Asensus Surgical, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Ascensus Third Quarter Financial and Operating Results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Mark Klossner of Westwick Partners. Please go ahead.

Good afternoon, everyone, and thank you for joining us for the Ascensus Third Quarter 2021 Conference Call. On the call with me today are Anthony Fernando, President and Chief Executive Officer, and Shamiz Rampertab, Chief Financial Officer. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call, including any guidance provided, are forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business, including any impact from the COVID-19 pandemic. The company undertakes no obligation to update the information provided on this call. For a discussion of risks and uncertainties associated with the Ascensus surgical business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the 2020 Form 10-K, filed in March 2021, and the Form 10-Q, expected to be filed later today, and other filings we make with the SEC. During this call, we will also present certain non-GAAP financial information related to the adjusted net loss attributable to common stockholders and the adjusted net loss per common share attributable to common stockholders. Management believes that these non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of the company's core operating results. Management uses non-GAAP measures to compare our performance relative to forecast and strategic plans, to benchmark our performance externally against competitors, and for certain compensation decisions. Reconciliations from U.S. GAAP to non-GAAP results are presented in the tables accompanying our earnings release, which can be found in the investor relations section of our website. It is now my pleasure to turn the call over to Ascensus Surgical's President and Chief Executive Officer, Anthony Fernando.

Thanks, Bob. And thank you all for joining us today. On today's call, I will provide a brief summary of our recent accomplishments and then ask Shamice to review our financial performance, after which I will discuss our performance during the third quarter, as well as our priorities for the rest of 2021 before turning to Q&A. Starting with a review of our recent performance. Despite the headwinds associated with the recent COVID-19 Delta variant spike during the quarter, we made tremendous progress towards many of our 2021 goals since our last call. We signed lease agreements with three hospitals, and we sold one system, bringing the total number of new Sennheis program initiations thus far in 2021 to six. We made progress with our regulatory milestones receiving FDA 510 clearance for both the 5-millimeter articulating instruments and the expanded capabilities of the Intelligent Surgical Unit, or ISU, in July and September, respectively. We are incredibly happy with what we've accomplished so far, and we are excited to keep the momentum going in 2021. With that, I will turn the call over to Shamis for a financial update.

Thanks, Anthony. Turning to the third quarter, for the three months ended September 30th, 2021, the company reported revenue of $2.6 million as compared to revenue of $0.8 million in the three months ended September 30th, 2020. Revenue in the third quarter of 2021 included $1.4 million in system revenues $0.8 million in instruments and accessories, and $0.4 million in services. For the three months ended September 30, 2021, total operating expenses were $16.7 million as compared to $14.6 million in the three months ended September 30, 2020. For the three months ended September 30, 2021, net loss attributable to common stockholders was $16.1 million or $0.07 per share as compared to net loss attributable to common stockholders of $15.1 million, or $0.15 per share, in the three months ended September 30, 2020. With the three months ended September 30, 2021, the adjusted net loss attributable to common stockholders was $14.3 million, or $0.06 per share, as compared to an adjusted net loss of $11.9 million, or $0.12 per share, in the three months ended September 30th, 2020. Adjusted net loss is GAAP net loss adjusted for the following items, amortization of intangible assets, change in fair value of contingent consideration, gain on extinguishment of debt, employee retention tax credit, and for 2020, change in fair value of warrant liabilities, all of which are non-cash charges. Adjusted net loss attributable to common stockholders is a non-GAAP financial measure. The reconciliation from GAAP to non-GAAP measures can be found in our earnings release. Turning to the balance sheet, the company had cash, cash equivalents, short-term and long-term investments, excluding restricted cash, of approximately $147.9 million and working capital of $125.4 million as of September 30, 2021. I'll turn the call back over to Anthony.

Thanks, Shamice. I will now provide an update on recent performance as well as the progress we have made on the key focus areas for 2021. As a reminder, these are, first, the continued market development for the Sennheis system, and second, expanding our portfolio and continuing the technological advancement of Sennheis. The primary focus of our market development activities is the growth of our global install base, acceleration of procedure volumes, and the increase in the number of foundational sites. Despite the headwinds associated with COVID that impacted all of our major geographies during the quarter, I'm very happy with what we were able to achieve. Since August, we have seen a material acceleration of the movement of customers through our pipeline, leading to one system purchase in Russia and three leases to Japanese institutions. As of today, we have had six new Senhance program initiations and continue to expect to have a total of 10 to 12 by the end of 2021. In September, we announced the purchase of a Senhan system by Loginow Moscow Clinical Scientific Center, one of the largest and most innovative institutions funded by the Moscow Health Department. This is the first Senhan surgical system to be used within Russia. In Japan, we recently announced that Sapporo Medical University Hospital, Kurosaki University Hospital, and Shinmatsudo Central General Hospital have all initiated their Senhance programs. This brings the total installations in Japan to seven. Japan continues to be a key geography for Senhance because of the favorable landscape. Japan has one of the highest concentrations of laparoscopic surgeons globally, lending itself to a quick adoption curve for a platform built on the fundamentals of laparoscopy. In addition, Senhance is widely reimbursed with coverage for over 98 procedures across a variety of specialty. Because of this, we opted to invest and to grow our footprint in Japan with the establishment of a training center in late 2020. We are happy with the accelerated adoption in this region in recent quarters and continue to expect growth in the future. Our pipeline remains strong going into the end of 2021. COVID has caused varying levels of delays globally within hospitals, which have impacted our ability to visit customers, install new systems, and train new surgeon users. However, we feel confident that these are simply matters of timing and not matters of demand. By year end, we expect to see multiple additional SENHANCE program initiations across several of our geographies. Moving on to procedures. We continue to see consistent strong volume trends throughout 2021, despite the headwinds faced with the ongoing COVID pandemic. In the quarter, Total procedure volume increased over 47% compared to the prior year quarter, and importantly, grew over 5% compared to the second quarter of 2021, bringing year-to-date procedure volumes to over 1,500. The strong year-over-year growth was primarily driven by volumes in the EMEA and the U.S., which grew 71% and 41%, respectively. Volumes in Asia were roughly flat to 2020, as this region saw the most significant COVID-related headwinds in the period. Given the macro challenges we faced during the quarter, we are very happy with the procedure volumes, which continue to validate the desire of surgeons to utilize the Senhance system globally. Now looking at foundational sites. As a reminder, Foundational sites are hospitals that are performing or on track to perform clinical procedures with Senhance at an annualized rate of greater than 100 procedures per year. While we have made significant progress this year fostering expanded utilization within all of our installs, the effects from COVID-19 during the quarter has disrupted new sites from reaching the 100 procedure per year run rate. Foundational sites still remain a key indication for us, and we expect to see improvements in the overall procedure environment by year-end. Now turning to our second initiative for the year, the continued portfolio expansion and the technological advancement of the Senhan system. During the quarter, we received FDA 510K clearance for both the 5-millimeter articulating instruments, and the expanded capabilities of the Intelligent Surgical Unit, or ISU, both of which are key regulatory milestones we had set at the beginning of the year. As discussed on our last call, adding articulation broadens the clinical utility and value of our platform's technology by offering better access to difficult to reach areas of the anatomy by providing two additional degrees of freedom. We are currently planning for a limited market release in 2022. We also received 510 clearance for an expansion of capabilities with the ISU in September. The newest ISU features introduce more advanced features, including 3D measurement, digital tagging, image enhancement, and enhanced camera control based on real-time data from the anatomical structures while performing surgery. The addition of these cutting-edge digital capabilities to our existing surgical platform gives surgeons real-time intraoperative digital tools and demonstrates our commitment to our vision of performance-guided surgery. One feature that has been extremely well received is 3D measurement. Prior to the 3D measurement feature being offered with the ISU, surgeons had two options. One, drop a paper tape measure into the operating cavity and manually straighten out the tape and measure using their surgical tools before pausing to remove the tape measure. Or use ultrasound imaging interoperatively and measure anatomy on the image. Both of these options are completely antiquated and require the surgeon to spend a tremendous amount of time completing a critical but relatively basic task. The 3D measurement enabled by the ISU is a revolution in the way surgeons interact with the surgical platform. We are providing the surgeons with real-time intraoperative digital technology that allows them to be better informed while being more efficient and helping to reduce cognitive fatigue. The 3D measurement along with the other set of features are changing the landscape and the way surgery is being performed in a significant way. We did see some supply chain issues related to one component of the ISU in the quarter. This is pushing out the timing of broad application of the ISU. Once these issues are resolved, we expect to quickly ramp up the rollout of the ISU in the United States and Europe. Now for an update on Senhance Connect, which connects expert Senhance Surgeon users across the globe by streaming multiple camera views and an endoscopic view simultaneously in conjunction with two-way screen sharing and annotations. We have completed several installations of Senhans Connect in both Europe and the United States this quarter and expect to see more installations before the close of the year. These have facilitated collaboration events where supporting surgeons were able to remotely connect from their office to the OR and observe a procedure in real time performed by a peer. The increase in installations of our innovative communication system allows for progress towards reaching the full potential of our system, providing the opportunity for surgeons around the world to access and learn from their peers on the best practices for utilizing the SennHealth system. In summary, off the back of a successful first half of 2021, we are very pleased with the progress we have made in the third quarter, given some of the COVID-19 disruption experienced. We delivered strong procedure volume growth and an acceleration of new system installs. We drove key regulatory milestones, receiving two FDA 510 clearances, including the expanded capabilities of the ISU in the U.S., which represented a meaningful step forward towards our goal of delivering on the promise of performance-guided surgery. In addition, we strengthen our leadership by filling key roles across the organization, namely in clinical, marketing, and R&D. We are excited about the future of Ascensus Surgical and believe all of the hard work our team has put in over the last year is coming to fruition. Looking ahead, we are looking to carry this momentum into the final quarter of the year and expect to meet our goal of 10 to 12 new program initiations by the end of 2021, as well as see continued growth in procedure volume. With that, I would like to open the line for questions.

We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question is from R.K. Remekant of H.C. Wainwright. Please go ahead.

Thank you. Good afternoon, Anthony and Shamise. Excellent quarter, obviously. both on the top line and also on the procedures. Just to start off, just a quick question on the top line. With 1.4 million systems booking, I'm just trying to make sure, I didn't hear it, but I just want to make sure. There was no capital purchase, but most of that was basically on your lease commercialization. Is that correct?

Hi, RK. Actually, it includes a capital purchase. The system for Russia was a sale. So it was a sale plus lease and service revenues.

Okay, perfect. And then, you know, the... Obviously, it's great to hear, you know, the 47% increase in procedures year-over-year and also 5% against the second quarter. So, just trying to understand, you know, what is helping, you know, that upswing in the numbers of procedures and, you know, if we really believe the vaccination that's going on in this country it seems at a decent pace. So should we, you know, how should we think about, you know, getting to the end of the year? Obviously, you're already past last year's 1,400 and odd procedures with 1,500 in the first nine months. So that we can try to gauge how we should think about 2022.

Yeah, okay. So, I mean, great, great question. I think most of the case growth that we've seen has come from the EMEA region, as we've seen some of the restrictions lift and cases kind of taking off. And secondly, in the U.S. as well, we've seen pretty good case volume growth in U.S. and Europe, while Asia was relatively flat. So we are seeing more cases. And also for this year, another point I'll make is if we look at quarter over quarter from the beginning of this year, we've had a pretty steady pace growing each quarter from the previous quarter. So it's very difficult to predict how the Q4 numbers are, because if we look at it from an institution basis, you see ups and downs. some institutions picking up, some are slowing down, and then a month later you'll see them ramping back up. So it's kind of hard to predict, but our hope is that if nothing changes, then we hope to continue this case growth momentum into the fourth quarter in the remaining two months. But All the signs that we are seeing so far is relatively positive from Asia, from EMEA, and from the US, and hoping to see no changes that we can continue this pace. But we'll have to wait and see how any pandemic restrictions or anything that might impact. But right now, we are pretty bullish and see pretty good momentum going into Q4.

Okay. And then regarding the portfolio enhancement, right, with the ISU and the 5mm articulating arms, how, you know, what sort of a benefit can they deliver? You know, is it more on the procedure side, or is it more on trying to, trying new, I mean, getting new centers to buy the device because you have more results on the, more dozen results on the system. How generally does this help?

Yeah. Great question, RK. So I think as we've kind of talked about this before, our goal is really to reduce the variability in surgery and also to help reduce complications and improve outcomes. That's our goal in all the surgeries we do. So these tools are helping to accomplish that by being able to be a lot more objective for the surgeon so that the surgeons can measure things, they can see things, they can put markers and make them ergonomically and even from a fatigue point of view, make it simpler in terms of image and camera control. So the goal, the ultimate goal by all of this, it's less about adding all these bells and whistles, like you called it, for features, but it's really trying to say, how do we use digital technology to reduce the variability and reduce complications and improve the outcome for the patient at the end. And we are seeing some good interest from the surgeons who have the ISU. We have ISUs in Japan, in Europe, and in the U.S. now, and definitely seeing very good interest and very positive feedback because these are tools that surgeons have not seen before. And for the first time, they are getting used to part. They're trying to say, okay, this is good. We like this. Now how do we use it more, and how do we benefit from this even more? So it is really focused on being a lot more objective and also providing some, you know, digital tools to help reduce the variabilities in surgery.

Perfect. And one last question from me before I get back into the queue. Japan, obviously, I guess that's the big word for the year 2021 for you folks. With almost, I believe you have seven units now in Japan. So with seven units, geographically, it's not quite big. Do you foresee putting more resources, especially when you have such a reimbursement-friendly environment, and potential to grow. And if you're planning to put some resources, how is that going to impact your financials going forward? Or what you already currently have, is that good enough to expand even further?

Yeah. Yes, RK. So I think the resources that we currently have, our team in Japan, can easily handle more than the seven systems for a few reasons. Because most of the sites, once we get them up the initial learning curve, these sites become independent. So they can operate the system independently. pretty independently within their staff. And we don't need to support those sites 100%. So we are kind of trying to stagger the start of some of these sites so that we can get each site up to speed. But the team there and the resources there I think can very comfortably support a few more systems. And we'll continue to invest as well in trying to improve the surgeon experience and providing them training tools and things like that. So we will invest, and I think it will change slightly the expense side of things, but I think it will be somewhat in line with the increase in cases and revenue as well.

Perfect. Thank you very much. Thanks for taking all my questions.

Thank you, Arke.

This concludes the question and answer session. I would like to turn the conference back over to Anthony for any closing remarks.

Thank you again for your interest in the Census Surgical, and we look forward to updating you on our progress on our next quarterly call. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.