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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 June 30, 2021

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

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 July 30, 2021 was 234,323,983.

 

 

 

 

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.

Managements Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

     

PART II.

OTHER INFORMATION

32

     

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

     
 

SIGNATURES

35

 

 

 

FORWARD-LOOKING STATEMENTS

In addition to historical financial information, this report 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 the impact of the coronavirus (COVID-19) pandemic on our operating results. 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, 2020 (the “Fiscal 2020 Form 10-K”), and other filings we make with 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. To the extent that our business is negatively impacted due to a variety of factors, including the impact of COVID-19 on our operating results, we may implement longer-term cost reduction efforts in order to mitigate such impact. References in this report to “we,” “our,” “us,” or the “Company” refer to Asensus Surgical, Inc., including its subsidiaries Asensus Surgical US, Inc., SafeStitch LLC, 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.

 

 

 

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

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Revenue:

                

Product

 $696  $315  $2,400  $557 

Service

  406   340   785   698 

Total revenue

  1,102   655   3,185   1,255 
                 

Cost of revenue:

                

Product

  1,478   720   3,858   1,633 

Service

  869   693   1,601   1,518 

Total cost of revenue

  2,347   1,413   5,459   3,151 
                 

Gross loss

  (1,245)  (758)  (2,274)  (1,896)

Operating Expenses:

                

Research and development

  4,089   4,257   8,304   8,191 

Sales and marketing

  3,562   2,901   6,615   7,154 

General and administrative

  3,848   3,619   7,840   6,968 

Amortization of intangible assets

  2,862   2,619   5,729   5,183 

Change in fair value of contingent consideration

  478   212   735   1,268 

Restructuring and other charges

  -   -   -   858 

Total Operating Expenses

  14,839   13,608   29,223   29,622 
                 

Operating Loss

  (16,084)  (14,366)  (31,497)  (31,518)

Other Income (Expense)

                

Gain on extinguishment of debt

  2,847   -   2,847   - 

Change in fair value of warrant liabilities

  -   (114)  (1,981)  (269)

Interest income

  79   4   131   31 

Interest expense

  (5)  -   (12)  - 

Other expense, net

  (7)  (55)  (36)  (70)

Total Other Income (Expense), net

  2,914   (165)  949   (308)
                 

Loss before income taxes

  (13,170)  (14,531)  (30,548)  (31,826)

Income tax (expense) benefit

  (2)  691   36   1,388 
                 

Net loss

  (13,172)  (13,840)  (30,512)  (30,438)

Deemed dividend related to beneficial conversion feature of preferred stock

  -   -   -   (412)

Deemed dividend related to conversion of preferred stock into common stock

   (299)  -   (299)

Net loss attributable to common stockholders

  (13,172)  (14,139)  (30,512)  (31,149)
                 

Comprehensive loss:

                

Net loss

  (13,172)  (13,840)  (30,512)  (30,438)

Foreign currency translation gain (loss)

  472   962   (1,466)  90 
                 

Comprehensive loss

 $(12,700) $(12,878) $(31,978) $(30,348)
                 

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

 $(0.06) $(0.27) $(0.14) $(0.77)

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

  233,250   52,351   219,199   40,628 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

Asensus Surgical, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

 

  

June 30, 2021

  

December 31, 2020

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $157,078  $16,363 

Accounts receivable, net

  960   1,115 

Inventories

  12,523   10,034 

Other current assets

  3,446   6,501 

Total Current Assets

  174,007   34,013 
         

Restricted cash

  1,045   1,166 

Inventories, net of current portion

  6,590   8,813 

Property and equipment, net

  9,876   10,342 

Intellectual property, net

  15,943   22,267 

Net deferred tax assets

  288   307 

Operating lease right-of-use assets, net

  4,099   1,164 

Other long term assets

  156   186 

Total Assets

 $212,004  $78,258 
         

Liabilities and Stockholders' Equity

        

Current Liabilities:

        

Accounts payable

 $2,653  $1,965 

Accrued expenses

  4,007   5,615 

Operating lease liabilities - current portion

  861   686 

Deferred revenue

  786   789 

Notes payable - current portion, net of debt discount

  -   1,228 

Total Current Liabilities

  8,307   10,283 
         

Long Term Liabilities:

        

Contingent consideration

  4,671   3,936 

Noncurrent operating lease liabilities

  3,465   628 

Notes payable, less current portion

  -   1,587 

Warrant liabilities

  -   255 

Total Liabilities

  16,443   16,689 
         

Commitments and Contingencies (Note 10)

          
         

Stockholders' Equity:

        

Common stock $0.001 par value, 750,000,000 shares authorized at June 30, 2021 and December 31, 2020; 234,231,132 and 116,231,072 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

  234   116 

Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at June 30, 2021 and December 31, 2020

  -   - 

Additional paid-in capital

  947,249   781,397 

Accumulated deficit

  (753,424)  (722,912)

Accumulated other comprehensive income

  1,502   2,968 

Total Stockholders' Equity

  195,561   61,569 

Total Liabilities and Stockholders' Equity

 $212,004  $78,258 

 

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

  

Preferred Stock

  

Treasury Stock

                 
  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Additional Paid-in

Capital

  

Accumulated

Deficit

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Total

Stockholders'

Equity

 

Balance, December 31, 2020

  116,231  $116   -  $-   -  $-  $781,397  $(722,912) $2,968  $61,569 

Stock-based compensation

  -   -   -   -   -   -   1,786   -   -   1,786 

Issuance of common stock, net of issuance costs

  70,666   71   -   -   -   -   129,251   -   -   129,322 

Exercise of stock options and warrants

  45,114   45   -   -   -   -   32,687   -   -   32,732 

Award of restricted stock units

  706   1   -   -   -   -   -   -   -   1 

Return of common stock to pay withholding taxes on restricted stock

  -   -   -   -   67   -   (214)  -   -   (214)

Cancellation of treasury stock

  -   -   -   -   (67)  -   -   -   -   - 

Other comprehensive loss

  -   -   -   -   -   -   -   -   (1,938)  (1,938)

Net loss

  -   -   -   -   -   -   -   (17,340)  -   (17,340)

Balance, March 31, 2021

  232,717   233   -   -   -   -   944,907   (740,252)  1,030  $205,918 

Stock-based compensation

  -   -   -   -   -   -   1,842   -   -   1,842 

Issuance of common stock, net of issuance costs

  332   -   -   -   -   -   992   -   -   992 

Exercise of stock options and warrants

  508   -   -   -   -   -   337   -   -   337 

Award of restricted stock units

  674   1   -   -   -   -   -   -   -   1 

Return of common stock to pay withholding taxes on restricted stock

  -   -   -   -   246   -   (829)  -   -   (829)

Cancellation of treasury stock

  -   -   -   -   (246)  -   -   -   -   - 

Other comprehensive loss

  -   -   -   -   -   -   -   -   472   472 

Net loss

  -   -   -   -   -   -   -   (13,172)  -   (13,172)

Balance, June 30, 2021

  234,231  $234   -  $-   -  $-  $947,249  $(753,424) $1,502  $195,561 
                                         
                                         

Balance, December 31, 2019

  20,691  $21   -  $-   -   -  $720,484  $(663,600) $(1,370) $55,535 

Stock-based compensation

  -   -   -   -   -   -   1,923   -   -   1,923 

Issuance of common stock, preferred stock and warrants under 2020 financing, net of issuance costs

  14,122   14   7,937   79   -   -   13,432   -   -   13,525 

Issuance of common stock, net of issuance costs

  7,030   7   -   -   -   -   11,205   -   -   11,212 

Conversion of preferred stock to common stock

  3,053   3   (3,053)  (30)  -   -   27   -   -   - 

Exchange of shares for Series B Warrants

  2,041   2   -   -   -   -   2,468   -   -   2,470 

Award of restricted stock units

  141   -   -   -   -   -   -   -   -   - 

Return of common stock to pay withholding taxes on restricted stock

  -   -   -   -   28   -   (33)  -   -   (33)

Cancellation of treasury stock

  -   -   -   -   (28)  -   -   -   -   - 

Other comprehensive loss

  -   -   -   -   -   -   -   -   (872)  (872)

Net loss

  -   -   -   -   -   -   -   (16,598)  -   (16,598)

Balance, March 31, 2020

  47,078   47   4,884   49   -   -   749,506   (680,198)  (2,242) $67,162 

Stock-based compensation

  -   -   -   -   -   -   1,933   -   -   1,933 

Exercise of warrants

  4,913   5   -   -   -   -   3,335   -   -   3,340 

Conversion of preferred stock to common stock

  4,884   5   (4,884)  (49)  -   -   44   -   -   - 

Award of restricted stock units

  28   -   -   -   -   -   -   -   -   - 

Other comprehensive loss

  -   -   -   -   -   -   -   -   962   962 

Net loss

  -   -   -   -   -   -   -   (13,840)  -   (13,840)

Balance, June 30, 2020

  56,903  $57   -  $-   -  $-  $754,818  $(694,038) $(1,280) $59,557 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

Asensus Surgical, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

  

Six Months Ended June 30,

 
  

2021

  

2020

 

Operating Activities:

        

Net loss

 $(30,512) $(30,438)

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

        

Depreciation

  1,585   1,162 

Amortization of intangible assets

  5,729   5,183 

Stock-based compensation

  3,628   3,856 

Gain on extinguishment of debt

  (2,847)  - 

Deferred tax benefit

  (36)  (1,388)

Write down of inventory

  288   - 

Change in fair value of warrant liabilities

  1,981   269 

Change in fair value of contingent consideration

  735   1,268 
         

Changes in operating assets and liabilities:

        

Accounts receivable

  127   (350)

Inventories

  (1,687)  (2,332)

Operating lease right-of-use assets

  (2,970)  546 

Other current and long term assets

  3,177   281 

Accounts payable

  679   (1,221)

Accrued expenses

  (1,428)  (1,451)

Deferred revenue

  14   22 

Operating lease liabilities

  3,052   (608)

Other long term liabilities

  -   65 

Net cash and cash equivalents used in operating activities

  (18,485)  (25,136)
         

Investing Activities:

        

Purchase of property and equipment

  (700)  (3)

Net cash and cash equivalents used in investing activities

  (700)  (3)
         

Financing Activities:

        

Proceeds from issuance of common stock, preferred stock and warrants under 2020 financing, net of issuance costs

  -   13,525 

Proceeds from issuance of common stock, net of issuance costs

  130,314   11,212 

Proceeds from notes payable, net of issuance costs

  -   2,815 

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

  (1,041)  (33)

Payment of contingent consideration

  -   (74)

Proceeds from exercise of stock options and warrants

  30,835   3,340 

Net cash and cash equivalents provided by financing activities

  160,108   30,785 
         

Effect of exchange rate changes on cash and cash equivalents

  (329)  17 

Net increase in cash, cash equivalents and restricted cash

  140,594   5,663 

Cash, cash equivalents and restricted cash, beginning of period

  17,529   10,567 

Cash, cash equivalents and restricted cash, end of period

 $158,123  $16,230 
         

Supplemental Schedule of Non-cash Investing and Financing Activities:

        

Transfer of inventories to property and equipment

 $1,243  $3,403 

Acquisition of property and equipment in accounts payable

 $67  $- 

Reclass of warrant liability to common stock and additional paid-in-capital

 $2,236  $- 

Lease liabilities arising from obtaining right-of-use assets

 $3,461  $- 

Exchange of common stock for Series B Warrants

 $-  $2,470 

Transfer of in-process research and development to intellectual property

 $-  $2,425 

Conversion of preferred stock to common stock

 $-  $79 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Asensus Surgical, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

1.

Organization and Capitalization

 

Asensus Surgical, Inc. (formerly known as TransEnterix, 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. The Company is focused on the market development for and commercialization of the Senhance® Surgical 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 3 mm microlaparoscopic 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 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 (gallbladder removal) surgery.

 

 

In Japan, the Company has received regulatory approval and reimbursement for 98 laparoscopic procedures.

 

 

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

 

In 2020, the Company obtained regulatory clearance for the Senhance ultrasonic system in Taiwan and Japan. On February 12, 2020, the Company expanded its claims in the EU for the Senhance System to include pediatric patients, allowing accessibility to more surgeons and patients, as well as expanding its potential market to include pediatric hospitals in Europe. The Company anticipates the robotic precision provided by the Senhance System, coupled with the already available 3 mm diameter instruments, will prove to be an effective tool in surgery with smaller patients. On March 13, 2020 the Company announced that it received FDA clearance for the Intelligent Surgical Unit™ (ISU™) for use with the Senhance System. The Company believes it is the first such FDA submission seeking clearance for machine vision technology in abdominal robotic surgery. On September 23, 2020, the Company announced the first surgical procedures successfully completed using the ISU.

 

On January 19, 2021, the Company announced that it received CE Mark for the ISU. Finally, on July 28, 2021, the Company announced that it received FDA clearance for 5 mm 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 October 31, 2018, the Company acquired the assets, intellectual property and highly experienced multidisciplinary personnel of MST Medical Surgical Technologies, Inc., or MST, an Israeli-based medical technology company.  Through this acquisition the Company acquired MST’s AutoLap™ assets and technology, one of the only image-guided robotic scope positioning systems with FDA clearance and CE Mark.  The Company believes MST’s image analytics technology will accelerate and drive meaningful Senhance System developments and allow the Company to expand the Senhance System to add augmented, intelligent vision capability. The Company sold the AutoLap assets in October 2019, while retaining the core technology.

 

6

 

At-the-Market Offering

On May 19, 2021, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the “Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), Robert W. Baird & Co. Incorporated (“Baird”) and Oppenheimer & Co. Inc. (“Oppenheimer”). Each of Cantor, Baird and Oppenheimer are individually an “Agent” and collectively are the “Agents” under the Agreement. Also on May 19, 2021, the Company filed a prospectus supplement relating to an at-the-market offering (the “2021 ATM Offering”) by the Company of up to an aggregate of $100,000,000 of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), which shares of Common Stock are registered under the Registration Statement on Form S-3 ASR (File No. 333-256284) and automatically effective on May 19, 2021.

 

 

 

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. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q 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. The results reported in these 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 financial statements and the notes thereto included in the Fiscal 2020 Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) have been condensed or omitted in the accompanying interim condensed consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

 

Liquidity

The Company had an accumulated deficit of $753.4 million and working capital of $165.7 million as of June 30, 2021. The Company has not established sufficient sales revenues to cover its operating costs and believes it may require additional capital in the future to proceed with its operating plan.

 

The Company believes the COVID-19 pandemic will continue to negatively impact its operations and ability to implement its market development efforts, which will have a negative effect on its financial condition.

 

In the first quarter of 2021, the Company raised additional capital through equity offerings, including raising net proceeds of $73.4 million in a January 2021 public offering, $28.6 million in a January 2021 registered direct offering, and $27.3 million in an at-the-market offering launched in 2020 (the “2020 ATM Offering”). Also, outstanding Series B, C and D warrants were exercised in the six months ended June 30, 2021 for aggregate proceeds to the Company of $30.6 million.

 

In the second quarter of 2021, the Company launched the 2021 ATM Offering and raised proceeds, net of legal costs and commissions, of $1.0 million under this offering in the three months ended June 30, 2021.

 

As of June 30, 2021, the Company had cash and cash equivalents, excluding restricted cash, of approximately $157.1 million.

 

While the Company believes that its existing cash and cash equivalents as of June 30, 2021 will be sufficient to sustain operations for at least the next 12 months from the issuance of these financial statements, the Company believes it may need to obtain additional financing in the future to proceed with its business plan. Management's plan to obtain additional resources for the Company may include additional sales of equity under the 2021 ATM Offering or otherwise, 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. However, management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans.

 

7

 

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: potential negative impacts on the Company's operations caused by the COVID-19 pandemic; the historical lack of profitability; the Company’s ability to raise additional capital; the success of its market development efforts, the liquidity and capital resources of its partners; its ability to successfully develop, clinically test and commercialize its products; the timing and outcome of the regulatory review process for its products; changes in the health care and regulatory environments of the United States, the United Kingdom, 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 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- term intangible assets, fair value estimates related to contingent consideration, warrant liabilities, stock compensation expense, revenue recognition, accounts receivable reserves, excess and obsolete inventory reserves, inventory classification between current and non-current, measurement of lease liabilities and corresponding ROU assets, and deferred tax asset valuation allowances.

 

The COVID-19 pandemic has caused significant social and economic restrictions that have been imposed in the United States and abroad, which has resulted in significant volatility in the global economy and led to reduced economic activity. In the preparation of these financial statements and related disclosures, the Company has assessed the impact that COVID-19 has had on its estimates, assumptions, forecasts, and accounting policies. The Company continues to monitor closely the COVID-19 pandemic impact on its estimates, assumptions and forecasts used in the preparation of its financial statements. As the COVID-19 situation is unprecedented and ever evolving, future events and effects related to COVID-19 cannot be determined with precision, and actual results could significantly differ from estimates or forecasts.

 

Principles of Consolidation and Foreign Currency Considerations

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, Asensus Surgical US, Inc., SafeStitch LLC, 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.

 

The functional currency of the Company’s operational foreign subsidiaries is predominantly the Euro. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for a subsidiary using a functional currency other than the U.S. dollar is included in accumulated other comprehensive income or loss as a separate component of stockholders’ equity.

 

The Company’s intercompany accounts are denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in accumulated other comprehensive income or loss as a separate component of stockholders’ equity, while gains and losses resulting from the remeasurement of intercompany receivables from a foreign subsidiary for which the Company anticipates settlement in the foreseeable future are recorded in the condensed consolidated statements of operations and comprehensive loss. The net gains and losses included in net loss in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2021 and 2020 were not significant.

 

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents.

 

Restricted cash as of June 30, 2021 and December 31, 2020 includes $1.0 million and $1.2 million, respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards, and automobile leases.

 

8

 

Concentrations and Credit Risk

The Company’s principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents, including amounts held in money market accounts. The Company places cash deposits with a federally insured financial institution. The Company maintains its cash at banks and financial institutions it considers to be of high credit quality; however, the Company’s domestic cash deposits may at times exceed the Federal Deposit Insurance Corporation’s insured limit. Balances in excess of federally insured limitations may not be insured. The Company has not experienced losses on these accounts, and management believes that the Company is not exposed to significant risks on such accounts.

 

The Company’s accounts receivable are derived from sales and leases to customers located throughout the world. The Company evaluates its customers’ financial condition and, generally, requires no collateral from its customers. The Company provided reserves for potential credit losses and recorded no bad debt charges during the three and six months ended June 30, 2021 and 2020. The Company had four customers who constituted 59% of the Company’s net accounts receivable as of June 30, 2021. The Company had seven customers who constituted 68% of the Company’s net accounts receivable at December 31, 2020. The Company had five customers who accounted for 39% of revenue in the three months ended June 30, 2021 and seven customers who accounted for 60% of revenue in the three months ended June 30, 2020. The Company had four customers who accounted for 54% of revenue in the six months ended June 30, 2021 and nine customers who accounted for 65% of revenue in the six months ended June 30, 2020.

 

Accounts Receivable

Accounts receivable are recorded at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts was determined on a customer specific basis based on deemed collectability. The allowance for doubtful accounts was $1.7 million and $1.8 million as of June 30, 2021 and December 31, 2020, respectively.

 

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. The Company records reserves, when necessary, to reduce the carrying value of inventory to its net realizable value. Management considers forecast demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

 

Any inventory on hand at the measurement date in excess of the Company's current requirements based on anticipated levels of sales is classified as long-term on the Company's condensed consolidated balance sheets. The Company's classification of long-term inventory requires it to estimate the portion of on hand inventory that can be realized over the upcoming twelve months.

 

Intellectual Property

Intellectual property consists of purchased patent rights and developed technology acquired as part of previous business acquisitions. Amortization of the patent rights is recorded using the straight-line method over the estimated useful life of the patents of 10 years. Amortization of the developed technology is recorded using the straight-line method over the estimated useful life of 5 to 7 years.

 

The Company periodically evaluates intellectual property for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To determine the recoverability, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If such estimated cash flows are less than the carrying amount of the assets, then such assets are written down to their fair value. No impairment of intellectual property was identified during the three and six months ended June 30, 2021 and 2020.

 

Property and Equipment

Property and equipment consists primarily of operating lease Senhance System assets, machinery, manufacturing equipment, demonstration equipment, computer equipment, furniture, and leasehold improvements, which are recorded at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:

 

Operating lease assets – Senhance System leasing (in years)

5

Machinery, manufacturing and demonstration equipment (in years)

3-5

Computer equipment (in years)

3

Furniture (in years)

5

Leasehold improvements

Lesser of lease term or 3 to 10 years

 

9

 

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.

 

The Company reviews its property and equipment assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If such estimated cash flows are less than the carrying amount of the assets, then such assets are written down to their fair value. The Company did not identify any impairment during the three and six months ended June 30, 2021 and 2020.

 

Notes Payable Payroll Protection Program

The Company’s policy is to account for forgivable loans received through the U.S. Small Business Administration (the “SBA”) under the CARES Act Payroll Protection Program (“PPP”), as debt in accordance with ASC 470, Debt, and other related accounting pronouncements. The forgiveness of debt, in whole or part, is recognized once the debt is extinguished, which occurs when the Company is legally released from the liability by the SBA. Any portion of debt forgiven, adjusted for accrued interest forgiven and unamortized debt issuance costs, is recorded as a gain on extinguishment of debt, and presented in the condensed consolidated statements of operations and comprehensive loss. On June 10, 2021, the Company received notification from the SBA that the principal amount of its PPP loan of $2.8 million and related interest had been forgiven.

 

Contingent Consideration

Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. Contingent consideration is measured at fair value using a discounted cash flow model utilizing significant unobservable inputs including the probability of achieving each of the potential milestones, future Euro-to-USD exchange rates, and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities of success or changes in expected achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability. The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the condensed consolidated statements of operations and comprehensive loss.

 

On September 21, 2015, the Company completed the strategic acquisition, through its wholly owned subsidiary TransEnterix International, from Sofar, of all of the assets, employees and contracts related to the advanced robotic system for minimally invasive laparoscopic surgery now known as the Senhance System. Under the terms of the Purchase Agreement, as amended in 2016, as of June 30, 2021 the Company has accrued $4.7 million of estimated fair value of remaining contingent consideration which shall be payable upon achievement of trailing revenues from sales or services contracts of the Senhance System of at least 25.0 million over a calendar quarter.

 

Warrant Liabilities

The Company’s Series B Warrants (see Note 8) were measured at fair value using a simulation model which took 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 3). The warrant liability was revalued at each reporting period and changes in fair value were recognized in the condensed 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. All remaining outstanding Series B Warrants were exercised in the first quarter 2021.

 

Revenue Recognition

The Company’s revenue consists of product revenue resulting from the sale and lease of Systems, System components, instruments and accessories, and service revenue. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company's revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities. The Company’s System sale arrangements generally include a five-year service period; the first year of service is generally free and included in the System sale arrangement and the remaining four years are generally included at a stated service price.

 

10

 

The Company’s System sale arrangements generally contain multiple products and services. For these consolidated sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct, which is if a product or service is separately identifiable from other items in the consolidated package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s System sale arrangements may include a combination of the following performance obligations: system(s), system components, instruments, accessories, and system services.

 

For arrangements that contain multiple performance obligations, revenue is allocated to each performance obligation based on its relative estimated standalone selling price. When available, standalone selling prices are based on observable prices at which the Company separately sells the products or services; however due to limited sales to date, standalone selling prices generally are not directly observable. The Company estimates the standalone selling price using the market assessment approach considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer, and market conditions. The Company regularly reviews estimated standalone selling prices and updates these estimates if necessary.

 

The Company recognizes revenues as the performance obligations are satisfied by transferring control of the product or service to a customer. The Company generally recognizes revenue for the performance obligations as follows:

 

 

System sales. For Systems and System components sold directly to end customers (including those arising from System purchases under lease rights to purchase), revenue is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. For Systems sold through distributors, for which distributors are responsible for installation, revenue is recognized generally at the time of shipment. The Company’s System arrangements generally do not provide a right of return. The Systems are generally covered by a one-year warranty. Warranty costs were not material for the periods presented.

 

Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which generally occurs at the time of shipment, but also occurs at the time of delivery depending on the customer arrangement.

 

Service. Service revenue is recognized ratably over the term of the service period as the customers benefit from the service throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed. 

 

The following table presents revenue disaggregated by type and geography:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(in thousands)

  

(in thousands)

 

U.S.

                

Systems

 $91  $45  $184  $75 

Instruments and accessories

  79   7   141   67 

Services

  104   103   202   171 

Total U.S. revenue

  274   155   527   313 
                 

Outside of U.S. ("OUS")

                

Systems

  258   117   1,430   127 

Instruments and accessories

  268   146   645   288 

Services

  302   237   583   527 

Total OUS revenue

  828   500   2,658   942 
                 

Total

                

Systems

  349   162   1,614   202 

Instruments and accessories

  347   153   786   355 

Services

  406   340   785   698 

Total revenue

 $1,102  $655  $3,185  $1,255 

 

The Company recognizes sales by geographic area based on the country in which the customer is based. Operating lease revenue from Senhance System Leasing is included as Systems in the above table and was approximately $0.3 million and $0.1 million in the three months ended June 30, 2021 and 2020, respectively, and $0.7 million and $0.2 million in the six months ended June 30, 2021 and 2020, respectively.

 

11

 

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. Transaction price allocated to remaining performance obligations was approximately $3.2 million and $3.1 million as of June 30, 2021 and December 31, 2020, respectively.

 

The Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Contract assets are included in accounts receivable and totaled $0.1 million and $0.1 million as of June 30, 2021 and December 31, 2020, respectively. 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 for the periods presented. Revenue recognized for the three months ended June 30, 2021 and 2020 that was included in the deferred revenue balance at the beginning of each reporting period was $0.2 million and $0.4 million, respectively. Revenue recognized for the six months ended June 30, 2021 and 2020 that was included in the deferred revenue balance at the beginning of each reporting period was $0.4 million and $0.6 million, respectively. The aggregate amount of transaction price allocated to performance obligations that remain unsatisfied as of June 30, 2021 was $3.2 million, which is expected to be recognized as revenue over one to three years.

 

In connection with assets recognized from the costs to obtain a contract with a customer, the Company determined that the sales incentive programs for its sales team do not meet the requirements to be capitalized as the Company does not expect to generate future economic benefits from the related revenue from the initial sales transaction and such costs are expensed as incurred.

 

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 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 System.

 

In determining whether a transaction should be classified as a sales-type, operating, or direct financing lease, the Company considers the following terms at lease commencement: (1) whether title of the Senhance System transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased System, (3) whether the lease term is for the major part of the remaining economic life of the leased System, (4) whether the lease grants the lessee an option to purchase the leased System that the lessee is reasonably certain to exercise, and (5) whether the underlying System is of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term. All such arrangements through June 30, 2021 are classified as operating leases.

 

Revenue related to lease elements from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon System usage and is presented as product revenue. Revenue related to lease elements from operating lease arrangements was approximately $0.3 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.7 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively.

 

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. During the three months ended June 30, 2021 and 2020, the Company recorded $0.2 million and $0 million, respectively, of expenses for inventory obsolescence related to certain System components. During the six months ended June 30, 2021 and 2020, the Company recorded $0.3 million and $0 million, respectively, of expenses for inventory obsolescence related to certain System components.

 

Research and Development Costs

Research and development expenses primarily consist of engineering, product development and regulatory expenses, incurred in the design, development, testing and enhancement of our products. Research and development costs are expensed as incurred.

 

12

 

Stock-Based Compensation

The Company recognizes expenses for share-based awards exchanged for services rendered equal to the estimated fair value of these awards over the requisite service period. The Company recognizes as expense, the grant-date fair value of stock options and other stock-based compensation issued to employees and non-employee directors over the requisite service periods, which are typically the vesting periods. The Company uses the Black-Scholes-Merton model to estimate the fair value of our stock options. The volatility assumption used in the Black-Scholes-Merton model is based on the Company’s historical volatility. The expected term of options granted has been determined based upon the simplified method, because the Company does not have sufficient historical information regarding its options to derive the expected term. Under this approach, the expected term is the mid-point between the weighted average of vesting period and the contractual term. The risk-free interest rate is based on U.S. Treasury rates whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company estimates forfeitures based on its historical experience and adjust the estimated forfeiture rate based upon actual experience. For awards with performance conditions, we begin recognizing compensation expense when it becomes probable that the performance condition will be attained.

 

The fair value of restricted stock units is determined by the market price of the Company’s common stock on the date of grant.

 

The Company records as expense the fair value of stock-based compensation awards, including stock options and restricted stock units. Compensation expense for stock-based compensation was approximately $1.8 million and $1.9 million for the three months ended June 30, 2021 and 2020, respectively, and was approximately $3.6 million and $3.9 million for the six months ended June 30, 2021 and 2020, respectively.

 

Income Taxes 

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets or liabilities for the temporary differences between financial reporting and tax basis of the Company’s assets and liabilities, and for tax carryforwards at enacted statutory rates in effect for the years in which the asset or liability is expected to be realized. The effect on deferred taxes of a change in tax rates is recognized in income during the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amounts expected to be realized. The Company has elected to account for global intangible low-taxed income (“GILTI”) as a period expense in the year the tax is incurred.

 

The Company recognizes the financial statement benefit of an income tax position only after determining that the relevant taxing authority would more likely than not sustain the position following audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes.

 

Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require application of significant judgment. The Company is subject to U.S. federal and various state, local and foreign jurisdictions. Due to the Company’s net operating loss carryforwards, the Company may be subject to examination by authorities for all previously filed income tax returns.

 

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

 

Segments

The Company operates in one business segment—the research, development and sale of medical device robotics 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.

 

Approximately 77% and 27% of the Company’s total consolidated assets are located within the U.S. as of June 30, 2021 and December 31, 2020, respectively. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include intellectual property, other current assets, property and equipment, cash, accounts receivable, other long-term assets and inventory of $47.6 million and $56.8 million as of June 30, 2021 and December 31, 2020, respectively. Total assets outside of the United States amounted to 23% and 73% of total consolidated assets as of June 30, 2021 and December 31, 2020, respectively.  Long-lived assets in the U.S. were 21% and 11%, Italy were 37% and 48%, and Switzerland were 40% and 41%, as of June 30, 2021 and December 31, 2020, respectively. The Company recognizes sales by geographic area based on the country in which the customer is based. For the three months ended June 30, 2021 and 2020, 25% and 24%, respectively, of net revenue were generated in the United States; while 53% and 56%, respectively, were generated in Europe; and 22% and 20% were generated in Asia. For the six months ended June 30, 2021 and 2020, 17% and 25%, respectively, of net revenue were generated in the United States; while 32% and 52%, respectively, were generated in Europe; and 51% and 23% were generated in Asia.

 

13

 

Impact of Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740, Income Tax and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 effective January 1, 2021; the adoption did not result in a material impact on the Company's financial statements and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The guidance is not expected to have a material impact on the Company's financial statements and related disclosures.

 

In August 2020, the FASB issued ASU 2020-06 Debt Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entitys Own Equity (subtopic 815-40) guidance on the accounting for convertible debt instruments and contracts in an entity’s own equity. The guidance simplifies the accounting for convertible instruments by reducing the various accounting models that can require the instrument to be separated into a debt component and equity component or derivative component. Additionally, the guidance eliminated certain settlement conditions previously required to be able to classify a derivative in equity. The new guidance is effective on a modified or full retrospective basis for fiscal years beginning after December 15, 2023, including interim periods with those fiscal years. The Company is currently evaluating the impact on the condensed consolidated financial statements upon adoption.

 

The Company has evaluated all other issued and unadopted ASUs and believes the adoption of these standards will not have a material impact on its condensed consolidated statements of operations and comprehensive loss, balance sheets, or statements of cash flows.

 

 

 

3.

Fair Value

 

The Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities include cash and cash equivalents, restricted cash, contingent consideration and warrant liabilities. ASC 820-10 (“Fair Value Measurement Disclosure”) requires the valuation using a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. The Company did not have any transfers of assets and liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy during the three and six months ended June 30, 2021 and 2020.

 

For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

 

As prescribed by U.S. GAAP, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.

 

14

 

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures and based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects changes in classifications between levels will be rare.

 

The carrying values of accounts receivable, other current assets, accounts payable, and certain accrued expenses as of June 30, 2021 and December 31, 2020 approximate their fair values due to the short-term nature of these items. The Company’s notes payable balance also approximates fair value as of December 31, 2020, as the interest rate on the notes payable approximates the rates available to the Company as of this date.

 

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

 

  

June 30, 2021

 
  

(in thousands)

 
                 

Description

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Total

 

Assets measured at fair value

                

Cash and cash equivalents

 $157,078  $-  $-  $157,078 

Restricted cash

  1,045   -   -   1,045 

Total assets measured at fair value

 $158,123  $-  $-  $158,123 

Liabilities measured at fair value

                

Contingent consideration

 $-  $-  $4,671  $4,671 

Total liabilities measured at fair value

 $-  $-  $4,671  $4,671 

 

  

December 31, 2020

 
  

(in thousands)

 
                 

Description

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

  

Total

 

Assets measured at fair value

                

Cash and cash equivalents

 $16,363  $-  $-  $16,363 

Restricted cash

  1,166   -   -   1,166 

Total assets measured at fair value

 $17,529  $-  $-  $17,529 

Liabilities measured at fair value

                

Contingent consideration

 $-  $-  $3,936  $3,936 

Warrant liabilities

  -   -   255   255 

Total liabilities measured at fair value

 $-  $-  $4,191  $4,191 

 

The Company’s financial liabilities consisted of contingent consideration payable to Sofar related to the Senhance Acquisition in September 2015. This liability is reported as Level 3 as estimated fair value of the contingent consideration related to the acquisition requires significant management judgment or estimation and is calculated using the income approach, using various revenue and cost assumptions, and applying a probability to each outcome. The increase in fair value of the contingent consideration of $0.5 million and $0.7 million for the three and six months ended June 30, 2021, respectively was primarily due to a lower discount rate, increased volatility, and the passage of time. The increase in fair value of the contingent consideration of $0.2 million and $1.3 million for the three and six months ended June 30, 2020, respectively was primarily due to the passage of time. Adjustments associated with the change in fair value of contingent consideration are included in the Company’s condensed consolidated statements of operations and comprehensive loss. The Company uses a probability-weighted income approach for estimating the fair value of the contingent consideration. The significant unobservable inputs used in this approach include estimates of amounts and timing of stated milestones, volatility, and the discount rate.

 

On April 28, 2017, the Company sold 24.9 million units (the “Units”), each consisting of approximately 0.077 shares of the Company's Common Stock, a Series A warrant to purchase approximately 0.077 shares of Common Stock with an exercise price of $13.00 per share (the “Series A Warrants”), and a Series B warrant to purchase approximately 0.058 shares of Common Stock with an exercise price of $13.00 per share (the “Series B Warrants,” together with the Series A Warrants, the “Warrants”), at an offering price of $1.00 per Unit. All of the Series A Warrants were exercised prior to the expiration date of October 31, 2017. As of December 31, 2020, 567,660 Series B Warrants were outstanding with an exercise price of $0.35 per share. All outstanding Series B Warrants were exercised in the first quarter 2021.

 

15

 

The final remeasurement upon exercise of the Series B warrants was on February 8, 2021 and all Series B warrants have been exercised as of June 30, 2021. The change in fair value of the Series B warrants for the six months ended June 30, 2021 and 2020 was an increase of $2.0 million and an increase of $0.3 million, respectively and was included in the Company’s condensed consolidated statements of operations and comprehensive loss. The increase in fair value of the Series B warrants of $2.0 million for the six months ended June 30, 2021 was primarily due to an increase in share price, a lower discount rate, increased volatility, and the passage of time. No change in fair value was recorded for the three months ended June 30, 2021. The change in fair value of the Series B warrants for the three months ended June 30, 2020 was an increase of $0.1 million and was primarily due to a lower discount rate, decreased volatility, and the passage of time. The following table presents the inputs and valuation methodologies used for the Company’s fair value of the Series B warrants:

 

  

December 31,

 

Series B Warrants

 

2020

 
     

Valuation methodology

 

Black-Scholes-Merton

 

Term (years)

  1.32 

Risk free rate

  0.10%

Dividends

  - 

Volatility

  150.97%

Share price

 $0.63 

 

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements for contingent consideration as of June 30, 2021 and December 31, 2020:

 

  

Methodology

 

Unobservable Input

 

2021

  

2020

 
               

Contingent consideration

 

Probability weighted income approach

 

Milestone dates

 2025to2029  2024to2029 
    

Discount rate

  9.0%    9.50%  
    

Volatility

  74.0%    71.0%  

 

The following table summarizes the change in fair value, as determined by Level 3 inputs for the warrants and the contingent consideration for the six months ended June 30, 2021:

 

  

Fair Value Measurement at Reporting Date (Level 3)

 
  

(in thousands)

     
  

Common stock warrants

  

Contingent consideration

 

Balance at December 31, 2020

 $255  $3,936 

Exercise of warrants

  (2,236)  - 

Change in fair value

  1,981   735 

Balance at June 30, 2021

 $-  $4,671 
         

Current portion

 $-  $- 

Long-term portion

  -   4,671 

Balance at June 30, 2021

 $-  $4,671 

 

 

 

4.

Inventories

 

The components of inventories are as follows:

 

  

June 30, 2021

  

December 31, 2020

 
  

(in thousands)

 

Finished goods

 $13,238  $10,749 

Raw materials

  5,875   8,098 

Total inventories

 $19,113  $18,847 
         

Current portion

 $12,523  $10,034 

Long-term portion

  6,590   8,813 

Total inventories

 $19,113  $18,847 

 

During the three and six months ended June 30, 2021, the Company recorded a $0.2 million and a $0.3 million charge for inventory obsolescence related to certain system components, respectively. There were no such write-downs or charges for the three and six months ended June 30, 2020.

 

 

 

5.

Intellectual Property

 

The components of gross intellectual property, accumulated amortization, and net intellectual property as of June 30, 2021 and December 31, 2020 are as follows:

 

  

June 30, 2021

 
  

(in thousands)

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Foreign Currency Translation Impact

  

Net Carrying Amount

 

Developed technology

 $68,838  $(55,755) $2,601  $15,684 

Technology and patents purchased

  400   (185)  44   259 

Total intellectual property

 $69,238  $(55,940) $2,645  $15,943 

 

  

December 31, 2020

 
  

(in thousands)

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Foreign Currency Translation Impact

  

Net Carrying Amount

 

Developed technology

 $68,838  $(51,734) $4,872  $21,976 

Technology and patents purchased

  400