeable future, particularly as we increase our research and development spending as we develop and seek regulatory approval for the LUNA System and enhancements to our digital surgery and Performance-Guided Surgery product offerings. Management has concluded that substantial doubt exists about our ability to continue as a going concern as a result of anticipated capital needs in conjunction with past recurring losses and an accumulated deficit.  As of September 30, 2023, our accumulated deficit was $922.1 million and our working capital was $33.8 million.  We believe that our existing cash, cash equivalents and short-term investments, together with cash received from product, service, and lease sales will be sufficient to meet our anticipated cash needs into the late second quarter of 2024.  However, we will need additional financing to implement our next generation products strategy.  Management's plans to obtain additional resources for the Company may include additional sales of equity, traditional financing, such as loans, entry into strategic collaborations, entry into an out-licensing arrangement or provision of additional distribution rights in some or all of its markets. However, management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans. If sufficient funds are not received on a timely basis, the Company would then need to reduce costs further and/or pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection. Substantial doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock and we may have a more difficult time obtaining financing.

 

 

The conflict in Israel and Gaza is likely to have a material adverse impact on us and our employees.

We have an office and valued employees who live and work in Israel. The current conflict in Israel could have a material adverse impact on our business and operations. Our digital surgery software development efforts are centered in our Israeli subsidiary, and the conflict could cause unexpected delays in our development efforts. Some of our employees have been called to active military duty. In addition, a third-party manufacturer of our ISU is in Israel, which could negatively impact our ability to meet our supply obligations, and export of such ISUs, and other supply management activities and materials, could be delayed by transport restrictions. If the conflict is prolonged or significantly worsens, these factors could have a material adverse impact on our business operations and employees.

 

Changes in funding for the FDA or future government shutdowns could cause delays in the submission and regulatory review of applications, which could negatively impact our business or prospects.

The ability of the FDA to review and provide regulatory clearance for new medical devices can be affected by a variety of factors, including government budget and funding levels, its ability to hire and retain key personnel and accept submission, applications, and the payment of user fees, and the implementation of statutory, regulatory, and policy changes.

 

Disruptions at the FDA and other agencies, including as a result of pandemics like COVID-19 and legislative actions, may also slow the time necessary for new medical devices to be reviewed and/or cleared by necessary government agencies, which would adversely affect our business. For example, Congress is currently negotiating reauthorization of the FDA user fee bills, which are critical to the FDA’s operations. Moreover, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, had to furlough critical employees and stop critical activities. If a prolonged government shutdown occurs, if the FDA is required to furlough review staff or other necessary employees, or if agency operations are otherwise impacted, it could significantly affect the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business or results of operations.

 

Item 2         Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3          Defaults Upon Senior Securities.

 

None.

 

Item 4          Mine Safety Disclosures.

 

Not applicable.

 

 

Item 5         Other Information.

 

During the three months ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement”, as such terms are defined in Item 408 of Regulation S-K.

 

 

 

Item 6.         EXHIBITS

 

Exhibit

No.

 

Description

31.1 *

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

     

31.2 *

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

     

32.1 *

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

32.2 *

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

101.INS *

 

Inline XBRL Instance Document.

     

101.SCH* *

 

Inline XBRL Taxonomy Extension Schema Document.

     

101.CAL* *

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

     

101.DEF* *

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

     

101.LAB* *

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

     

  101.PRE *

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

     

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included in Exhibit 101).

 

*         Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     

Asensus Surgical, Inc.

       

Date: November 14, 2023

 

By:

/s/ Anthony Fernando

   

Anthony Fernando

   

President and Chief Executive Officer

       

Date: November 14, 2023

 

By:

/s/ Shameze Rampertab

   

Shameze Rampertab

   

Executive Vice President and Chief Financial Officer

 

 

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