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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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, 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
X
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes      No  ☒.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common Stock
$0.001 par value per share
 
TRXC
 
NYSE American
The number of shares outstanding of the registrant’s common stock, as of August 7, 2019 was 217,742,389
 


Table of Contents

TRANSENTERIX, INC.
TABLE OF CONTENTS FOR FORM 10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

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. 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, 2018 filed on February 27, 2019, or the Fiscal 2018 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 Inc.; TransEnterix Italia S.r.l.; TransEnterix Europe S.à.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd; TransEnterix Japan KK; TransEnterix Israel Ltd. and TransEnterix Netherlands B.V.
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.


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TransEnterix, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands except per share amounts)
(Unaudited)
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
3,639

 
$
6,389

 
$
5,820

 
$
11,156

Cost of revenue
3,936

 
3,732

 
6,403

 
6,287

Gross (loss) profit
(297
)
 
2,657

 
(583
)
 
4,869

Operating Expenses (Income)

 

 

 

Research and development
6,295

 
5,281

 
11,950

 
10,546

Sales and marketing
7,868

 
6,046

 
15,542

 
12,016

General and administrative
4,489

 
3,627

 
9,049

 
6,303

Amortization of intangible assets
2,585

 
2,743

 
5,196

 
5,570

Change in fair value of contingent consideration
960

 
812

 
1,958

 
1,439

Acquisition related costs

 

 
45

 

Loss (gain) from sale of SurgiBot assets, net

 
37

 
97

 
(11,959
)
Total Operating Expenses
22,197

 
18,546

 
43,837

 
23,915

Operating Loss
(22,494
)
 
(15,889
)
 
(44,420
)
 
(19,046
)
Other Income (Expense)

 

 

 

Change in fair value of warrant liabilities
2,528

 
(17,507
)
 
2,422

 
(15,678
)
Interest income
178

 
320

 
496

 
590

Interest expense
(1,061
)
 
(2,056
)
 
(2,177
)
 
(2,712
)
Other (expense) income
(191
)
 
1

 
(496
)
 
(57
)
Total Other Income (Expense), net
1,454

 
(19,242
)
 
245

 
(17,857
)
Loss before income taxes
(21,040
)
 
(35,131
)
 
(44,175
)
 
(36,903
)
Income tax benefit
869

 
883

 
1,479

 
1,773

Net loss
$
(20,171
)
 
$
(34,248
)
 
$
(42,696
)
 
$
(35,130
)
Comprehensive loss

 

 

 

Foreign currency translation gain (loss)
1,240

 
(4,398
)
 
(709
)
 
(2,090
)
Comprehensive loss
$
(18,931
)
 
$
(38,646
)
 
$
(43,405
)
 
$
(37,220
)
Net loss per common share:
 
 
 
 
 
 
 
Basic
(0.09
)
 
(0.17
)
 
(0.20
)
 
(0.17
)
Diluted
(0.10
)
 
(0.17
)
 
(0.21
)
 
(0.17
)
Weighted average number of shares used in computing net loss per common share:
 
 
 
 
 
 
 
Basic
217,471

 
204,504

 
217,135

 
202,214

Diluted
218,579

 
204,504

 
218,579

 
202,214

See accompanying notes to consolidated financial statements.

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TransEnterix, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
 
June 30,
2019
 
December 31,
2018
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
23,302

 
$
21,061

Short-term investments
9,973

 
51,790
Accounts receivable, net
5,669

 
8,560
Inventories
20,091

 
10,941
Interest receivable
30

 
26
Other current assets
10,240

 
9,205
Total Current Assets
69,305

 
101,583
Restricted cash
712

 
590
Property and equipment, net
5,782

 
6,337
Intellectual property, net
34,190

 
39,716
In-process research and development
10,667

 
10,747
Goodwill
79,904

 
80,131
Other long term assets
2,818

 
203
Total Assets
$
203,378

 
$
239,307

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
7,039

 
$
4,433

Accrued expenses
8,182
 
9,619
Deferred revenue – current portion
897

 
1,733
Contingent consideration – current portion
74

 
72
Deferred consideration - MST Acquisition
6,310

 
5,962
Total Current Liabilities
22,502

 
21,819
Long Term Liabilities
 
 
 
Deferred revenue – less current portion
68

 
109
Contingent consideration – less current portion
12,521

 
10,565
Notes payable – net of debt discount
29,528

 
28,937
Warrant liabilities
2,214

 
4,636
Net deferred tax liabilities
3,164

 
4,720
Other long term liabilities
1,894

 

Total Liabilities
71,891

 
70,786
Commitments and Contingencies (Note 17)

 

Stockholders’ Equity
 
 
 
Common stock $0.001 par value, 750,000,000 shares authorized at
   June 30, 2019 and December 31, 2018; 217,625,492 and 216,345,984 shares
   issued and outstanding at June 30, 2019 and December 31, 2018, respectively
217

 
216
Additional paid-in capital
682,736

 
676,373
Accumulated deficit
(552,095
)
 
(509,406)
Accumulated other comprehensive income
629

 
1,338
Total Stockholders’ Equity
131,487

 
168,521
Total Liabilities and Stockholders’ Equity
$
203,378

 
$
239,307



See accompanying notes to consolidated financial statements.

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TransEnterix, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2018
216,346
 
$
216

 

 

 
$
676,373

 
$
(509,406
)
 
$
1,338

 
$
168,521

Stock-based compensation

 

 

 

 
2,981

 

 

 
2,981

Exercise of stock options and warrants
159

 

 

 

 
236

 

 

 
236

Award of restricted stock units
613

 
1

 

 

 

 

 

 
1

Return of common stock to pay withholding taxes on restricted stock

 

 
194

 

 
(499
)
 

 

 
(499
)
Cancellation of treasury stock

 

 
(194
)
 

 

 

 

 

Cumulative effect of change in accounting principle (Note 2)

 

 

 

 
(7
)
 
7

 

 

Other comprehensive loss

 

 

 

 

 

 
(1,949
)
 
(1,949
)
Net loss

 

 

 

 

 
(22,525
)
 

 
(22,525
)
Balance, March 31, 2019
217,118

 
$
217

 

 

 
$
679,084

 
$
(531,924
)
 
$
(611
)
 
$
146,766

Stock-based compensation

 

 

 

 
3,355

 

 

 
3,355

Exercise of stock options and warrants
324

 

 

 

 
297

 

 

 
297

Award of restricted stock units
183

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 
1,240

 
1,240

Net loss

 

 

 

 

 
(20,171
)
 

 
(20,171
)
Balance, June 30, 2019
217,625

 
$
217

 

 

 
$
682,736

 
$
(552,095
)
 
$
629

 
$
131,487


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Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2017
199,282

 
$
199

 

 

 
$
621,261

 
$
(447,640
)
 
$
5,028

 
$
178,848

Stock-based compensation

 

 

 

 
1,834

 

 

 
1,834

Issuance of common stock and warrants, net of issuance costs

 

 

 

 
11

 

 

 
11

Exercise of stock options and warrants
1,038

 
1

 

 

 
2,227

 

 

 
2,228

Award of restricted stock units
367

 

 

 

 

 

 

 

Return of common stock to pay withholding taxes on restricted stock

 

 
174

 

 

 

 

 

Cancellation of treasury stock

 

 
(174
)
 

 

 

 

 

Issuance of common stock related to sale of SurgiBot assets
1,286

 
1

 

 

 
2,999

 

 

 
3,000

Cumulative effect of change in accounting principle

 

 

 

 

 
11

 

 
11

Other comprehensive income

 

 

 

 

 

 
2,308

 
2,308

Net loss

 

 

 

 

 
(882
)
 

 
(882
)
Balance, March 31, 2018
201,973

 
$
201

 

 
$

 
$
628,332

 
$
(448,511
)
 
$
7,336

 
$
187,358

Stock-based compensation

 

 

 

 
2,370

 

 

 
2,370

Issuance of common stock and warrants, net of issuance costs

 

 

 

 
(9
)
 

 

 
(9
)
Exercise of stock options and warrants
5,735

 
6

 

 

 
14,639

 

 

 
14,645

Award of restricted stock units
4

 

 

 

 

 

 

 

Return of common stock to pay withholding taxes on restricted stock

 

 
2

 

 

 

 

 

Cancellation of treasury stock

 

 
(2
)
 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 
(4,398
)
 
(4,398
)
Net loss

 

 

 

 

 
(34,248
)
 

 
(34,248
)
Balance, June 30, 2018
207,712

 
$
207

 

 
$

 
$
645,332

 
$
(482,759
)
 
$
2,938

 
$
165,718

See accompanying notes to consolidated financial statements.

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TransEnterix, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2019
 
2018
Operating Activities
 
 
 
Net loss
$
(42,696
)
 
$
(35,130
)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
 
 
 
Loss (gain) from sale of SurgiBot assets, net
97

 
(11,959
)
Depreciation
1,126

 
1,277

Amortization of intangible assets
5,196

 
5,570

Amortization of debt discount and debt issuance costs
622

 
495

Amortization of short-term investment discount
(300
)
 

Interest expense on deferred consideration - MST acquisition
387

 

Stock-based compensation
6,336

 
4,204

Deferred tax benefit
(1,479
)
 
(1,799
)
Write down of inventory
761
 

Change in fair value of warrant liabilities
(2,422
)
 
15,678

Change in fair value of contingent consideration
1,958

 
1,439

Loss on extinguishment of debt

 
1,400

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,808

 
(762
)
Interest receivable
(4
)
 
(24
)
Inventories
(10,301
)
 
(1,560
)
Other current and long term assets
(3,689
)
 
1,905

Accounts payable
2,499

 
404

Accrued expenses
(1,454
)
 
(359
)
Deferred revenue
(862
)
 
31

Other long term liabilities
1,879

 

Net cash and cash equivalents used in operating activities
$
(39,538
)
 
$
(19,190
)
Investing Activities
 
 
 
Purchase of short-term investments
(12,883
)
 

Proceeds from maturities of short-term investments
55,000

 

Proceeds related to sale of SurgiBot assets, net

 
4,496

Purchase of property and equipment
(189
)
 
(358
)
Proceeds from sale of property and equipment

 
32

Net cash and cash equivalents provided by investing activities
41,928

 
4,170

Financing Activities
 
 
 
Payment of note payable

 
(15,305
)
Proceeds from issuance of debt and warrants, net of issuance costs
(30
)
 
18,870

Payment of contingent consideration

 
(395
)
Proceeds from issuance of common stock and warrants, net of issuance costs

 
2

Taxes paid related to net share settlement of vesting of restricted stock units
(499
)
 

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

 
3,000

Proceeds from exercise of stock options and warrants
534

 
9,813

Net cash and cash equivalents provided by financing activities
5

 
15,985

Effect of exchange rate changes on cash and cash equivalents
(32
)
 
(78
)
Net increase in cash, cash equivalents and restricted cash
2,363

 
887

Cash, cash equivalents and restricted cash, beginning of period
21,651

 
97,606

Cash, cash equivalents and restricted cash, end of period
$
24,014

 
$
98,493

 
 
 
 

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TransEnterix, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
 
 
Supplemental Disclosure for Cash Flow Information
 
 
 
Interest paid
$
1,528

 
$
599

Supplemental Schedule of Noncash Investing and Financing Activities
 
 
 
Transfer of inventories to property and equipment
$
415

 
$
1,055

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

 
$
7,060

See accompanying notes to consolidated financial statements.

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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 in laparoscopy to increase control and reduce surgical variability in today’s value-based healthcare environment. The Company is focused on the commercialization of 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 a CE Mark in Europe for laparoscopic abdominal and pelvic surgery, as well as limited thoracic operations excluding cardiac and vascular surgery. On October 13, 2017, the Company received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic colorectal and gynecologic surgery. These indications cover 23 procedures, including benign and oncologic procedures. In May 2018, the indications for use expanded when the Company received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery for a total of 28 indicated procedures. The Senhance System is available for sale in the United States, the European Union, Japan, Taiwan and select other countries.
The Senhance System is a multi-port robotic surgery system that 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.
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™ 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. See Note 3 for a description of the related transaction. On July 3, 2019, the Company announced the sale of the AutoLap assets. See Note 18 for a description of the related transaction.
During 2018 and early 2019, the Company successfully obtained FDA clearance and a CE Mark for 3 millimeter diameter instruments and its Senhance ultrasonic system. The 3 millimeter instruments enable the Senhance System to be used for microlaparoscopic surgeries, allowing for tiny incisions. The ultrasonic system is an advanced energy device used to deliver controlled energy to ligate and divide tissue, while minimizing thermal injury to surrounding structures.
The Company has also developed the SurgiBot System, a single-port, robotically enhanced laparoscopic surgical platform. In December 2017, the Company entered into an agreement with Great Belief International Limited, or GBIL, to advance the SurgiBot System towards global commercialization. The agreement transferred ownership of the SurgiBot System assets to GBIL, while the Company retained the option to distribute or co-distribute the SurgiBot System outside of China. GBIL intends to manufacture the SurgiBot System in China, obtain Chinese regulatory clearance from the National Medical Products Administration ("NMPA"), and commercialize in the Chinese market.  The agreement provides the Company with proceeds of at least $29.0 million, of which $15.0 million has been received to date. The remaining $14.0 million represents minimum royalties and will be paid beginning at the earlier of receipt of Chinese regulatory approval or March 2023.
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 that 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.

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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 Europe S.à.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd.; TransEnterix Japan KK; TransEnterix Israel Ltd. and TransEnterix Netherlands B.V.
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 2018 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.à.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd.; TransEnterix Japan KK; TransEnterix Israel Ltd. and TransEnterix Netherlands B.V. All material inter-company accounts and transactions have been eliminated in consolidation.
Going Concern
The Company's consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of $552.1 million as of June 30, 2019, and has working capital of $46.8 million as of June 30, 2019. The Company has not established sufficient sales revenues to cover its operating costs and requires additional capital to proceed with its operating plan. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. In order to continue as a going concern, the Company will need, among other things, additional capital resources.

Traditionally, the Company has raised additional capital through equity offerings. Management's plan to obtain such resources for the Company may include additional sales of equity, traditional financing, such as loans; entry into a strategic collaboration, entry into an out-licensing arrangement or provision of additional distribution rights in some or all of our markets. In addition, the Company may consider fundamental business combination transactions. If the Company is unable to obtain adequate capital through one of these methods, or if expected capital from existing agreements is not received when due, or at all, it would need to reduce its sales and marketing and administrative expenses and delay research and development projects, including the purchase of equipment and supplies, until it is able to obtain sufficient funds. If such sufficient funds are not received on a timely basis, the Company would then need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection. However, management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to meet its future financial covenants on its existing debt, and to continue as a going concern within one year from the date that these financial statements are issued. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

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, accounts receivable reserves, excess and obsolete inventory reserves, and deferred tax asset valuation allowances.


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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 June 30, 2019 includes $0.7 million 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, 2018 includes $0.6 million in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards 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 June 30, 2019 and December 31, 2018, short-term investments consisted of $10.0 million and $51.8 million, respectively, in U.S. government securities, all of which mature in less than a year.
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 June 30, 2019 and December 31, 2018. This classification was based upon management’s determination that it has the positive intent and ability to hold the securities until their maturity dates, as the investments mature within six months and the underlying cash invested in these securities is not required prior to the investments maturity. Due to the short-term maturities of these instruments, the amortized cost approximates the related fair values, which are based on level 1 inputs as defined in Note 5. As of June 30, 2019 and December 31, 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 June 30, 2019 or December 31, 2018.
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 and short-term investments. 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. Our oversees cash deposits follows the EU Directive, whereby 0.1 million is deemed an appropriate level of protection, with deposits covered per depositor per bank. The Company’s short-term investments consist of U.S. government securities. 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 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 five customers who constituted 93% of the Company’s net accounts receivable at June 30, 2019.  The Company had five customers who constituted 89% of the Company’s net accounts receivable at December 31, 2018. The Company had five customers who accounted for 91% of sales for the three months ended June 30, 2019 and three different customers who accounted for 96% of sales for the three months ended June 30, 2018. For the six months ended June 30, 2019, the Company had two customers who accounted for 76% of the Company's net revenue, while for the six months ended June 30, 2018, the Company had five different customers who accounted for 94% of the Company's net revenue.
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.

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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 June 30, 2019 or December 31, 2018.
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 that 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 June 30, 2019 or December 31, 2018.
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 for the Senhance System was acquired on September 21, 2015. On October 13, 2017, upon receiving FDA clearance 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.
The IPR&D from MST was acquired on October 31, 2018.
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.

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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, 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 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) income.
Warrant Liabilities
The Company’s Series B Warrants (see Note 14) 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) income. 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 predominately 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 consolidated statements 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 six months ended June 30, 2019 and 2018 were not significant.
Business Acquisitions
Business acquisitions are accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired.
Significant judgments are used during this process, particularly with respect to intangible assets. Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.
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; the liquidity and capital resources of its partners; its ability to successfully develop, clinically test and commercialize its products; the timing and

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outcome of the regulatory review process for its products; changes in the health care and regulatory environments of the United States, the European Union, Japan, Taiwan and other countries in which the Company operates or intends to operate; its ability to attract and retain key management, marketing and scientific personnel; its ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights; its ability to successfully transition from a research and development company to a marketing, sales and distribution concern; competition in the market for robotic 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 (the “New Revenue Standard”), 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 years 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.
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 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.

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The following table presents revenue disaggregated by type and geography:
 
Three Months Ended
Six Months Ended
 
2019
2018
 
2019
2018
 
(in thousands)
(unaudited)
U.S.
 
 
 
 
 
Systems
$

$
875

 
$

$
875

Instruments and accessories
25

409

 
25

409

Services
127

28

 
260

49

Total U.S. revenue
152

1,312

 
285

1,333

Outside of U.S. ("OUS")
 
 
 
 
 
Systems
2,737

3,782

 
4,024

7,236

Instruments and accessories
535

1,101

 
1,081

2,212

Services
215

194

 
430

375

Total OUS revenue
3,487

5,077

 
5,535

9,823

Total
 
 
 
 
 
Systems
2,737

4,657

 
4,024

8,111

Instruments and accessories
560

1,510

 
1,106

2,621

Services
342

222

 
690

424

Total revenue
$
3,639

$
6,389

 
$
5,820

$
11,156


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 $3.8 million as of June 30, 2019.
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 $0.2 million and $0.1 million as of June 30, 2019 and 2018, 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 six months ended June 30, 2019 and 2018, that was included in the deferred revenue balance at the beginning of each reporting period was $0.7 million and $0.2 million, respectively. Revenue for the three months ended June 30, 2019 also included $1.3 million from a system sold in 2017 for which revenue was deferred until its first clinical use, which occurred in the second quarter of 2019.
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. During the six months ended June 30, 2019, the Company recorded $0.8 million charge 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.


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Stock-Based Compensation
The Company follows ASC 718 “Stock Compensation”, which provides 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. The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant for awards. 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 $6.3 million and $4.2 million for the six months ended June 30, 2019 and 2018, 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.
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, resulting in no impact to the consolidated statement of operations.
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 has determined that the deemed repatriation applicable to the year ending December 31, 2017 does not result in an additional U.S. income tax liability as it has no undistributed foreign earnings.
The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI as a period expense in the year the tax is incurred.
Comprehensive (Loss) Income
Comprehensive (loss) income 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 42% and 54% of the Company’s total consolidated assets are located within the U.S. as of June 30, 2019 and December 31, 2018, respectively. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include goodwill, intellectual property, in-process research and development, other current assets, property and equipment, cash, accounts receivable and inventory of $118.4 million and $111.0 million at June 30, 2019 and December 31, 2018, respectively. Total assets outside of the U.S. excluding goodwill amounted to 43% and 34% of total consolidated assets at June 30, 2019 and December 31, 2018, respectively. The Company recognizes sales by geographic area based on the country in which the customer is based. For the six months ended June 30, 2019 and 2018, 5% and 12%, respectively, of net revenue were generated in the United States; 95% and 88%, respectively, were generated in Europe and Asia.



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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. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The Company adopted ASU 2018-07 on January 1, 2019, whereby the accounting for share-based payments for non-employees and employees will be substantially the same. The adoption of ASU 2018-7 did not have a material impact on the 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 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 did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic (842), which 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 most leases. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which amends the guidance to add a method of adoption whereby the issuer may elect to recognize a cumulative effect adjustment at the beginning of the period of adoption. ASU 2018-11 Leases (Topic 842), Targeted Improvements, does not require comparative period financial information to be adjusted. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
ASU 2016-02 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of the identified asset for a period of time, the customer has to have both (i)the right to obtain substantially all of the economic benefits from the use of the identified asset and (ii)the right to direct the use of the identified asset. A contract does not contain an identified asset if the supplier has a substantive right to substitute such asset ("the leasing criteria"). As part of the adoption of ASC 842, the Company performed an assessment of the impact that the new lease recognition standard will have on its consolidated financial statements. The Company’s leases relate to office equipment, company owned vehicles and corporate offices, all of which are classified as operating leases and include fixed payments. The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement under the new lease recognition standard.
On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company also elected, for all classes of underlying assets, to not separate non-lease components from lease components and instead to account for them as a single component.  The Company elected to apply the transition provisions as of January 1, 2019, the date of adoption, using the effective date approach, and recorded lease ROU assets and related liabilities on its balance sheet without restating prior periods.  Many of the Company’s leases include base rental periods coupled with options to renew or terminate the lease, generally at the Company’s discretion.  In evaluating the lease term, the Company considers whether renewal is reasonably certain.  To the extent a significant economic incentive exists to renew the lease, the option is included within the lease term.  Based on the Company’s leases, renewal options generally do not provide a significant economic incentive and are therefore excluded from the lease term. The ROU asset is included in other long-term assets on the consolidated balance sheets.  The current portion of operating lease liabilities are presented within accrued liabilities while the non-current portion of operating lease liabilities are presented within other long term liabilities on the consolidated balance sheets and represents the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate, which ranges between 6.6% and 8.5% based on the terms

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of the lease.  The weighted average discount rate as of June 30, 2019 was 7.8% .  There was no change to the Company’s consolidated statements of operations and comprehensive loss or cash flows.
The details of this adjustment are summarized below.
 
Balance at
December 31, 2018
 
Adjustments Due
to ASC 842
 
Balance at
January 1, 2019
 
(unaudited)
(In thousands)
Assets
 
 
 
 
 
Other long term assets
$

 
$
1,751

 
$
1,751

Liabilities and Stockholders' Equity
 
 
 
 
 
Accrued expenses

 
507

 
507

Other long term liabilities
$

 
$
1,244

 
$
1,244


As of June 30, 2019, the right-of-use asset totaled $2.6 million and is included within other long term assets on the consolidated balance sheet and the lease liability totaled $2.9 million, of which $1.0 million is classified as current within accrued expenses and $1.9 million is classified as non-current within other long term liabilities on the consolidated balance sheet.  Operating lease costs for the three and six months ended June 30, 2019 totaled $0.4 million and $0.7 million, respectively, and is included within operating expenses in the consolidated statement of operations and comprehensive loss. The weighted average remaining lease term for operating leases as of June 30, 2019 was 3.0 years. Total cash paid for operating leases during the six month period ended June 30, 2019 was $0.7 million and is included within cash flows from operating activities within the consolidated statement of cash flows.
The following table presents the minimum lease payments as of June 30, 2019 (in thousands):
July 1, 2019 to December 31, 2019
662

 
January 1, 2020 to December 31, 2020
1,317

 
January 1, 2021 to December 31, 2021
669

 
January 1, 2022 to December 31, 2022
404

 
January 1, 2023 to December 31, 2023
194

 
January 1, 2024 to December 31, 2024
33

 
Thereafter

 
Total minimum lease payments

3,279

 
Less: Amount of lease payments representing interest
(352
)
 
Present value of future minimum lease payments
2,927

 

3.     Acquisitions
MST Medical Surgery Technologies Ltd. Acquisition
On September 23, 2018, the Company entered into an Asset Purchase Agreement (the “MST Purchase Agreement”) with MST Medical Surgery Technologies Ltd., an Israeli private company (the “Seller”), and two of the Company’s wholly owned subsidiaries, as purchasers of the assets of the Seller, including the intellectual property assets (collectively, the “Buyers”). The closing of the transactions occurred on October 31, 2018, pursuant to which the Company acquired the Seller’s assets consisting of intellectual property and tangible assets related to surgical analytics with its core image analytics technology designed to empower and automate the surgical environment, with a focus on medical robotics and computer-assisted surgery. The core technology acquired under the MST Purchase Agreement is a software-based image analytics information platform powered by advanced visualization, scene recognition, artificial intelligence, machine learning and data analytics.
Under the terms of the MST Purchase Agreement, at the closing the Buyers purchased substantially all of the assets of the Seller. The acquisition price consisted of two tranches. At or prior to the closing of the transaction the Buyers paid $5.8 million in cash and the Company issued 3.15 million shares of the Company’s common stock. A second tranche of $6.6 million in additional consideration will be payable in cash, stock or cash and stock, at the discretion of the Company, within one year after the closing date.
The MST 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 MST Purchase Agreement.
In connection with the closing under the MST Purchase Agreement (the “MST Acquisition”), the Company and the Seller entered into a Lock-Up Agreement, dated October 31, 2018, pursuant to which the Seller agreed, subject to certain exceptions, not to sell, transfer or otherwise convey any of the shares of Company common stock (the “Securities Consideration”) for six months following the Closing Date.  As of the date of this report, 50% of the Securities Consideration is free from the lock-up restrictions. For the remaining 50% of the Securities Consideration, the Lock-Up Agreement provides that an additional 25% of the Securities

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Consideration will be released from the lock-up restrictions on the twelve-month anniversary of the Closing Date and all of the Securities Consideration will be released from the lock-up restrictions on the eighteen-month anniversary of the closing date, or earlier upon certain other conditions.  The Lock-Up Agreement further provides that the Seller may not sell, transfer or convey the additional consideration, if such additional consideration is paid in whole or in part through the issuance of shares of the Company’s common stock, until after the six-month anniversary of the issuance of the Company’s common stock as additional consideration, or earlier upon certain other conditions.  
In connection with the MST Acquisition closing, the Company also entered into a Registration Rights Agreement, dated as of October 31, 2018, with the Seller, pursuant to which the Company agreed to register the Securities Consideration such that such Securities Consideration is eligible for resale following the end of the lock-up periods described above.
The MST Purchase Agreement was accounted for as a business combination utilizing the methodology prescribed in ASC 805. The purchase price for the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values.
The following table summarizes the acquisition date fair value of the consideration (in thousands).
Stock consideration
$
8,300

Cash consideration
5,800

Present value of deferred consideration
5,900

Other consideration
314

Total consideration
$
20,314


The value of the stock consideration was determined based on the fair value of the stock on the closing date, adjusted for a lack of marketability discount related to the Lock-Up Agreement.  The value of the deferred consideration was determined based on the present value of the future payment using a market interest rate.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on October 31, 2018, the date of acquisition (in thousands):
Property and equipment
$
43

In-process research and development
10,633

Goodwill
9,638

Net assets acquired
$
20,314


The Company allocated $10.6 million of the purchase price to identifiable intangible assets of in-process research and development that met the separability and contractual legal criterion of ASC 805. IPR&D is principally the estimated fair value of the MST technology which had not reached commercial technological feasibility nor had alternative future use at the time of the acquisition and therefore the Company considered IPR&D, with assigned values to be allocated to the IPR&D assets acquired.
Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill resulting from this acquisition arises largely from synergies expected from combining the intellectual property acquired from MST with the Company’s existing intellectual property as well as acquired employees. The goodwill is deductible for income tax purposes.
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.
Under the terms of the Purchase Agreement, the consideration consisted of the issuance of (i) 15,543,413 shares of the Company’s common stock (the “Securities Consideration”) and (ii) approximately $25.0 million U.S. Dollars and 27.5 million Euro in cash consideration (the “Cash Consideration”). 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”). The initial Securities Consideration was issued in full at the closing of the Senhance Acquisition; under the Amendment, the second tranche of the Cash Consideration was restructured, and an additional issuance of 3,722,685 shares of the Company’s common stock with an aggregate fair market value of 5.0 million occurred in January 2017. Following the Amendment, the total Cash Consideration was $25.0 million U.S. Dollars and approximately 22.5 million Euro, of which all but 15.1 million Euro has been paid as of June 30, 2019.  The majority of the remaining Cash Consideration to be paid is the third tranche of the Cash Consideration (the

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“Third Tranche”) of 15.0 million 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. 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.
4.
Cash, Cash Equivalents, and Restricted Cash
Restricted cash at June 30, 2019 and December 31, 2018 includes $0.7 million and $0.6 million respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit card agreement and automobile leases.
5.
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 six months ended June 30, 2019 and the year ended December 31, 2018.
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.
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, short-term investments, interest receivable, accounts payable, and certain accrued expenses at June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, as the interest rates on the notes payable approximate the rates available to the Company as of these dates.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

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June 30, 2019
 
 
(In thousands)
(unaudited)
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