trxc-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

 

FORM 10-Q

 

(Mark One)

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period ended September 30, 2018

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

 

TRANSENTERIX, 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.)

 

 

635 Davis Drive, Suite 300, Morrisville, NC

27560

(Address of principal executive offices)

(Zip code)

Registrant’s 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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “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 of the Exchange Act.

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

216,119,434 shares of the Company’s common stock, par value $0.001 per share, were outstanding as of November 2, 2018.

 

 

 

 

 


 

TRANSENTERIX, INC.

TABLE OF CONTENTS FOR FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

 

1

 

 

Consolidated Balance Sheets (unaudited)

 

2

 

 

Consolidated Statements of Stockholders’ Equity (unaudited)

 

3

 

 

Consolidated Statements of Cash Flows (unaudited)

 

4

 

 

Notes to Consolidated Financial Statements (unaudited)

 

5

Item 2.

 

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

 

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

Item 1A.

 

Risk Factors

 

38

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 3.

 

Defaults Upon Senior Securities

 

38

Item 4.

 

Mine Safety Disclosure

 

38

Item 5.

 

Other Information

 

38

Item 6.

 

Exhibits

 

39

 

 

 

 

 

 

 

SIGNATURES

 

40

 

i


 

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 (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. 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 Consolidated Financial Statements “and “Risk Factors” in this report, as well as the disclosures made in the TransEnterix, Inc. Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 8, 2018, or the Fiscal 2017 Form 10-K, and other filings we make with the Securities and Exchange Commission, or SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law. References in this report to “we,” “our,” “us,” or the “Company” refer to TransEnterix, Inc., including its subsidiaries, TransEnterix International; TransEnterix Italia S.r.l.; TransEnterix Europe S.à.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd; TransEnterix Japan KK and TransEnterix Israel Ltd.

 

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.

 

 

 

ii


 

TransEnterix, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

5,422

 

 

$

183

 

 

$

16,578

 

 

$

3,713

 

Cost of revenue

 

 

4,249

 

 

 

921

 

 

 

10,536

 

 

 

3,227

 

Gross profit (loss)

 

 

1,173

 

 

 

(738

)

 

 

6,042

 

 

 

486

 

Operating Expenses (Income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,838

 

 

 

4,889

 

 

 

15,384

 

 

 

16,814

 

Sales and marketing

 

 

5,819

 

 

 

4,528

 

 

 

17,835

 

 

 

12,000

 

General and administrative

 

 

3,686

 

 

 

2,920

 

 

 

9,989

 

 

 

8,688

 

Amortization of intangible assets

 

 

2,674

 

 

 

1,821

 

 

 

8,244

 

 

 

5,144

 

Change in fair value of contingent consideration

 

 

(1,358

)

 

 

773

 

 

 

81

 

 

 

1,226

 

Issuance costs for warrants

 

 

 

 

 

 

 

 

 

 

 

627

 

Acquisition related costs

 

 

345

 

 

 

 

 

 

345

 

 

 

 

Gain from sale of SurgiBot assets, net

 

 

44

 

 

 

 

 

 

(11,915

)

 

 

 

Reversal of transfer fee accrual

 

 

(2,994

)

 

 

 

 

 

(2,994

)

 

 

 

Total Operating Expenses (Income)

 

 

13,054

 

 

 

14,931

 

 

 

36,969

 

 

 

44,499

 

Operating Loss

 

 

(11,881

)

 

 

(15,669

)

 

 

(30,927

)

 

 

(44,013

)

Other (Expense) Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liabilities

 

 

(8,760

)

 

 

(22,887

)

 

 

(24,438

)

 

 

(25,213

)

Interest income

 

 

391

 

 

 

62

 

 

 

982

 

 

 

124

 

Interest expense

 

 

(685

)

 

 

(563

)

 

 

(3,398

)

 

 

(1,581

)

Other expense

 

 

(52

)

 

 

(194

)

 

 

(109

)

 

 

(294

)

Total Other (Expense) Income, net

 

 

(9,106

)

 

 

(23,582

)

 

 

(26,963

)

 

 

(26,964

)

Loss before income taxes

 

$

(20,987

)

 

$

(39,251

)

 

$

(57,890

)

 

$

(70,977

)

Income tax benefit

 

 

781

 

 

 

738

 

 

 

2,554

 

 

 

2,337

 

Net loss

 

$

(20,206

)

 

$

(38,513

)

 

$

(55,336

)

 

$

(68,640

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(561

)

 

 

2,952

 

 

 

(2,651

)

 

 

9,515

 

Comprehensive loss

 

$

(20,767

)

 

$

(35,561

)

 

$

(57,987

)

 

$

(59,125

)

Net loss per share - basic and diluted

 

$

(0.10

)

 

$

(0.26

)

 

$

(0.27

)

 

$

(0.51

)

Weighted average common shares outstanding - basic and diluted

 

 

209,088

 

 

 

149,516

 

 

 

204,531

 

 

 

134,622

 

 

See accompanying notes to consolidated financial statements.

 

 

1


 

TransEnterix, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,748

 

 

$

91,217

 

Short-term investments

 

 

39,670

 

 

 

 

Accounts receivable, net

 

 

5,669

 

 

 

1,536

 

Inventories

 

 

10,242

 

 

 

10,817

 

Interest receivable

 

 

51

 

 

 

80

 

Other current assets

 

 

9,039

 

 

 

9,344

 

Total Current Assets

 

 

106,419

 

 

 

112,994

 

Restricted cash

 

 

663

 

 

 

6,389

 

Property and equipment, net

 

 

6,659

 

 

 

6,670

 

Intellectual property, net

 

 

42,925

 

 

 

52,638

 

Goodwill

 

 

70,669

 

 

 

71,368

 

Other long term assets

 

 

224

 

 

 

192

 

Total Assets

 

$

227,559

 

 

$

250,251

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,785

 

 

$

3,771

 

Accrued expenses

 

 

7,432

 

 

 

10,974

 

Deferred revenue - current portion

 

 

1,270

 

 

 

1,088

 

Deferred gain from sale of SurgiBot assets

 

 

 

 

 

7,500

 

Contingent consideration – current portion

 

 

555

 

 

 

719

 

Notes payable - current portion, net of debt discount

 

 

 

 

 

4,788

 

Total Current Liabilities

 

 

12,042

 

 

 

28,840

 

Long Term Liabilities

 

 

 

 

 

 

 

 

Deferred revenue - less current portion

 

 

131

 

 

 

 

Contingent consideration – less current portion

 

 

11,549

 

 

 

11,699

 

Notes payable - less current portion, net of debt discount

 

 

19,106

 

 

 

8,385

 

Warrant liabilities

 

 

15,044

 

 

 

14,090

 

Net deferred tax liabilities

 

 

5,624

 

 

 

8,389

 

Total Liabilities

 

 

63,496

 

 

 

71,403

 

Commitments and Contingencies (Note 18)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock $0.001 par value, 750,000,000 shares authorized at

   September 30, 2018 and December 31, 2017; 212,631,801 and 199,282,003

   shares issued and outstanding at September 30, 2018 and

   December 31, 2017, respectively

 

 

212

 

 

 

199

 

Additional paid-in capital

 

 

664,439

 

 

 

621,261

 

Accumulated deficit

 

 

(502,965

)

 

 

(447,640

)

Accumulated other comprehensive income

 

 

2,377

 

 

 

5,028

 

Total Stockholders’ Equity

 

 

164,063

 

 

 

178,848

 

Total Liabilities and Stockholders’ Equity

 

$

227,559

 

 

$

250,251

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

2


 

TransEnterix, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

Balance, December 31, 2017

 

 

199,282

 

 

$

199

 

 

 

 

 

$

 

 

$

621,261

 

 

$

(447,640

)

 

$

5,028

 

 

$

178,848

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,694

 

 

 

 

 

 

 

 

 

6,694

 

Issuance of common stock and warrants, net of

   issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

279

 

 

 

 

 

 

 

 

 

279

 

Exercise of stock options and warrants

 

 

11,028

 

 

 

11

 

 

 

 

 

 

 

 

 

34,869

 

 

 

 

 

 

 

 

 

34,880

 

Award of restricted stock units

 

 

1,036

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Return of common stock to pay withholding taxes on

   restricted stock

 

 

 

 

 

 

 

 

(537

)

 

 

(1)

 

 

 

(1,663

)

 

 

 

 

 

 

 

 

(1,664

)

Cancellation of treasury stock

 

 

 

 

 

 

 

 

537

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Issuance of common stock related to sale of

   SurgiBot assets

 

 

1,286

 

 

 

1

 

 

 

 

 

 

 

 

 

2,999

 

 

 

 

 

 

 

 

 

3,000

 

Cumulative effect of change in accounting

   principle (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

11

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,651

)

 

 

(2,651

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(55,336

)

 

 

 

 

 

(55,336

)

Balance, September 30, 2018

 

 

212,632

 

 

$

212

 

 

 

 

 

 

 

 

$

664,439

 

 

$

(502,965

)

 

$

2,377

 

 

$

164,063

 

 

See accompanying notes to consolidated financial statements.

 

 

 

3


 

TransEnterix, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(55,336

)

 

$

(68,640

)

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

 

 

 

 

 

 

 

 

Gain from sale of SurgiBot assets, net

 

 

(11,915

)

 

 

 

Depreciation

 

 

1,876

 

 

 

1,816

 

Amortization of intangible assets

 

 

8,244

 

 

 

5,144

 

Amortization of debt discount and debt issuance costs

 

 

575

 

 

 

212

 

Amortization of held to maturity investment discount

 

 

(51

)

 

 

 

Stock-based compensation

 

 

6,694

 

 

 

5,321

 

Non-employee warrant awards

 

 

 

 

 

571

 

Deferred tax benefit

 

 

(2,572

)

 

 

(2,320

)

Loss on extinguishment of debt

 

 

1,400

 

 

 

308

 

Change in fair value of warrant liabilities

 

 

24,438

 

 

 

25,213

 

Change in fair value of contingent consideration

 

 

81

 

 

 

1,226

 

Recovery of transfer fee

 

 

(2,994

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,262

)

 

 

886

 

Interest receivable

 

 

28

 

 

 

79

 

Inventories

 

 

(1,276

)

 

 

(3,519

)

Other current and long term assets

 

 

27

 

 

 

(2,454

)

Accounts payable

 

 

(903

)

 

 

(1,599

)

Accrued expenses

 

 

(56

)

 

 

207

 

Deferred revenue

 

 

361

 

 

 

 

Net cash and cash equivalents used in operating activities

 

 

(35,641

)

 

 

(37,549

)

Investing Activities

 

 

 

 

 

 

 

 

Purchase of short-term investments

 

 

(39,619

)

 

 

 

Proceeds related to sale of SurgiBot assets, net

 

 

4,496

 

 

 

 

Purchase of property and equipment

 

 

(490

)

 

 

(1,488

)

Purchase of intellectual property

 

 

 

 

 

(418

)

Proceeds from sale of property and equipment

 

 

32

 

 

 

 

Net cash and cash equivalents used in investing activities

 

 

(35,581

)

 

 

(1,906

)

Financing Activities

 

 

 

 

 

 

 

 

Payment of notes payable

 

 

(15,305

)

 

 

(13,343

)

Proceeds from issuance of debt and warrants, net of issuance costs

 

 

18,828

 

 

 

12,956

 

Payment of contingent consideration

 

 

(395

)

 

 

(395

)

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

 

 

279

 

 

 

31,546

 

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

 

 

(1,662

)

 

 

(168

)

Proceeds from issuance of common stock related to sale of SurgiBot assets

 

 

3,000

 

 

 

 

Proceeds from exercise of stock options and warrants

 

 

11,396

 

 

 

5,449

 

Net cash and cash equivalents provided by financing activities

 

 

16,141

 

 

 

36,045

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(114

)

 

 

(311

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(55,195

)

 

 

(3,721

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

97,606

 

 

 

34,590

 

Cash, cash equivalents and restricted cash, end of period

 

$

42,411

 

 

$

30,869

 

Supplemental Disclosure for Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,135

 

 

$

597

 

Supplemental Schedule of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

 

Transfer of inventories to property and equipment

 

$

2,160

 

 

$

 

Transfer of property and equipment to inventories

 

$

648

 

 

$

 

Issuance of common stock as contingent consideration

 

$

 

 

$

5,227

 

Relative fair value of warrants issued with debt

 

$

 

 

$

300

 

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

 

$

23,485

 

 

$

2,289

 

Cashless exercise of warrants

 

$

4,272

 

 

$

 

 

See accompanying notes to consolidated financial statements.

4


 

TransEnterix, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

1.

Organization and Capitalization

TransEnterix, Inc. (the “Company”) is a medical device company that is digitizing the interface between the surgeon and the patient to improve minimally invasive surgery by addressing the clinical and economic challenges associated with current laparoscopic and robotic options in today's value-based healthcare environment. The Company is focused on the commercialization of the Senhance™ Surgical System (the “Senhance System”), which digitizes laparoscopic minimally invasive surgery. The Senhance System allows for robotic precision, haptic feedback, surgeon camera control via eye sensing and improved ergonomics while offering responsible economics.

The Senhance System has been granted a CE Mark in Europe for laparoscopic abdominal and pelvic surgery, as well as limited thoracic operations excluding cardiac and vascular surgery. In April 2017, the Company submitted a 510(k) application to the FDA for the Senhance System. On October 13, 2017, the Company received 510(k) clearance from the FDA for use in laparoscopic colorectal and gynecologic surgery. In May 2018, the Company received 510(k) clearance from the FDA expanding the indications for use in laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery. The Senhance System is available for sale in the U.S., the EU and select other countries.

The Senhance System is a multi-port robotic surgery system which allows multiple robotic arms to control instruments and a camera. The system features advanced technology to enable surgeons with haptic feedback and the ability to move the camera via eye movement. The system replicates laparoscopic motion that is familiar to experienced surgeons, and integrates three-dimensional high definition vision technology. The Senhance System also offers responsible economics to hospitals by offering robotic technology with reusable instruments thereby reducing additional costs per surgery when compared to other robotic solutions.

The Company also developed the SurgiBot™ System, a single-port, robotically enhanced laparoscopic surgical platform. On December 18, 2017, the Company announced that it had entered into an agreement with Great Belief International Limited (“GBIL”) to advance the SurgiBot System towards global commercialization.  The agreement transfers ownership of the SurgiBot System assets, while the Company retains the option to distribute or co-distribute the SurgiBot System outside of China. GBIL intends to have the SurgiBot System manufactured in China and obtain Chinese regulatory clearance from the China Food and Drug Administration (“CFDA”), while entering into a nationwide distribution agreement with China National Scientific and Instruments and Materials Company (“CSIMC”) for the Chinese market.  The agreement provides the Company with proceeds of at least $29 million, of which $7.5 million was received in December 2017. An additional $7.5 million was received at the second closing in March 2018, which included a $3.0 million equity investment at $2.33 per share of common stock. The remaining $14.0 million, representing minimum royalties, will be paid beginning at the earlier of receipt of Chinese regulatory approval or five years after the second closing date.

On September 18, 2015, the Company entered into a Membership Interest Purchase Agreement, (the “Purchase Agreement”) with Sofar S.p.A., (“Sofar”) as seller, Vulcanos S.r.l. (“Vulcanos”), as the acquired company, and TransEnterix International, Inc. (“TransEnterix International”), a direct, wholly owned subsidiary of the Company which was incorporated in September 2015, as buyer. The closing of the transactions occurred on September 21, 2015 (the “Closing Date”) pursuant to which the Company acquired all of the membership interests of Vulcanos from Sofar (now known as the “Senhance Acquisition”), and changed the name of Vulcanos to TransEnterix Italia S.r.l (“TransEnterix Italia”). The Senhance Acquisition included all of the assets, employees and contracts related to the Senhance System. See Note 3 for a description of the related transactions.

On September 3, 2013, TransEnterix Surgical, Inc. a Delaware corporation (“TransEnterix Surgical”), and SafeStitch Medical, Inc., a Delaware corporation (“SafeStitch”) consummated a merger transaction whereby TransEnterix Surgical merged with a merger subsidiary of SafeStitch, with TransEnterix Surgical as the surviving entity in the merger (the “Merger”). As a result of the Merger, TransEnterix Surgical became a wholly owned subsidiary of SafeStitch. On December 6, 2013, SafeStitch changed its name to TransEnterix, Inc. and increased the authorized shares of common stock from 225,000,000 to 750,000,000, and authorized 25,000,000 shares of preferred stock, par value $0.01 per share.

As used herein, the term “Company” refers to the combination of SafeStitch and TransEnterix Surgical after giving effect to the Merger, and includes TransEnterix International, Inc.; TransEnterix Italia S.r.l.; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd.; TransEnterix Japan KK and TransEnterix Israel Ltd.

 

 

5


 

2.

Summary of Significant Accounting Policies

Basis of Presentation

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 2017 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 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. The accompanying Consolidated Financial Statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, SafeStitch LLC, TransEnterix Surgical, Inc., TransEnterix International, Inc., TransEnterix Italia S.r.l., TransEnterix Europe S.Á.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd.; TransEnterix Japan KK and TransEnterix Israel Ltd. All inter-company accounts and transactions have been eliminated in consolidation.

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 identifiable intangible assets and goodwill, contingent consideration, warrant liabilities, stock compensation expense, revenue recognition, restructuring and other charges, excess and obsolete inventory reserves, and deferred tax asset valuation allowances.

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 at September 30, 2018 includes $663,000 in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards and automobile leases. Restricted cash at December 31, 2017 includes $6.0 million in a money market account, held in connection with the Company’s notes payable and $389,000 in cash accounts held as collateral primarily under the terms of an office operating lease, credit card agreement and automobile leases.

 

Short-term Investments

 

Short-term investments are considered to be held-to-maturity and are carried at amortized cost using the effective interest method. As of September 30, 2018, short-term investments consisted of $39.7 million in U.S. government securities, all of which mature in less than a year. There were no investments as of December 31, 2017.

 

The Company reassesses the appropriateness of the classification of its investments at the end of each reporting period. The Company has determined that its debt securities should be classified as held-to-maturity as of September 30, 2018. This classification was based upon managements determination that it has the positive intent and ability to hold the securities until their maturity dates, as the investments mature within 6 months and the underlying cash invested in these securities is not required for current operations. Due to the short-term maturities of these instruments, the amortized cost approximates the related fair values, which are based on level inputs as defined in Note 5. As of September 30, 2018, the gross holding gains and losses were immaterial.

 

The Company reviews its short-term investments for other-than-temporary impairment if the cost exceeds the fair value. No such impairment was recorded as of September 30, 2018.

 

6


 

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 cash deposits may at times exceed the FDIC 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 net revenue to customers located throughout the world. The Company evaluates its customers’ financial condition and, generally, requires no collateral from its customers. The Company provides reserves for potential credit losses but has not experienced significant losses to date. The Company had four customers who accounted for 88% of the Company’s net accounts receivable at September 30, 2018 and one customer who constituted 88% of the Company’s net accounts receivable at December 31, 2017. The Company had five customers who accounted for 68% of the Company’s net revenue for the nine months ended September 30, 2018 and two customers who constituted 89% of the Company’s net revenue for the nine months ended September 30, 2017. The Company had four customers who accounted for 96% of the Company’s net revenue for the three months ended September 30, 2018 and five customers who constituted 100% of the Company’s net revenue for the three months ended September 30, 2017.

Accounts Receivable

Accounts receivable are recorded at net realizable value, which includes an allowance for estimated uncollectable accounts. The allowance for uncollectible accounts was determined based on historical collection experience.

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.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain intangible assets are amortized over 5 to 10 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Intellectual property consists of purchased patent rights and developed technology acquired as part of a business acquisition. 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. This method approximates the period over which the Company expects to receive the benefit from these assets.  No impairment existed at September 30, 2018 or December 31, 2017.

Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis at December 31 or when events or changes in circumstances indicate evidence a potential impairment exists, using a fair value based test. The Company continues to operate in one segment, which is considered to be the sole reporting unit and therefore, goodwill is tested for impairment at the enterprise level. No impairment existed at September 30, 2018 or December 31, 2017.

7


 

In-Process Research and Development

In-process research and development (“IPR&D”) assets represent the fair value assigned to technologies that were acquired, which at the time of acquisition have not reached technological feasibility and have no alternative future use. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. During the period that the IPR&D assets are considered indefinite-lived, they are tested for impairment on an annual basis, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs upon regulatory approval, and the Company is able to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value. The IPR&D was acquired on September 21, 2015.

On October 13, 2017, upon regulatory approval and the ability to commercialize the products associated with the IPR&D assets, the assets were deemed definite-lived, reclassified to intellectual property and are now amortized based on their estimated useful lives.

Property and Equipment

Property and equipment consists primarily of machinery, manufacturing equipment, demonstration equipment, computer equipment, furniture, and leasehold improvements, which are recorded at cost.

Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:

 

Machinery, manufacturing and demonstration equipment

 

3-5 years

Computer equipment

 

3 years

Furniture

 

5 years

Leasehold improvements

 

Lesser of lease term or 3 to 10 years

 

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.

Impairment of Long-Lived Assets

The Company reviews its long-lived 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 of its long-lived assets, 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 long-lived assets, then such assets are written down to their fair value. The Company’s estimates of anticipated cash flows and the remaining estimated useful lives of long-lived assets could be reduced in the future, resulting in a reduction to the carrying amount of long-lived assets.

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 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 timelines for 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 consolidated statements of operations and comprehensive loss.

Deferred Gain from Sale of SurgiBot Assets

In conjunction with the agreement with GBIL in relation to the transfer of the SurgiBot System assets, the Company received $7.5 million in December 2017.  This amount was included in deferred gain from sale of SurgiBot assets in the consolidated balance sheet pending transfer of the assets in March 2018 and was recognized in gain from sale of SurgiBot assets in the consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2018.

8


 

Warrant Liabilities

The Company’s Series B Warrants are measured at fair value using a simulation model which takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock, its expected volatility, holding cost and the risk-free interest rate for the term of the warrant (see Note 5). The warrant liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss. The selection of the appropriate valuation model and the inputs and assumptions that are required to determine the valuation requires significant judgment and requires management to make estimates and assumptions that affect the reported amount of the related liability and reported amounts of the change in fair value. Actual results could differ from those estimates, and changes in these estimates are recorded when known. As the warrant liability is required to be measured at fair value at each reporting date, it is reasonably possible that these estimates and assumptions could change in the near term.

Translation of Foreign Currencies

The functional currency of the Company’s operational foreign subsidiaries is Euros. 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 consolidated statement of operations and comprehensive loss. The net gains and losses included in net loss in the consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2018 and 2017 were not significant.

Risk and Uncertainties

The Company is subject to a number of risks similar to other similarly-sized companies in the medical device industry. These risks include, without limitation, the historical lack of profitability; the Company’s ability to raise additional capital; its ability to successfully develop, clinically test 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, Italy, other countries in the European Union, and other countries in which the Company intends to operate; its ability to attract and retain key management, marketing and scientific personnel; competition from new entrants; 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.

Revenue Recognition

The Company adopted ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018. The Company’s revenue consists of product revenue resulting from the sale 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 contain multiple products and services. For these bundled 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 bundled 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 include a combination of the following performance obligations: system(s), system components, instruments, accessories, and system service. The Company’s system sale arrangements generally include a five-year period of service. 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. The Company considers the service terms in the arrangements that are legally enforceable to be performance obligations. Other than service, the Company generally satisfies all of the performance obligations up-front. System components, system accessories, instruments, accessories, and service are also sold on a standalone basis.

9


 

 

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, 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. Accessory products include sterile drapes used to help ensure a sterile field during surgery, vision products such as replacement endoscopes, camera heads, light guides, and other items that facilitate use of the Senhance Surgical System.

 

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.

 

For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services. Due to limited sales to date, standalone selling prices 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 standalone selling prices and updates these estimates if necessary.

 

The following table presents revenue disaggregated by types and geography:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

(in thousands)

 

 

 

(unaudited)

 

 

(unaudited)

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Systems

 

$

868

 

 

$

 

 

$

1,742

 

 

$

 

Instruments and accessories

 

 

426

 

 

 

 

 

 

835

 

 

 

 

Services

 

 

87

 

 

 

 

 

 

137

 

 

 

 

Total U.S. revenue

 

 

1,381

 

 

 

 

 

 

2,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outside of U.S. ("OUS")

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Systems

 

 

3,450

 

 

 

 

 

 

10,686

 

 

 

2,609

 

Instruments and accessories

 

 

441

 

 

 

10

 

 

 

2,653

 

 

 

683

 

Services

 

 

150

 

 

 

173

 

 

 

525

 

 

 

421

 

Total OUS revenue

 

 

4,041

 

 

 

183

 

 

 

13,864

 

 

 

3,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Systems

 

 

4,318

 

 

 

 

 

 

12,428

 

 

 

2,609

 

Instruments and accessories

 

 

867

 

 

 

10

 

 

 

3,488

 

 

 

683

 

Services

 

 

237

 

 

 

173

 

 

 

662

 

 

 

421

 

Total revenue

 

$

5,422

 

 

$

183

 

 

$

16,578

 

 

$

3,713

 

 

The Company recognizes sales by geographic area based on the country in which the customer is based.

 

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 $4.4 million as of September 30, 2018.

10


 

 

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 as of September 30, 2018 and 2017, 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 nine months ended September 30, 2018 and 2017, that was included in the deferred revenue balance at the beginning of each reporting period was $0.3 million and $0.2 million, respectively.

 

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.

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.

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.

Stock-Based Compensation

The Company follows ASC 718 “Stock Compensation” and ASC 505-50 “Equity-Based Payments to Non-employees”, which provide guidance in accounting for share-based awards exchanged for services rendered and requires companies to expense the estimated fair value of these awards over the requisite service period. For awards granted to non-employees, the Company determines the fair value of the stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant for awards granted to employees. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of stock options. 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 expense associated with stock-based compensation is recognized on a straight-line basis over the requisite service period of each award.

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 $6,694,000 and $5,321,000 for the nine months ended September 30, 2018 and 2017, respectively.

The TransEnterix, Inc. 2007 Incentive Compensation Plan (the “Plan”) was originally approved by the Company’s board of directors, (the “Board”) and adopted by the majority of the Company’s stockholders on November 13, 2007. The Plan has been subsequently amended, and approved by stockholders, as required, to increase the number of shares available under the Plan and to make other changes.  As of May 24, 2018, the date of the Company’s annual meeting of stockholders for 2018, the number of shares of common stock, par value $0.001 per share (the “Common Stock”), authorized under the Plan is 40,940,000.

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.

11


 

 

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Legislation”) was enacted into law, which reduced the U.S. federal corporate income tax rate to 21% for tax years beginning after December 31, 2017. As a result of the newly enacted tax rate, the Company adjusted its U.S. deferred tax assets as of December 31, 2017, by applying the new 21% rate, which resulted in a decrease to the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $36.1 million.

 

The Tax Legislation also implements a territorial tax system. Under the territorial tax system, in general, the Company's foreign earnings will no longer be subject to tax in the U.S. As part of transition to the territorial tax system the Tax Legislation includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. The Company estimates that the deemed repatriation will not result in any additional U.S. income tax liability as it estimates it currently has no undistributed foreign earnings.

 

In accordance with Staff Accounting Bulletin (“SAB”) No. 118, income tax effects of the Tax Legislation may be refined upon obtaining, preparing, or analyzing additional information during a measurement period of one year.  During the measurement period provisional amounts may be adjusted for the effects, if any, of interpretive guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.

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 60% of the Company’s total consolidated assets are located within the U.S. as of September 30, 2018 and December 31, 2017. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include goodwill, intellectual property, other current assets, property and equipment, cash, accounts receivable and inventory of $91.8 million and $99.9 million at September 30, 2018 and December 31, 2017, respectively. Total assets outside of the U.S. excluding goodwill amounted to 31% of total consolidated assets at September 30, 2018 and December 31, 2017. The Company recognizes sales by geographic area based on the country in which the customer is based. For the nine months ended September 30, 2018, 16% of net revenue was generated in the U.S. and 83% was generated in Europe. For the nine months ended September 30, 2017, 62% of net revenue was generated in Europe and 38% in Asia.    

Impact of Recently Issued Accounting Standards  

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing this ASU and has not yet determined the impact ASU 2018-13 may have on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently assessing this ASU and has not yet determined the impact ASU 2018-07 may have on its consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in this update are intended to simplify the accounting for certain equity-linked financial instruments and embedded features with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under the new guidance, a down round feature will no longer need to be considered when determining whether certain financial instruments or embedded features should be classified as liabilities

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or equity instruments. That is, a down round feature will no longer preclude equity classification when assessing whether an instrument or embedded feature is indexed to an entity's own stock. In addition, the amendments clarify existing disclosure requirements for equity-classified instruments. These amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of this ASU should not have a material impact on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) which addresses changes to reduce the presentation diversity of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees.  The guidance became effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard will be applied retrospectively, but may be applied prospectively if retrospective application would be impracticable. The adoption of this ASU did not have an impact on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU 2018-10, which provides narrow-scope improvements to the lease standard. We expect to elect the ‘package of practical expedients’, which permits us to forgo reassessment of our prior conclusions about lease identification, lease classification and initial direct costs for leases entered into prior to the effective date. Additionally, we expect to elect the practical expedient to not provide comparative reporting periods; therefore, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We do not expect to elect the ‘use-of-hindsight practical expedient’ or the land easement transition relief, the latter of which is not applicable to our industry. Upon adoption, operating leases will be reported on the statement of financial position as gross-up assets and liabilities. The Company has begun evaluating and planning for adoption and implementation of this ASU, including reviewing all material leases, the ASU practical expedient guidelines and current accounting policy elections, and assessing the overall financial statement impact. We expect this ASU will have a material impact on the Company’s financial position. The impact on the Company’s results of operations is currently being evaluated. The impact of this ASU is non-cash in nature and is not expected to affect the Company’s cash flows.

In February 2017, the FASB issued ASU No. 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) — Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The new standard clarifies the scope of guidance applicable to sales of nonfinancial assets and also provides guidance on accounting for partial sales of such assets.  The adoption of this ASU did not have an impact on the consolidated financial statements.

The Company adopted the New Revenue Standard in the first quarter of fiscal year 2018 using the modified retrospective method resulting in a cumulative catch-up adjustment to opening retained earnings.  The Company applied the New Revenue Standard to all contracts and concluded that the timing and measurement of revenue recognition is materially consistent under the New Revenue Standard, except for the future billings related to future service included in its multi-year contracts that should be part of the consideration allocated to all performance obligations under the New Revenue Standard. Under the prior standard, future service billings were considered to be contingent revenue, and therefore, were not included in the consideration allocated. Accordingly, the amount of consideration allocated to the performance obligations identified in the Company’s system arrangements is different under the New Revenue Standard than the amount allocated under the prior standard. In general, this will result in an acceleration of the amount of revenue recognized for system sales with multi-year service contracts. Due to limited sales to date, the Company recorded a $11,000 cumulative catch-up adjustment to retained earnings in the first quarter of fiscal year 2018, offset by reductions in accounts receivable of $4,000 and deferred revenue of $15,000. Under the prior standard, revenue would have been $15,000 greater for the nine months ended September 30, 2018 than under the New Revenue Standard.

Reclassifications

Certain prior year amounts within the consolidated statement of operations and comprehensive loss have been reclassified.  Such reclassifications have no effect on previously recorded net loss.

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Classification of Certain Items Within the Company’s Form 10-K

 

Certain reclassifications of prior period amounts will be made within the Company’s Form 10-K filing for the year ended December 31, 2018 to conform to current period presentation. Specifically, during the nine months ended September 30, 2018, the Company determined that the amount related to the deferred gain on sale of SurgiBot assets as reflected within one line in the operating activities section of the consolidated statement of cash flows for the year ended December 31, 2017 should have been classified as cash flows provided from investing activities.  There is no impact to the consolidated statements of operations or consolidated balance sheets. The Company evaluated the effect of this misclassification and concluded it was not material to any of its previously issued consolidated financial statements. Upon revision, cash flows from operating activities for the year ended December 31, 2017, will decrease by $7.5 million to cash and cash equivalents used in operating activities of $47.3 million and cash flows from investing activities will increase by $7.5 million to cash and cash equivalents provided by investing activities of $5.5 million.  There is no impact of the reclassification to the nine months ended September 30, 2017.

 

3.

Acquisition of Senhance Surgical Robotic System

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 and changed the name of the acquired company from Vulcanos S.r.l. to TransEnterix Italia S.r.l.

Under the terms of the Purchase Agreement, the consideration consisted of the issuance of 15,543,413 shares of the Company’s common stock (the “Securities Consideration”) and approximately $25.0 million U.S. Dollars and €27.5 million Euro in cash consideration (the “Cash Consideration”). The Securities Consideration was issued in full at the closing of the Senhance Acquisition; the Cash Consideration was or will be paid in four tranches, as follows:

(1) $25.0 million of the Cash Consideration, which was paid at closing.

(2) On December 30, 2016, the Company and Sofar entered into an Amendment to the Purchase Agreement (the “Amendment”) to restructure the terms of the second tranche of the Cash Consideration (the “Second Tranche”). Under the Amendment, the Second Tranche was restructured to be paid through the (A) the issuance of 3,722,685 shares of the Company’s common stock with an aggregate fair market value of €5.0 million and (B) the payment of €5.0 million in cash upon the occurrence of either (i) receipt of clearance from the FDA for the Senhance System; or (ii) the Company having cash on hand of at least $50.0 million, or (iii) successfully completing a financing, raising at least $50.0 million in gross proceeds after September 2015, exclusive of any financing proceeds related to the December 2016 purchase agreement between the Company and Lincoln Park Capital Fund, LLC; with payment of simple interest at a rate of 9.0% per annum beginning on December 31, 2016. The Five Million Euro (€5,000,000) cash payment began to accrue simple interest at a rate of 9% per annum beginning on December 31, 2016 and continued to accrue interest until November 15, 2017 when it was paid in full.

(3) The third tranche of the Cash Consideration (the “Third Tranche”) of €15.0 million 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.

(4) The fourth tranche of the Cash Consideration of €2.5 million was payable in installments by December 31 of each year as reimbursement for certain debt payments made by Sofar under an existing Sofar loan agreement in such year, with payments beginning as of December 31, 2016. As of September 30, 2018, the Company had paid €2.1 million of the fourth tranche.

The Third Tranche payments will be accelerated in the event that (i) the Company or TransEnterix International is acquired, (ii) the Company significantly reduces or suspends selling efforts of the Senhance System, or (iii) the Company acquires a business that offers alternative products that are directly competitive with the Senhance System.

The Purchase Agreement contains customary representations and warranties of the parties and the parties have customary indemnification obligations, which are subject to certain limitations described further in the Purchase Agreement.

The Senhance Acquisition was accounted for as a business combination utilizing the methodology prescribed in ASC 805. The purchase price for the Senhance Acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values.

 

 

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4.

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents and restricted cash consist of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Cash

 

$

6,987

 

 

$

4,039

 

Money market

 

 

34,761

 

 

 

87,178

 

Total cash and cash equivalents

 

$

41,748

 

 

$

91,217

 

Restricted cash