Asensus Surgical(ASXC) - 2020 Q4 - Annual Report

Part I Business Asensus Surgical, a medical device company, pioneers 'Performance-Guided Surgery' with its Senhance® Surgical System, focusing on market development and regulatory expansion despite 2020 COVID-19 impacts Overview and Strategy Asensus Surgical rebranded to focus on 'Performance-Guided Surgery™' using the Senhance® System and ISU™ to provide clinical intelligence, reduce surgical variability, and improve outcomes - In February 2021, the company changed its name from TransEnterix, Inc. to Asensus Surgical, Inc. to align with its new strategy of pioneering 'Performance-Guided Surgery™'[13] - The company's strategy is to use the Senhance System and the Intelligent Surgical Unit (ISU) to unlock clinical intelligence, reduce surgical variability, and improve outcomes through machine vision and augmented intelligence[13][14] - The Performance-Guided Surgery framework is structured around three phases: pre-operative intelligent preparation, intra-operative real-time guidance, and post-operative performance analytics[15][16] Products and Technology The Senhance® Surgical System, a multi-port digital laparoscopic platform with haptic feedback and the ISU™ for machine vision, is the company's core product, with ongoing portfolio expansion - The Senhance System is a digital laparoscopic platform featuring haptic feedback, robotic precision, and reusable instruments, designed to keep per-procedure costs similar to traditional laparoscopy[18][53] - The Intelligent Surgical Unit (ISU™), which enables machine vision, received FDA clearance in January 2020 and CE Mark in January 2021. The first surgical procedures using the ISU were completed in September 2020[25][57] - The company acquired machine vision and augmented intelligence assets from MST in 2018, which accelerated the development of the ISU[59] - The product portfolio includes approximately 70 instruments and accessories, such as 3mm instruments for microlaparoscopic surgeries and the Senhance ultrasonic system for tissue ligation[56][57] Market Development and Commercialization The Senhance System is commercially available across key global markets, with 2020 efforts focused on increasing system placements and clinical validation despite a COVID-19 related 10% decrease in procedure volumes Senhance System Regulatory Approvals | Region | Approval Status | | :--- | :--- | | Europe | CE Mark for adult and pediatric laparoscopic abdominal, pelvic, and limited thoracic surgery. | | United States | FDA 510(k) clearance for 31 general and gynecologic laparoscopic procedures. | | Japan | Regulatory approval and reimbursement for 98 laparoscopic procedures. | | Russia | Registration certificate received in December 2020. | - In 2020, the company installed ten Senhance Systems (3 in the U.S., 4 in Europe, 3 in Asia) and initiated nine new clinical programs[28] - Procedure volumes in 2020 were over 1,450, a 10% decrease from the previous year, attributed to the impact of the COVID-19 pandemic on elective surgeries[32] - The number of foundational sites grew from seven at the start of 2020 to eleven by year-end[33] Intellectual Property and Competition The company holds a substantial IP portfolio, including licensed European patents, and competes in the highly competitive surgical robotics market based on the Senhance System's unique features and cost-effectiveness - As of December 31, 2020, the company's patent portfolio included approximately 51 U.S. patents, over 100 patents outside the U.S., and more than 150 pending patent applications[68] - Some patents and technology for the Senhance System are exclusively licensed from the European Union, with the license term running until the final licensed patent expires[70] - Key competitors include Johnson & Johnson/Verb Surgical Inc., Medtronic plc, Intuitive Surgical Inc., Memic Innovative Surgery Ltd., and CMR Surgical Ltd[71] Government Regulation The company operates under extensive government regulation, including FDA 510(k) clearance for its Class II Senhance System in the U.S. and compliance with MDD/MDR in Europe, alongside other healthcare laws - The Senhance System and related products are generally considered Class II devices in the U.S., requiring 510(k) premarket notification for market clearance[76][81] - In Europe, the company must comply with the Medical Devices Directive (MDD) and is transitioning to the new European Medical Device Regulation (MDR), which imposes stricter requirements and may impact resources[87][88] - The company is subject to ongoing FDA regulations after market placement, including Quality System Regulations (QSR), Medical Device Reporting (MDR) for adverse events, and rules against off-label promotion[85] Human Capital and Corporate Information As of December 31, 2020, Asensus Surgical had 138 globally distributed employees, with a focus on R&D and sales, emphasizing a collaborative culture and talent retention through competitive compensation - As of December 31, 2020, the company had 138 employees, with 47 in R&D and 28 in marketing and sales[99] - The company's workforce is globally distributed, with 58% in the United States and 42% located internationally[99] - The company's principal executive offices moved to 1 TW Alexander Drive, Suite 160, Durham, NC 27703, effective March 10, 2021[106] Risk Factors The company faces substantial risks including ongoing operating losses, COVID-19 impacts, high dependence on the Senhance System, intense competition, regulatory hurdles, and financial volatility Risks Related to the Operation of our Business The company faces risks from historical operating losses, COVID-19 disruptions, high dependence on the Senhance System's unpredictable sales cycle, intense competition, and reliance on sole-source suppliers - The company has a history of operating losses, with an accumulated deficit of $722.9 million as of December 31, 2020[109] - The COVID-19 pandemic has negatively impacted business by halting elective surgeries, causing delays in product installation and training, and potentially slowing FDA clearance processes[112][114] - The business is highly dependent on a single product, the Senhance System, and its commercial success is not assured[117][118] - The surgical robotics industry is increasingly competitive, with rivals like Intuitive Surgical, Johnson & Johnson, and Medtronic having significantly greater resources[124] Risks Related to Our Status as a Public Company The company's common stock exhibits high volatility, and stockholders face dilution from past and future capital raises, with no intention to pay dividends - The market price of the company's common stock has been highly volatile, fluctuating from a high of $43.29 to a low of $0.28 per share in the two years ending December 31, 2020 (split-adjusted)[144] - Stockholders have experienced significant dilution from past equity issuances and may experience additional dilution as the company expects to raise more capital in the future[145] - The company does not intend to pay dividends on its common stock in the foreseeable future[147] Risks Related to Protection of our Intellectual Property The company's success hinges on protecting its IP and avoiding third-party infringement, facing risks of costly patent litigation, potential loss of licensed European rights, and inadequate trade secret protection - The company could face substantial costs and liability if it is found to be infringing on the patent rights of third parties[148][149] - The company relies on an exclusive license from the European Union for some patents and technology related to the Senhance System, and failure to comply with the license terms could result in the loss of these rights[152] - There is no guarantee that pending patent applications will result in issued patents or that issued patents will provide sufficient protection against competitors[160][161] Risks Related to Regulation of our Business The company is subject to extensive and costly government regulation, including critical 510(k) clearances and post-market compliance, with non-compliance risking sanctions, recalls, and financial penalties - Even after obtaining regulatory clearance, the company is subject to continual review and extensive regulation regarding manufacturing, labeling, advertising, and promotion[162] - Modifications to cleared products may require new 510(k) clearances or other approvals, and the FDA may not agree with the company's determination of when a new submission is necessary[168] - The company is required to report any incidents where its product may have caused or contributed to a death or serious injury, which could lead to product recalls or other enforcement actions[174] - The business is subject to federal and state anti-kickback, fraud and abuse, and physician payment transparency laws, with non-compliance carrying substantial penalties[182] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[192] Properties The company leases all its facilities, including its principal corporate office in Durham, NC, and R&D centers in Milan, Italy, and Yokne'am Illit, Israel - The company's principal corporate office is a leased 27,807 sq. ft. facility in Durham, North Carolina, with a term ending in August 2031[193] - Research and development facilities are leased in Milan, Italy (11,273 sq. ft., lease ends July 2022) and Yokne'am Illit, Israel (5,597 sq. ft., lease ends April 2024)[193] Legal Proceedings The company reports that it is not a party to any material legal proceedings - None[195] Mine Safety Disclosures This item is not applicable to the company - Not applicable[195] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock, trading as 'ASXC' on NYSE American, had approximately 151 record holders as of March 9, 2021, with no repurchases in Q4 2020 - The company's common stock trading symbol changed from 'TRXC' to 'ASXC' on March 5, 2021, and it is listed on the NYSE American[196] - As of March 9, 2021, there were approximately 151 record holders of the company's common stock[196] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, revenue decreased to $3.2 million due to a shift to leasing and COVID-19, while net loss improved to $59.3 million due to non-recurring impairment charges, with significant capital raised to fund future operations Key Business Events and Transactions The company undertook extensive financing activities in 2020-2021, including equity offerings and a PPP loan, while also managing past acquisitions and asset sales like AutoLap - The company completed multiple equity financing transactions in 2020 and early 2021, including public offerings, at-the-market offerings, and a registered direct offering, significantly bolstering its cash position[210][211][213][215] - In April 2020, a subsidiary received a $2.8 million loan under the Paycheck Protection Program (PPP)[219] - In October 2019, the company sold its AutoLap assets for $17.0 million, recording a gain of $16.0 million[232] - The company terminated its loan agreement with Hercules Capital in November 2019, repaying approximately $16.4 million to simplify its balance sheet[227] Results of Operations In 2020, total revenue decreased by 63% to $3.2 million due to a shift to leasing, while net loss significantly narrowed to $59.3 million from $154.2 million, primarily due to non-recurring 2019 impairment charges Consolidated Statements of Operations Highlights (in thousands) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $3,175 | $8,531 | -62.8% | | Gross Loss | $(1,991) | $(12,200) | 83.7% improvement | | Research and Development | $16,621 | $22,468 | -26.0% | | Sales and Marketing | $13,064 | $28,014 | -53.4% | | General and Administrative | $14,137 | $18,758 | -24.6% | | Goodwill & Intangible Impairment | $0 | $86,881 | N/A | | Operating Loss | $(60,389) | $(154,575) | 60.9% improvement | | Net Loss | $(59,312) | $(154,201) | 61.5% improvement | - The decrease in product revenue from $7.1 million in 2019 to $1.6 million in 2020 was primarily due to a shift in strategy from system sales to system leasing arrangements[238] - The significant improvement in net loss was mainly due to the non-recurrence of a $79.0 million goodwill impairment and a $7.9 million IPR&D impairment charge recorded in 2019[256] Liquidity and Capital Resources The company ended 2020 with a $722.9 million accumulated deficit and $16.4 million cash, but significant equity raises in 2020-2021 are expected to fund operations for at least 12 months - As of December 31, 2020, the company had an accumulated deficit of $722.9 million and cash and cash equivalents of $16.4 million[263][265] - Management believes that cash on hand combined with net proceeds from financing activities in early 2021 will be sufficient to fund operations for at least the next 12 months[265] Consolidated Cash Flow Data (in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in Operating activities | $(46.7) | $(73.5) | | Net cash (used in) provided by Investing activities | $(0.0) | $67.6 | | Net cash provided by (used in) Financing activities | $53.4 | $(5.6) | - Contractual obligations as of December 31, 2020, totaled $7.1 million, primarily for operating leases and vendor agreements, excluding a potential €15.0 million contingent consideration payment to Sofar[277][278] Critical Accounting Policies and Estimates The company's financial statements rely on critical accounting policies requiring significant judgment, including valuation of intangibles, goodwill, IPR&D, contingent consideration, stock-based compensation, inventory, and complex revenue recognition - Key critical accounting policies involve significant estimates for: identifiable intangible assets and goodwill, IPR&D, contingent consideration, warrant liabilities, stock-based compensation, inventory valuation, revenue recognition, and income taxes[281][282] - Goodwill and IPR&D are tested for impairment annually or when indicators arise. In Q3 2019, the company recorded a $79.0 million goodwill impairment and a $7.9 million IPR&D impairment due to decreased sales forecasts and a decline in stock price[284][287] - Revenue recognition for system sales requires allocating the contract price to multiple performance obligations (system, instruments, service) based on estimated standalone selling prices, as observable prices are limited[293][295] - Contingent consideration and certain warrant liabilities are recorded at fair value at each reporting period, with changes in value recognized in the statement of operations, requiring significant judgment in valuation models and inputs[288][289] Quantitative and Qualitative Disclosures About Market Risk The company is a smaller reporting company and is not required to provide this information - The company is a smaller reporting company and is not required to provide this information[308] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020 and 2019, with an unqualified auditor's opinion from BDO USA, LLP, highlighting inventory valuation as a critical audit matter Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $16,363 | $9,598 | | Total Current Assets | $34,013 | $27,955 | | Total Assets | $78,258 | $74,779 | | Total Current Liabilities | $10,283 | $13,023 | | Total Liabilities | $16,689 | $19,244 | | Total Stockholders' Equity | $61,569 | $55,535 | Consolidated Statement of Operations Highlights (in thousands) | Account | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Total Revenue | $3,175 | $8,531 | | Gross Loss | $(1,991) | $(12,200) | | Operating Loss | $(60,389) | $(154,575) | | Net Loss | $(59,312) | $(154,201) | | Net Loss Per Share | $(0.85) | $(8.69) | - The Report of Independent Registered Public Accounting Firm by BDO USA, LLP provides an unqualified opinion on the consolidated financial statements[311] - The auditor identified the valuation of inventories as a critical audit matter, citing the significant management judgment required to forecast demand and estimate net realizable value[316] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[541] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes in Q4 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[542] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[545] Other Information The company reports no other information for this item - None[547] Part III Directors, Executive Officers, and Corporate Governance Information for Items 10-14 is incorporated by reference from the 2021 Proxy Statement, detailing equity compensation plan securities authorized for issuance and remaining available - The information required by Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2021 Proxy Statement[556][561][562] Equity Compensation Plan Information as of December 31, 2020 | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 7,089,363 | $10.76 | 2,076,152 | | Not approved by security holders | 230,490 | $4.38 | 0 | | Total | 7,319,853 | $10.50 | 2,076,152 | Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and comprehensive exhibits, including governance documents, material contracts, and CEO/CFO certifications - This section lists the financial statements and all exhibits filed with the Form 10-K[564][566] - Exhibits include key agreements such as the Membership Interest Purchase Agreement with Sofar, various financing agreements, and the company's Amended and Restated Incentive Compensation Plan[567][568] Form 10-K Summary The company has elected not to include a Form 10-K summary - The Company has elected not to include a Form 10-K summary[576]